"State Capacity and Economic Development under Capital Mobility"
Presenter: Xiaoxue Zhao, Postdoctoral Associate, Yale University Department of Economics
Abstract: This paper examines the effects of fiscal capacity on local states’ market-supporting investment and overall economic development. We build a simple model of capital competition among units with heterogeneous tax enforcement costs, and rely on the Golden Tax Project, which obviates the need for Chinese local tax agencies to deter tax evasion through onsite inspections, as a natural experiment to test the model predictions. Exploiting the heterogeneous shocks that the reform exerts on the fiscal capacity of Chinese counties with different geographic features, we show that the causal effect of a county’s fiscal capacity on its market-supporting investment and output respectively is, although positive for counties with the lowest capital mobility, significantly more negative in counties where firms face lower relocation costs. We then provide evidence for the reason why capital mobility decreases the positive economic impact of fiscal capacity: under capital mobility, firms that seek to evade taxes have relocated out of counties that experienced a bigger fiscal capacity increase after the reform. Our results imply that tax evasion was a real consideration for Chinese firms in their locational choice. Capital mobility, which erodes the complementarity between counties’ fiscal capacity and market-supporting investment, has an equalizing effect on economic outputs across counties with different fiscal capacity.
Paper: https://campuspress.yale.edu/xiaoxuezhao/files/2017/03/Liu-Zhao-State-Capacity-1mra69r.pdfWebsite: http://campuspress.yale.edu/xiaoxuezhao/
CRW provides a forum for the presentation of original research by China scholars from around the country in social science and humanities, sponsored by the 21st Century China Center at the UC San Diego School of Global Policy & Strategy. To view archive and upcoming workshops list, visit: http://china.ucsd.edu/events/workshops.html