Multitasking Chinese local governments : evidence from China’s environmental tax

Abstract

While China achieved double digit economic growth from the late 1990s to early 2000s, they came at the cost of environmental degradation, which made Chinese people no stranger of acid rain, water pollution, and air pollution. Thus, as an endeavor to mitigate such major concern, the central government of China started levying environmental taxes on polluted firms since 2018. Comparing to the pollution fee that was previously enforced by the local government, the institutionalization and centralization of the environmental tax would prevent local governments from conspiring with polluted firms, which were usually major tax contributors within their respective local jurisdictions. After the State Administration of Taxes becomes the administrator of environmental taxes, local governments no longer have administrative discretions to decide the costs of pollution over local firms, which may subsequently lead to firms’ resentment. How do local governments balance the two tasks simultaneously? In this dissertation, using difference in differences (DID) design, I evidence that local governments increase the amount of tax incentives to highly polluted firms as a compensation for their extra tax burden caused by environmental tax.