Investment Promotion, Tax Competition, and Industrial Land Price in China—Evidence from the Corporate Tax Collection Reform

Abstract

Fiscal arrangements have significant influences on the use of land in China. The tax collection reform in 2002 stipulates that firms establish after the reform are levied by the state tax bureau while those established before the reform continue to be levied by local tax bureaus. The reform divided similar firms into two groups by the date of establishment and created a discontinuity in the tax enforcement for those firms established around the date of the reform. Based on the land transaction data on a parcel basis, we used the regression discontinuity design to study the impact of reform on industrial land prices. We found that the reform has resulted in significant discontinuities in land prices. The firms levied by the state tax authority receive lower land prices relative to the same type of firms that are levied by local tax authorities. The intuition is that tax collection reform has brought an exogenous constraint on local governments’ ability to engage in tax competition. As a countermeasure, local governments use low-cost land as another way to attract investment.