Revenue Sharing and Local Government Tax Effort

This chapter explores the relationship between tax-sharing arrangements and tax rates, with the objective of examining how intergovernmental fiscal relations shape the interaction between government and the market. Theoretical analysis shows that both local government preferences and the tax revenue-sharing ratios between different government levels affect the effective tax rates borne by enterprises. Empirical analysis finds that an increase in tax revenue-sharing ratios for corporate income tax and value-added tax at municipal and county levels reduces tax evasion and increases effective tax rates. These findings, framed within the context of tax-sharing mechanisms, reveal how fiscal systems shape the government-market relationship. They also explain the source of variation in the tax burdens faced by enterprises in China and provide insights for future fiscal and tax system reforms.