Tax sharing and urban entrepreneurship: an analysis based on China's VAT revenue sharing reform

Tax revenue sharing reshapes fiscal relations between central and local governments, thereby influencing local fiscal capacity, expenditure behavior, and development strategies, and ultimately playing a pivotal role in urban growth. Yet, little is known about how tax revenue sharing affects urban entrepreneurship. This paper investigates this relationship by exploiting China’s 2016 value-added tax (VAT) revenue-sharing reform as a quasi-natural experiment, applying a difference-in-differences (DID) approach. The findings reveal that an increased local VAT retention ratio significantly promotes urban entrepreneurship, with the effect being more pronounced in non-resource-based cities and eastern regions. Mechanism analysis suggests that the reform fosters entrepreneurship primarily by incentivizing local governments to expand public services and infrastructure investment. Further evidence indicates that the positive effect of tax revenue sharing on entrepreneurship is stronger in regions with higher fiscal self-sufficiency, more intense intergovernmental tax competition, and lower levels of government intervention. JEL Code： H71