From Government to Enterprises:How Tax Sharing Interacts with Tax Rates

Tax sharing embodies central-local government fiscal relations and tax rates reflect government-market relations.Research on the interactions between tax sharing and tax rates helps uncover the effects of central-local fiscal relations on government-market relations.According to our study,China's flexible tax sharing and differential tax rates facing firms are two important typical facts;theoretical analysis discovered that effective corporate tax rates are influenced by local government preferences and tax sharing ratio;empirical analysis found that increasing CIT and VAT sharing ratios for governments at city and county levels led to the reduction of tax evasion and increase of effective tax rates.The above conclusions have revealed the unique mechanism of how government-market relations are influenced by fiscal system,explains the sources of differential tax rates facing Chinese firms,and provides reference for next-step fiscal reform.