How tax competition affects China’s environmental pollution?: A spatial econometric analysis

The relationship between tax policy and environment is a hot topic of widespread concern. Clarifying the mechanism between them is of great significance to promote the coordinated development of economy and environment. This study constructs a theoretical framework based on the multi-sector model of general equilibrium theory to investigate the effect of tax competition on environmental pollution. It is theoretically supported that such an effect exists and is affected by environmental protection investment (EI), that is, there is a threshold effect derived from EI. The theoretical finding is confirmed by an empirical study employing the spatial panel threshold model and using China’s provincial panel data from 2007 to 2019. The empirical result shows that the threshold effect of EI is significant since that lower tax competition (i.e., higher tax collection and management efficiency) tends to reduce environmental pollution when EI is below the threshold value and vice versa. In addition, we find that the effect of tax competition is regionally heterogeneous. Finally, several policy recommendations are proposed based on the theoretical and empirical results.