Local State Capacity and Uneven Taxation across Industrial Firms

Abstract

In this research we investigate the association between local state capacity (LSC) and effective tax burdens (ETBs) on industrial firms within counties between 1998 and 2013. The LSC measures a state's capacity for policy implementation and specifically its ability to acquire low-cost agricultural land for nonagricultural (industrial or commercial) purposes. Based on China's government-led development experience since the 1990s, we draw on two unique household survey datasets to capture LSC at county level. We find robust evidence that greater LSC was associated with much lower ETBs on large industrial firms. This taxation pattern implies local government's primary reliance on larger manufacturing firms, while the ETBs for small-and-medium enterprises are not as prominently addressed. This research highlights that LSC can affect both the amount of revenue a local government can generate and the methods it uses to collect these revenues.