Land lease revenue windfalls and local tax policy in China

This study examines how land lease revenue, a fiscal resource windfall available to local governments, has shaped local tax policy in China. We follow the literature to argue that the presence of resource revenue incentivizes governments to substitute the more distortive tax policy with the resource revenue. Studying a city-level dataset and a large manufacturing firm-level dataset from 2000 to 2013, we find evidence for this argument by showing that land lease revenue available to city governments is negatively associated with the effective tax rates faced by the firms in the cities. Furthermore, we show that the effect of land lease revenue is likely to be weakened in larger cities, cities with more agglomerated industries, and cities with lower capital mobility. Finally, we show that the effect of land lease revenue on tax rates is more salient for firms that are under the direct control of local governments and for firms that have stronger bargaining power with local governments.