The Impact of Value-Added Tax Sharing on the Green Development Capability of Manufacturing Industry

Wenting Liang; Kexin Wang; Hyoungsuk Lee

Abstract

Since the implementation of the tax-sharing reform in China, the fiscal distribution system has been continuously optimized, and the manufacturing industry has achieved historic development. However, while the manufacturing industry generates income for the local community, the long-standing problem of “high pollution and high emission” restricts the sustainable growth of the regional economy, and there is an urgent need to improve the green development capacity of the manufacturing industry. This paper selects Value-added tax (VAT) share and comprehensive index data of manufacturing industry at city and county level in China from 2010 to 2020, and measures the comprehensive value of China’s manufacturing industry’s green development ability by using principal component analysis. At the same time, a double fixed-effects model is constructed, which shows that the increase of VAT share of municipal and county governments helps to improve the green development capability of the manufacturing industry, and at the same time, there is a lag in this effect. Heterogeneity analysis also reveals that the promotion effect of rising local VAT share is more significant in the northeastern and western regions of China with state-owned enterprises. Further analysis of the impact mechanism shows that after the VAT share increase, Chinese city and county governments positively affect the improvement of green development capacity of the manufacturing industry by increasing the collection of sewage fees, but the competition for the liquidity tax base will have a negative impact on the manufacturing industry. In addition, the effectiveness of increasing financial subsidies to guide production upgrading is relatively weak.

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