Abstract:This paper constructs a dynamic model to analyze the impact of fiscal competition on factor flow and industrial upgrading. Increasing the tax rate of a factor of production will not only lead to the outflow of the factor of production, but also other factors of production; under the impact of tax rate changes, the adjustment of factor stock to a new equilibrium state is related to concave production function and convex adjustment cost function; the implementation of high comprehensive tax rate for backward industries in developed regions and low comprehensive tax rate for emerging industries will promote the rise of regional industries. The low comprehensive tax rate in backward areas will promote regional economic development and industrial upgrading, and the fiscal and taxation coordination of higher level governments is to achieve industrial upgrading and improve the level of social welfare in the two regions. The amount of shares held by local residents in enterprises also has an impact on the realization of regional welfare level.