Does centralization of tax administration regulate tax competition? Evidence from a quasi-natural experiment in China

Abstract

This study investigates how the centralization of tax administration affects tax competition among local governments in China, using the merger of the State Tax Bureau and Local Tax Bureau in 2018 as a quasi-natural experiment. Our findings demonstrate that the centralization of tax administration effectively curtails the degree of tax competition among local governments, resulting in an increase in the tax burden for enterprises previously managed by the local tax bureaus. Mechanism tests indicate that the reform significantly increases the tax burden on enterprises in regions with high levels of tax competition, and overall reduces the divergence of tax burden among enterprises, restraining cross-regional investments driven by tax avoidance. Additionally, we find that after the means of tax competition among local governments are curtailed, competition continues through fiscal expenditure. Our study provides evidence from China on curbing inter-governmental tax competition from the perspective of administrative institutional reform.