Rent-Tax Substitution and Its Impact on Firms: Evidence From Housing Purchase Limits Policy in China

Abstract

Using a novel source of quasi-experimental variation in the revenue of local governments from the housing purchase limits policy (HPLP), we investigate how the local governments make up for the loss of land lease revenue (from renting land-use rights) by strengthening tax enforcement in the period from 2008 to 2015. Overall, the HPLP decreased local governments’ total revenue. Specifically, in cities implementing HPLP, the proportion of land lease revenue in total revenue fell by 12.7%, while the proportion of tax revenue rose by 8.3%. In addition, we also examine how the HPLP affects firms. The results show that the HPLP increased the tax burden of local firms, particularly the burden arising from corporate income tax (CIT) and business tax (BT). Finally, we find that the HPLP reduces investment, employment, and wages for firms.

Keywords: Housing purchase limits policy, Government revenue, Land grant premium, Tax burden

JEL Classification: G18, H71, R52