The impact of tax competition on urban-rural income gap: a local governance perspective

Abstract

ABSTRACT In China, the regional economic development model affected by government competition is an important factor leading to the income inequality of urban and rural residents. This paper aims to study the influence mechanism of tax competition among local governments on urban-rural income gap from the perspective of government intervention and tries to explain the reasons for the gradual narrowing of urban-rural income disparity since 2010. Using a dynamic panel data of 30 provinces, this study reveals that tax competition has alleviated the urban-rural income gap, and this effect shows temporal extensibility and spatial correlation. It is more obvious in eastern and central China and consistent in different local tax categories. Although tax competition has narrowed the overall income gap, the wage income inequality has been exacerbated. In addition, local fiscal autonomy, urbanization, public service provision and industrial structure are the important influencing channels of the mechanism.