Effective Tax Rates, Spatial Spillover, and Economic Growth in China: An Empirical Study Based on the Spatial Durbin Model

Fiscal decentralization and political centralization in China have led to the strategic interaction of tax policies across provinces. By estimating the spatial Durbin model for panel data on 31 Chinese provinces from 2007-2013, we investigate the robust relationship between effective tax rates and economic growth in China from a spatial econometric perspective. We find that labor income tax rates are significantly negatively related to growth within a province, and insignificantly related to growth in neighboring provinces because the vote with one's feet mechanism is inapplicable in China. A decrease in capital income tax rates significantly enhances growth. Capital income tax competition characterized as race to the bottom induces neighboring provinces to also cut capital income tax rates to promote local economic growth. Consumption taxes are non-distorting.