A Study Of Fiscal Imbalance Among Multi-level Government In China

The Chinese government revised intergovernmental fiscal relations after the 1994 tax sharing system reform. The recentralization of tax revenues of central government in 1994 was not accompanied by revisions to expenditure responsibilities which remained as the pre-1994 fiscal system. The tax sharing fiscal system succeeded in raising the two ratios, and strengthening macroeconomic control ability. In the meanwhile, many problems arose from the current fiscal system, such as the proliferation of arbitrary charges, farmers' burden tax & fee, Prefecture and village financial difficulties, the disparity among regions, urban-rural disparity, and so on. It is very important to recognize clearly the whole impacts of the 1994 tax sharing system reform and key weakness in current system, not only does it correlate to resolve above-mentioned problems, but also conducive to the further deepening the reform of the system of intergovernmental fiscal relations in the future.Based on above-mentioned objective this dissertation investigates the whole effects of the 1994 tax sharing system reform. We find that both central government and province government centralized the tax revenues which belong to sub-province government under the pre-1994 fiscal system through the analysis and comparison of intergovernmental financial revenue and expenditure structure.This dissertation explores the traditional definition of vertical fiscal imbalance (VFI) and new development of the theory of VFI, and then presents a framework to analyze the VFI in China from 1978 to 2005 based on the traditional definition. We find that fiscal relations between central and sub-national government was imbalanced in the period 1994 to 2005. We construct three coefficients of VFI based on Hunter's method to measure the degree of VFI between central and sub-national public finance in China from 1994 to 2003. We find that the degree of VFI in China was widening after tax sharing reform based on the measured values of three coefficients. Current intergovernmental fiscal system cannot reduce the degree of VFI effectively; on the contrary, contribute to widening vertical fiscal imbalances. Furthermore, through investigating the disparities among three regions, provincial jurisdiction, and county level jurisdiction, we find that the current intergovernmental transfer system can reduce horizontal fiscal disparities effectively from per-capita fiscal revenue angle, but the effect of equalization is insignificant from per-capita fiscal expenditure. At the county level public finance, Current intergovernmental fiscal system cannot reduce fiscal disparities; on the contrary, contribute to widening fiscal disparities.Through investigating incentive effects of fiscal decentralization, we find it has different effects in different regions,and also different in urban-rural areas. Eastern coastal areas of China take more advantages from fiscal decentralization than in the middle and western areas of China; and it may be harmful to some areas in the middle and west China. Furthermore, the fiscal squeeze arises from asymmetrical urban-rural fiscal system of China, urban absorbs tax revenues from the rural area, but the rural area does not obtain equivalent public goods from state finance. The Dissertation investigates the relationship between fiscal decentralization and the supply of basic public goods, we find interjurisdictional competition under fiscal decentralization system causes the deviation of the structure of public expenditure, subnational government has more enthusiasm to invest in urban infrastructure projects which can promote economic growth quickly, and has no interesting in investing in basic public services such as education, social security and so on, Which Caused insufficient supplies of basic public services in the whole country, especially in poor areas.Intergovernmental fiscal relations in China is an asymmetrical"revenue centralization, expenditure decentralization"type since the 1994 tax sharing system reform, it needed intergovernmental transfers to balance the imbalanced situation in itself. Owing to the unreasonable intergovernmental transfers system, vertical and horizontal fiscal imbalance is widening. In order to eliminate fiscal disparities, we must to construct a balanced system of intergovernmental fiscal relations.