Taxational resource curse: Evidence from China

Presented by ANU College of Asia & the Pacific

This presentation will study tax enforcement in a two-sector economy and focus on cross-sector effect of sectoral shocks. Specifically, the study investigates whether business fluctuation in mining sector can translates into volatile tax enforcement in non-mining sectors. A theoretical model suggests sectoral compositional change affect tax enforcement on all sectors in an economy with differential tax rates across sectors. Using the firm panel data from the Annual Survey of Industrial Production in China during 2000 and 2007, the study instruments the value-added share of mining sector by employing customs prices of mining commodities. The 2SLS results show that the total effective tax rate of the non-mining sector rises as the value-added share of the mining sector falls, and vice versa. However, both the statutory tax rate of all firms and the macro effective tax rate of mining sector at prefecture level remain constant. The results are robust to two alternative measurements of tax enforcement – the effective VAT rate and the profit gap rate. The findings suggest cyclical sectoral tax enforcement spreads the risk from the mining sector to other sectors. In the end, the study shows that the volatile mining sector consequently reduce firms’ TFP. The results suggest that the volatile tax enforcement can be a mechanism underlying the resource volatility curse.

Shawn (Xiaoguang) Chen (陈晓光) is an assistant professor at the Business School of the University of Western Australia and a research fellow of National Institute of Fiscal Studies at Tsinghua University. He obtained Ph.D. from LSE in 2015. He specialises in the interplay between taxation, development, and state building. His current research investigates how tax enforcement in China is affected by the fiscal regime (tax sharing, decentralization, state-owned enterprises, etc) and political institutions (appointment and tenure of local politicians, corruption, etc); and how discretionary tax enforcement in China leads to both enormous aggregate production efficiency loss and persistent regional inequality. His papers were published in Journal of Public Economic, Economic Letters, Social Science in China (in Chinese《中国社会科学》), Economic Research Journal (in Chinese, 《经济研究》), Economics Quarterly Journal (in Chinese, 《经济学(季刊)》). He was the recipient of the Gregory Chow Best Paper Award of the Chinese Economics Society in 2005, and the Best Paper Award of the Annual Conference of Public Finance in China in 2015.

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