Local-central intergovernmental fiscal relations of China

Yang Zhiyong

Abstract


For a large country like China, handling of intergovernmental fiscal relations must create compatible incentives to central and local governments. China initially created a fiscal management system characterized by tax sharing in 1994, basically meeting the needs of its socialist market economic system. Yet further improvements must be made to the assignment of administrative authority and expenditure responsibilities, revenue allocation and the fiscal transfer payment system. This paper is based on the author’s previous research and the recent situation of adjustment in China’s intergovernmental fiscal relations. The paper examines the problems of local-central fiscal relations: insufficient alignment between fiscal revenues and administrative authority; uncertainty of sharing the revenue from income tax and value-added tax; imperfect tax rebate and transfer payment system. Concludes that uncertainties of local fiscal resources inevitably affected the behavior of local governments. The paper describes the land sales revenues of local government as the example how the interplay intergovernmental fiscal relations with other systems threatens socio-economic sustain-ability of China. The following measures in tax reforming are suggested: increasing the share of local governments in VAT distribution; reducing the property tax rates; canceling tax rebates; endowing local governments with certain taxing authority, including legislation and tax rate adjustment. In handling intergovernmental fiscal relations, great attention must be paid to the system’s stability to give play to its function of incentives and restraints.

Highlights

  1. China must create a hierarchical fiscal management system in line with its modern fiscal system and further standardize the division between administrative authority and expenditure responsibilities
  2. China should formalize a fiscal transfer payment system, and develop a hierarchical fiscal management system encompassing the sharing of tax, rents and profits

For citation

Yang Zhiyong. Local-central Intergovernmental Fiscal Relations of China. Journal of Tax Reform, 2017, vol. 3, no. 2, pp. 92–102. DOI: 10.15826/jtr.2017.3.2.033

Article info

Received April 10, 2017; accepted July 31, 2017


Keywords


fiscal management; intergovernmental fiscal relations; fiscal system; sharing tax revenue

Full Text

PDF

References


Musgrave R. A. The Theory of Public Finance: A Study in Political Economy. New York, McGraw-Hill, 1959.

Bahl R. Implementation Rules for Fiscal Decentralisation, Atlanta, Georgia USA, Georgia State University, 1999.

Bailey S. Local Government Economics: Principles and Practice. London, Macmillan Press, 1999.

Ter-Minassian T. (ed.). Fiscal Federalism in Theory and Practice. Washington, D.C.: IMF, 1997.

Ahmad E., Brosio G. (eds.) Handbook of Fiscal Federalism. Cheltenham, UK: Edward Elgar, 2006.

Bird R. M., Vaillancourt F. (eds.). Perspectives on Fiscal Federalism. Washington D.C.: The World Bank, 2006.

Charbit C. Explaining the Sub-National Tax-Grants Balance in OECD. Countries. OECD Working Papers on Fiscal Federalism. Paris, OECD, 2010, no. 11. 32 p. DOI: 10.1787/5k97b10s1lq4-en.

Jin Jing, Heng-fu Zou. Soft Budget Constraints and Local Government in China. In Rodden J. A., Eskeland G. S., Litvack J. I. (eds) Fiscal Decentralization and the Challenge of Hard Budget Constraints. Cambridge, MA: MIT Press, 2003, pp. 289–322.

Wong Christine, Bird Richard M. China’s Fiscal System: A Work in Progress. In Brandt, Rawski (eds) China’s Great Economic Transformation. Cambridge, Cambridge University Press, 2008.

Shen Chunli, Jing Jin, Heng-fu Zou. Fiscal Decentralization in China: History, Impact, Challenges and Next Steps. Annals of Economics and Finance, 2012, vol. 13, no. 1, pp. 1–51.

Wang Z., Ma L. Fiscal Decentralization in China: A Literature Review. Annals of Economics and Finance, 2014, Vol. 15, no. 2, pp. 751–770.

Yang Zhiyong. How the Reform of Tax Assignment Begins in China. Sub National Fiscal Research, 2013, no. 10.

Yang Zhiyong. A Study on the Division of Responsibilities between the Central and Local Governments in the Reform of Tax Assignment in China. Comparative Economic & Social Systems, 2015, no. 2.

Yang Zhiyong. Study on Change of Thought of Power Division between Central and Local Governments: Historical and Comparative Approaches. Public Finance Research, 2016, no. 9.

Lou Jiwei. Rethinking of Intergovernment Fiscal Relations in China. Beijing, China Financial and Economic Publishing House, 2013.




DOI: https://doi.org/10.15826/jtr.2017.3.2.033

Copyright (c) 2017 Yang Zhiyong

eLibrary logoeLibrary logo  DOAJ logo ERIH PLUS logo 

© Journal of Tax Reform : ISSN 2414-9497 (online), ISSN 2412-8872 (print)