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Sub-national Fiscal Pressure and Tax Sheltering for Enterprises——Theory and Empirical Evidence from China
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TitleSub-national Fiscal Pressure and Tax Sheltering for Enterprises——Theory and Empirical Evidence from China  
AuthorChen Sixia,Xu Wenli and Huang Duan  
OrganizationZhongnan University of Economics and Law, Faculty of Public Finance and Taxation;Wuhan University, Economics and Management School; 
Key WordsFiscal Pressure; Tax Sheltering; Tax Sharing Ratio; Difference in Difference 
AbstractIn this paper, we make a theoretic model to analyze the way that sub-national fiscal pressure is formed and make out the optimal tax strategy to relieve this pressure. In the theoretic model, it shows that sub-national fiscal pressure doesn’t have an obvious impact on the real income tax rate whose revenue is owned mainly by central government. However, it increases the real sales tax rate whose taxation are owned all by local governments. We mainly certify the hypothesis applying with the public companies’ data from 1997-2012 by using a difference-in-difference model based on the Income Taxation Sharing Reform in 2002. It finds that local governments weaken the tax sheltering for business tax as local governments can fully enjoy a high proportion of the taxation under fiscal pressure. While for the corporate tax whose revenue is mainly owned by central government, there is little change in the tax sheltering after tax reform. This paper provides extra evidence to prove the existing of “Helping Hand” after the tax decentralization reform. It is also instructive to remind us that it really matters to ensure that local governments are correctly encouraged to carry out those tax reduction policies strictly if tax burden reductions are meant to be. 
Serial NumberWP1228 
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