The impact of VAT tax sharing on industrial pollution in China

Abstract

Contrary to the Chinese central government's strong encouragement of green development, the initiative of local governments in pollution control remains inefficient. This phenomena may be associated with Chinese special tax sharing system. Based on the practice of China's sub-provincial fiscal system reform from 2003 to 2020, this paper examines the impact of sub-provincial revenue share on industrial pollution at the prefecture level, and explores the influence of fiscal incentives caused by VAT tax sharing on local government decision-making. First, we study the effect of VAT tax sharing on industrial pollution through fixed effect model. We find that the increase in VAT tax sharing promotes environmental pollution, especially in the central and western regions. In addition, we analyze the moderating effects of industrialization and government competition on the industrial pollution effect of VAT tax sharing. The results show that the degree of regional industrialization strengthens the pollution effect caused by the increase of VAT sharing, while the government competition weakens the effect. Based on these findings, we also employ the panel threshold model to investigate the nonlinear effects of VAT tax sharing and industrial pollution. Only when the proportion of VAT tax sharing exceeds the threshold value will it have an impact on industrial pollution. This study provides enrich empirical evidence for the successive problems of extreme environmental pollution from the perspective of fiscal revenue decentralization, which is of practical importance for improving tax sharing system and enhancing pollution control efficiency.