Facing or retreating? Evaluating the impact of fiscal pressure and the selection preference of tax efforts among Chinese local government

Abstract

As China’s economy enters a new era, fiscal pressure is growing rapidly. How will local governments select their preference of tax efforts under pressure? Are they facing or retreating? This paper selects macro data of 30 provincial administrative regions from 2000 to 2018 and uses the instrumental variable method and threshold regression model. While the paper put fiscal pressure, land-transferring fees, local government debt, and transfer payments into the same regression equation to test the causal relationship between fiscal pressure and the selection preference of tax efforts among Chinese local government. We found that local governments prefer to increase tax efforts under fiscal pressure. Moreover, the heterogeneity analyses prove that eastern local governments prefer higher tax efforts. When the tax and economic growth rates are low, local governments have less selection preference to strengthen tax efforts. Threshold regression tests show that transfer payments have a moderating effect on local tax efforts, and transfer payments have a threshold effect. When transfer payments are under the minimum threshold value or above the maximum threshold value, it may lead to the inaction of local governments, who do not try their best to raise tax efforts. These findings are valuable in policy-making for the construction of sustainable public finance.