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PPP, Capital Flow and Regional Tax Rate

【Authors】
YUAN Cheng, LIU Chong & HE Xilong
【WorkUnit】
YUAN Cheng, LIU Chong (Peking University, 100871)HE Xilong (Chengdu Municipal Finance Bureau, 610093)
【Abstract】

This paper investigates the mechanism of Public-Private Partnership (PPP) affecting capital flow and regional tax rate under the tax competition framework of Zodrow and Mieszkowski (1986) and Wilson (1986). The theoretical model shows that the PPP model has direct and indirect effects on capital flow; the social capital participation rate has a positive U-shaped effect on regional tax rate. The indirect effect dominates when the social capital participation rate is low and its growth leads to lower local tax rate; and the direct effect dominates when it is high and its growth results in higher local tax rate. The theoretical predictions are consistent with the empirical evidence of a panel data of 285 prefecture-level cities from 2006 to 2013. The empirical results show that, tax competition is common among cities in China; the higher the social capital participation rate, the more capital the city attracts and the smaller the marginal effect of tax rate on capital. The critical point of the positive U-shaped effect of social capital participation rate on regional tax rate is around 55%.

JEL:H20, H29, H41, H77

【KeyWords】
PPP, Capital Flow, Tax Competition, Social Capital Participation Rate (SCPR)