Taxational Resource Curve – Evidence from China
We study the impact of profit margin of mining sectors on the effective tax rates of non-mining firms in China. Based on the Annual Survey of Industrial Production during 2000 – 2007, the analysis uses composition of mining industries in every county (or prefecture) and profit margin of the same industry in other provinces as instrument of variation in the mining tax base. We find the effective VAT rate of non-mining firms exhibits significant and robust counter-cyclical movement against mining sectors. Similar results also apply to the total effective tax rate and the tax evasion in corporate income tax. Further results show the negative impact of volatility in the effective VAT rate on firm-size distribution and aggregate productivity. The findings suggest the “Taxational resource curse” in China. The study proposes a new mechanism and provides novel evidence as to the “resource curse”. It also helps understand economic predicament and poor go! vernance in resource-rich regions in China.