LOCAL TAXES AND GOVERNMENT CHOICE OF PUBLIC GOODS IN A SPATIAL EQUILIBRIUM MODEL - IMPLICATIONS FOR CHINA'S LOCAL PUBLIC FINANCE REFORM AND URBAN GROWTH PATTERN

Abstract

This study examines the incentive for spending on different public goods by local governments in a model of open cities. We focus on the incentives under two alternative local tax regimes-a value-added tax vs. residential property tax-and the choice of three types of public goods-productive public capital (e.g. ports), residential public capital(e.g. public transit), and consumption public services(e.g. healthcare). We show that introducing residential property tax to replace value-added tax as the main source of local revenue would encourage more public consumption and help curb the ?land financing? incentive of local governments. We also examine the incentive for public good choice from local government?s preference for GDP versus the quality of life. The results show that the higher preference for GDP contributes to the more public capital investment rather than public service provision.