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The effect of a fiscal squeeze on tax enforcement: Evidence from a natural experiment in China

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This paper investigates the impact of the abolition of the agricultural taxes in 2005 across China on county governments' incentives for tax enforcement. I show that the revenue loss of… Click to show full abstract

This paper investigates the impact of the abolition of the agricultural taxes in 2005 across China on county governments' incentives for tax enforcement. I show that the revenue loss of county governments was largely offset by tougher tax enforcement. The incentive for VAT enforcement can be weakened, however, if the county: (1) receives a lower share of total VAT revenues; (2) has a broader VAT tax base; or, (3) has more abundant sources of revenue from land sales. These findings suggest that incentives of local governments can be vital to tax enforcement and to the tax capacity of a country.

Keywords: tax; effect fiscal; enforcement; squeeze tax; fiscal squeeze; tax enforcement

Journal Title: Journal of Public Economics
Year Published: 2017

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