Structural tax reform and local government non-tax revenues – evidence from rural tax reform of China

Abstract

ABSTRACT Taking rural tax reform as an exogenous shock and exploiting county data from 2001 to 2007, this research investigates the impact of structural tax reform on local governments’ non-tax revenues with a difference-in-difference method. The result shows that structural tax reform has a significant positive impact on local governments’ non-tax revenue. This impact can primarily be attributed to changes in the tax–sharing ratio and the adoption of setting revenue by expenditure. Heterogeneity analysis reveals that the policy effects of rural tax reform vary in the transfer payment from the central government, the scale of local governments, and the degree of regional legalization. Further study demonstrates that, as measured by per capita fiscal revenue, the local fiscal burden grows rather than reduces due to rural tax reform, reiterating the presence of ‘Huang Zongxi’s Law’ in industrialized societies. Finally, we provide policy recommendations for enhancing regional legalization, strengthening official promotion channels, transforming government functions, and optimizing government macro-control functions.