Tax Equity and Coordinated Regional Development: Evidence from Adjustments to Pension Insurance Contribution Rates

Improving the tax system to advance social equity is a key priority of China's new round of fiscal and tax system reform. Competition over taxes and fees among local governments has long exacerbated regional economic imbalances, hindering the implementation of the coordinated regional development strategy and the achievement of common prosperity. Theoretically, promoting equity in taxes and fees is an effective means of curbing the adverse effects of such competition, yet few studies have examined its effects on coordinated regional development. This paper develops a theoretical model of interregional competition and coordination over taxes and fees and finds that achieving equity in taxes and fees helps promote coordinated regional development. Furthermore, building on the theoretical equivalence between the economic effects of pension insurance contributions and those of payroll taxes, as well as the fact that pension insurance contribution rates are lower in more economically developed regions of China, this paper exploits the external shock generated by the narrowing of regional disparities in pension insurance contribution rates in 2019 to causally identify the effect of tax equity on regional coordination. The empirical results show that greater equity in pension insurance contributions significantly narrowed the development gap between less-developed and developed regions, thereby promoting coordinated regional development. Mechanism tests indicate that the narrowing of disparities in pension insurance contributions promotes coordinated regional development by fostering the growth of incumbent firms in less-developed regions, enhancing these regions' ability to attract factors of production such as capital and labor, improving the efficiency of interregional resource allocation, and ultimately advancing economic development in less-developed regions. This study not only offers useful insights for advancing China's new round of fiscal and tax system reform but also provides a new approach to further implementing the coordinated regional development strategy.