Tax competition, environmental regulation and high-quality economic development: An empirical test based on spatial Durbin model

Abstract

Studying economic development in China is a very important topic recently because China's economy is moving toward high-quality development and local governments face the dilemma of environmental governance and economic development. To contribute to the literature in this area further, this paper assesses the impact of tax competition and environmental regulation on high-quality economic development through the spatial Durbin model and instrumental variable and by using the data from 278 prefecture-level and above cities from 2007 to 2017 in China. Our empirical analysis shows that tax competition inhibits high-quality economic development and a positive spatial spillover effect, environmental regulation has a significant direct promoting effect on high-quality economic development and a negative spatial spillover effect, and local government tax competition inhibits the promotion effect of environmental regulation on high-quality economic development. Further heterogeneity analysis conducted in our study shows that both the direct and spatial spillover effects of tax competition and environmental regulation on high-quality economic development in large and medium-sized cities are significantly lower than those in small cities. Our empirical analysis infers that since the 18th National Congress of the Communist Party of China, the promotion effect of environmental regulation on high-quality economic development and the synergistic effect with tax competition has become more and more significant. The findings in our paper are useful for both the central government and the local governments in making better decisions for economic development in China as well as in other countries.