Fiscal Incentives and Sustainable Urbanization: Evidence from China

Abstract

Fiscal incentives can affect governments’ behavior and further influence economic and social development. Due to the specific conditions of the household registration system and the land ownership system in China, the urbanization process is dominated by the government. This article conceptually and empirically investigates the influence of fiscal incentives on sustainable urbanization. We theoretically analyze the fiscal reasons why land urbanization occurs faster than the population urbanization. Then we employ panel data of 30 provinces and autonomous regions in China from 2000 to 2012 to discuss the impact of fiscal incentives on urbanization from four aspects: fiscal revenue, types of taxes, fiscal self-financing rate, and tax losses. The econometric results show that both the local tax revenue and fiscal self-financing rate have a significantly negative effect on the gap between land urbanization and population urbanization. The larger the proportion of business tax, the smaller the gap, and vice versa for value-added tax. The greater the local governments’ tax losses, the greater the gap. The results explain why local governments in China choose land urbanization rather than population urbanization from the perspective of fiscal incentives.