Study On Effects Of Fiscal Transfer Payment To County Governments

Reform of Tax-sharing System, which is one of the most important part of a series incremental reforms with marketing orientation in China, have been improving intergovernmental fiscal relationship and enhancing governments’fiscal capacity, but there still exists some problem not solved:ambiguously defined expenditure duties of local governments led to their excessive dependence on intergovernmental transfer payment fund and the upper level government considers the transfer funds an efficient means to supervise the lower governments. Therefore, an efficient, fair, stable and normative fiscal transfer payment system will ensure the governments’following the principle of "incentive compatibility" when providing public goods and services.The paper, adopting the analytic techniques of welfare economics and based on the theories of fiscal decentralization, intergovernmental fiscal transfer payment and economic growth, set up a analytic framework to analyze the effect of fiscal transfer payment:the fiscal transfer payment system will impact the decision behaviors of county governments in a mechanism, that is, transfer payment system will change the status of local income distribution including real fiscal capacity, economic growth and fiscal efforts. The three factors are not independent of one another, but connect closely:the disparities of disposable real fiscal revenue among counties will have a significant effect on local economic growth and finally influence the own-source fiscal revenue via fiscal effort; and conversely, fiscal effort will influence disposable fiscal revenue and eventually influence the economic growth.By a series of reforms, the system of fiscal transfer payment consisting of tax return grants, earmarked grants and nonearmarked grants to counties have formed, which plays a great role in reducing the gap of real fiscal capacity among different county areas; however, problems still exist like mismatching of expenditure duties and fiscal capacity. Therefore, the paper, selecting 44 agriculture leading counties from the 77 agriculture leading county areas and mainly using the official data between 2000 and 2009 after deflating by GDP deflator, analyzes the influences of fiscal transfer payment funds on local fiscal capacity, economic growth and fiscal effort with the classic panel models and comes the following conclusions:(1) With matrix method, the paper calculates Gini coefficient and decomposes the results to find the disparities and changing reasons of different level disposable fiscal revenues among the counties. Before accepting the transfer payment funds, Gini coefficients do not change a lot and remains about 0.30, but the concentration index of corporate income tax is much higher than that-there is a big gap in industry structures among the counties which will impact local economic growth and economic convergence; meanwhile, the ratio of nontax revenue to own-sources revenue is up to 40% after abolishing agricultural tax and the increasing share is equal to the share of agricultural tax before to which the land leasing income contributes great. The unusual increase of the nontax revenue restrains the fiscal effort of county governments, the grant distribution of fiscal transfer payment itself is relatively equal and scale of nonearmarked grants is bigger and lead to the change of Gini coefficient. After accepting the transfer funds, the real fiscal capacity universally increase and the gap reduces, which ensure the equal provision of public goods and services; however, the income distribution pattern do not change:the disposable fiscal capacity of the counties in the north and west area are the weakest and that of the counties in the south and east areas are strongest. The nonearmarked grants with poverty relieving effect contribute great to the area equalization The own-sources revenues accounts for most part of local fiscal disparities, so improving the economic growth is a right way to increase the own-sources revenues and thus the county governments will not excessively depend on the transfer grants.Neoclassical theory pointed out that in the long run the economies among different countries and areas will be convergent. The development path of counties in Liaoning Province improve the theory. The fiscal transfer payment funds enhancing the economic growth, among which the nonearmarked funds play the most important role, that is, in some degree the transfer funds increase the efficiency of financial resources allocation; meanwhile, the transfer funds slow the economic convergence down and decrease the effects of their equalization. The main reason for this results is owing to the Matthew effect:the more developed the counties are, the more transfer grants they accept, the faster the economy grow. When distributing the fiscal grants, the upper level governments take too much of factors like fiscal feeding population which lead to the unreasonable distribution structure of fiscal funds and a mismatch between expenditure duties and revenue duties. In addition, the number of earmarked grants is too big and the appointed purpose of nonearmarked grants is too much because of the ambiguous definition of expenditure duties and revenue duties and the upper governments serving as a supervisor. The promotion and assessment mechanism impel the public officials in counties to make a short run basis decision of economic growth and mainly concern the economic growth but not the nonproductive public goods and services.The fiscal efforts index range from 0.29 to 4.20, which shows great regional disparities: the more richer the counties are, the more effort they make to collect fiscal revenue. Fiscal transfer grants restrain the fiscal efforts of financial and tax sectors in counties. In the process, income effect plays the decisive role. The bigger the ratio of transfer funds to local fiscal expenditure, the less effort the governments make to collect revenues. The unconditional funds including earmarked and nonearmarked grants play more roles than tax return, the conditional fund. Comparatively,the costs of the unconditional grants are lower because they are decided by the factors like the revenue capacity, the expenditure demand and other objective factors like population, jurisdiction area and so on. The counties with lower resource endowment will make more effort to collect the same amount of revenue as that of counties with higher resource endowment, so the underdeveloped counties will give up tax effort to compete for more transfer payment funds. The ratio of sub-transfer funds to total transfer funds also have effect on fiscal effort, but in an opposite way:the ratios of tax return and nonearmarked grants to the total transfer funds encourage the fiscal efforts. The reason for this result is that the local officials realize that the nonearmarked grants can promote the economic growth, increase the wealth and then motivates the government to collect more revenue; meanwhile, the increasing fiscal revenue means the increase of tax and tax return fund and then the officials in order to be promoted and to enhance the government reputation will improve their tax effort. In summary, it is not an appropriate way to provide too much transfer grants to local government which will lead to financial dependence. Except for transfer payment funds, the wealth, economic structure and population will have some effect on fiscal efforts.Based on the above results, the paper discusses the theories of intergovernmental relationship further and points out that the clear definition of expenditure duties is the precondition of definition of revenue duties and fiscal capacity and revenue duties and fiscal capacity is the necessary means to realize expenditure duties. The matching between fiscal capacity and expenditure is a better choice than the matching between revenue duties and expenditure duties. The paper also reviews the experiences of the developed countries and areas in the construction of fiscal transfer payment system:clear awareness of goals, avoidance of dependence and fully equalization. Finally, the paper puts forward some possible paths to choose for the reform of fiscal transfer payment system to county areas:the definition of the boundary between market and government, the division of expenditure and revenue duties, the design of transfer payment system, the establishment of hard budget framework.