On Central-Local Fiscal Relations Of China

Central-local fiscal relations refer to the division between fiscal revenue and fiscal expenditure, and the consequent division between fiscal capacity and fiscal power. The reform of tax sharing system in 1994 elevated the proportion of central fiscal revenue to overall fiscal revenue in a short time, achieved considerable success in adapting to market mechanism and closing international practice, and realized preliminarily the transformation of central-local fiscal relations from administrative balance to mechanical balance. However, the reform of tax sharing system was not flawless. The operating practice more than ten years seems to indicate that the reform of tax sharing system is of strong and transitive characteristics, and is exerting its inherent potential to the utmost. Absolutely, the reform of tax sharing system is not isolated, and it is only one phase of an endless cycle of power from centralization to decentralization in respect of central-local fiscal relations in China since P.R.China was founded. How to deepen the reform of tax sharing system and how to rationalize central-local fiscal relations has become a common focus in the theoretical field and the practical field. On the basis of the formula of specifying problems——analyzing reasons——exploring countermeasures and the research method of game theory, this paper confirms the game predicament and its negative influences of central-local fiscal relations in China, analyses the formation mechanism of the game predicament of central-local fiscal relations in China, and explores the equilibrium selection of central-local fiscal relations in China. This paper believes that it is of great necessity to lead political analysis into game relations when making a research on central-local fiscal relations. The cycle of power from centralization to decentralization, and the prevailing opportunism in central-local fiscal relations result from the fact of being lack of rational, perspicuous, stable and compatible rules between the central government and local governments firstly, and secondly, result from the absence of rational relations of power and interest between the central government and local governments. To rationalize central-local fiscal relations, first of all, we should try our efforts to the redesigning of the formulation and implementation between the policies and laws, and secondly, we should devote ourselves to the readjustment of the fiscal capacity and power between the central government and local governments.This paper includes six parts:PrefaceThe preface introduces the cause and the significance of the research, the present situation of the research, the research method, the research thoughts and the research frame. The preface consists of five sections. The first section clarifies the cause and the significance of the research. The reform of tax sharing system in 1994 elevates the proportion of the central fiscal revenue to overall fiscal revenue in a short time. At the same time, the extra-budgetary funds of the local governments also expand rapidly. Reviewing the history of the adjustment and change of central-local fiscal relations since P.R.China being founded, we have no difficulties in finding its orbit of the endless cycle of power from centralization to decentralization, which, then naturally, arouses our attention and consideration on rationalizing central-local fiscal relations. Through the research on central-local fiscal relations, this paper will provide some comprehensive and structural development ideas for the reform of tax sharing system in the overall context. In a short term, this research will be helpful to deepen the reform of tax sharing system, and will realize the stabilization and development of central-local fiscal relations. In a long term, this research will be beneficial to decipher the endless cycle of power from centralization to decentralization of central-local fiscal relations since P.R.China was founded, which consequently provide a stable political foundation for the realization of the harmonious relations between the central government and local governments and the establishment of the harmonious society of Socialist. The second section introduces and evaluates the present research on central-local fiscal relations conducted by domestic scholars as well as those abroad, whose achievements are innumerable. As far as the research on central-local fiscal relations of China is concerned, the foreign scholars pay attention to the model in terms of centralization and decentralization, and the domestic scholars focus on the economic analysis on the whole. Although the model between centralization and decentralization acquires a certain achievements in analytical level, it can not cease the endless cycle of power from centralization to decentralization in practical level. Although the economic analysis profoundly analyses the problems lying in central-local fiscal relations, and accordingly provides some ideas for solving them, it faces the embarrassing situation of having precise logic but having little influence and limited function in practical level. Then, the innovation of this paper is embodied in two facets. One is from the model between centralization and decentralization to game relations, and the other is from economic analysis to political analysis. The third section introduces the research method and its applications. This section introduces game theory and its basic concepts, and clarifies the basic hypothesis of game theory. On this basis, this section respectively explores zero-sum game and positive-sum game, dynamic games of complete information and dynamic games of incomplete information, equilibrium and their applications in this paper. The fourth section explains the research thoughts. The foundation of the research thoughts in this paper is based on the premise that central-local fiscal relations are a part of central-local relations. In fact, this paper explores central-local fiscal relations under the background of central-local relations. What is more, this paper attempts to comprehend central-local relations from the angle of fiscal relations. Then, this section analyses the necessity of understanding central-local relations from the angle of fiscal relations through theoretical and practical aspects, and forms the research thoughts of understanding central-local relations from the angle of fiscal relations. The fifth section sets up the research frame. This paper insists on the belief that"one is divided into three". That is to say, this paper depends on two extremes, and then tries to find out the equilibrium through the dynamic operating of two extremes in relatively neutral stand. Specifically, this paper regards the rationality, perspicuity, stability and compatibility between the policies and laws as one part of research frame according to the external rules of game relations, and regards the behavior choices of fiscal capacity and power between the central government and local governments as another part according to the important subjects of game relations.Chapter One The Definition and Historical Evolution of Central-Local Fiscal RelationsThis chapter respectively in four sections introduces central-local relations, central-local fiscal relations, the comparison between central-local fiscal relations and its close concepts, and the historical evolution of central-local fiscal relations of China since P.R.China being founded. To be specific, the first section defines central-local relations both from the formal characteristic and the content characteristic. Central-local relations of this paper refer to the one between the central government and local governments. Central-local relations are the relations of power on the basis of relations of benefits. On the surface, central-local relations are directly embodied in exterior relations of power between the central government and local governments. In reality, central-local relations are embodied in interior relations of benefit between the central government and local governments. The second section defines central-local fiscal relations. The finance is a sort of relation of distribution governed by the country (or government), which is embodied in the revenue and expenditure and their influences of the country (or government). Central-local fiscal relations are the division of fiscal revenue and fiscal expenditure, and the consequent division between fiscal capacity and fiscal power. The third section compares the affiliation and distinction between central-local fiscal relations and its close concepts. This section compares the affiliation and distinction between central-local fiscal relations and intergovernmental fiscal relations, and the affiliation and distinction between central-local fiscal relations and fiscal system. The fourth section hackles the historical evolution of central-local fiscal relations in China since P.R.China was founded. By combining with the comprehensive characteristics and the demands of the political and economic situations in China since P.R.China was founded, this section devotes itself to hackling the development orbit of central-local fiscal relations in China, which are tight centralization and"eating from one big pot", decentralization and"eating out of separate kitchens", recentralization and tax sharing system. On this basis, this section concludes the game characters of central-local fiscal relations in China. On the one hand, the policy plays a dominant role, but the function of law is limited. On the other hand, the central government dominates in the system, and the local governments play out of the system.Chapter Two The Game Predicament of Central-Local Fiscal Relations in ChinaThis chapter explicitly discusses the game predicament of central-local fiscal relations in China. The reform of tax sharing system in 1994 regulates preliminarily central-local fiscal relations in China, but it did not relieve the tense game relations between the central government and local governments. On the contrary, the game relations become more acute in new form at original and new fields, which are embodied in the division between business power and fiscal expenditure, the division between business power and fiscal power, and the fiscal transfer from the central government to local governments. Firstly, the division of business power and fiscal expenditure between the central government and local governments is indefinite, which is mainly embodied in the aspects, such as: the offside and vacancy of the government, and the indefinite responsibility between the central government and local governments. Secondly, the division of business power and fiscal power between the central government and local governments is mismatched, which is mainly embodied in the fiscal revenues of the local governments can not meet the demands for the fiscal expenditures, that the tax powers of the local governments can not satisfy the demands for the adjustment of tax revenues, that the extra-budgetary funds of the local governments can not fulfill the demands for the budgetary management, and that the extra-system funds of the local governments can not meet the demands for the fiscal management. Thirdly, the fiscal transfer from the central government to local governments is irregular, which is mainly embodied in the facts that the configuration of the fiscal transfer is not rational, and that the distribution method of the fiscal transfer is not regular.Chapter Three The Formation Mechanism of the Game Predicament of Central-Local Fiscal Relations in ChinaThis chapter analyses the formation mechanism of the game predicament of central-local fiscal relations in China through the external rules of zero-sum game and zero-sum game itself. On the one hand, game rules are lack of rationality, perspicuity, stability and compatibility caused by the current situation that the policies and laws do not work coordinately and can not respectively function their own duty. On the other hand, it is the zero-sum game that derives from the behavior choices preferred by the central government and local governments on the basis of their own benefits. This chapter includes three sections. The first section analyses the influencing factors of zero-sum game between the central government and local governments. Since the power of local governments is granted by the central government, and there are not explicit written documents in law to protect this granted power, therefore, the benefits of the local governments can not obtain the esteem from the central government and the protection from the law. Consequently, the dual identities of the local governments make the choices of the local governments on the basis of their partial benefits frequently conflict with the consideration of the central government on the basis of the whole country's benefits, and make central-local relations get in zero-sum game of wining or losing accordingly. The second section analyses the formation mechanism of the game predicament of central-local fiscal relations in China from the angle of the external rules of zero-sum game of central-local fiscal relations, which can be concluded as follows: the policies are lack of the rationality, stability and compatibility when the laws are absent, the laws and policies are lack of the perspicuity, and the laws and policies are lack of the compatibility. The third section analyses the formation mechanism of the game predicament of central-local fiscal relations in China in terms of zero-sum game of central-local fiscal relations, which can be summarized as follows: the dynamic games of incomplete information in the centralization of the central government and the counterwork of the local governments, and the dynamic games of incomplete information in the decentralization of the central government and the counterwork of the local governments.Chapter Four The Equilibrium Selection of Central-Local Fiscal Relations in ChinaThis chapter explores the equilibrium selection of central-local fiscal relations in China in terms of the game rules, and the players and their behaviors. This chapter consists of three sections. The first section analyses the possibility of positive-sum game between the central government and local governments. The relations between central government and local governments are not naturally exclusive. That is to say, central-local relations have the possibility of positive-sum game, which in specific stems from two aspects: on the one hand, definite rules are beneficial to positive-sum game, and on the other hand, the transfer of power is not inconsistent with the authority remaining. The second section explores the redesigning of the formulation and implementation between the policies and laws, which specifically includes the following aspects: reinforcing the participation of the local governments during the process of formulating policy to avoid the adverse selection, reinforcing the central supervision during the process of implementing policy to avoid the moral hazard, and propelling the transition from the dominant policy adjustment to the dominant law adjustment and realizing the organic integration between standardization and flexibility. The third section explores the readjustment of the fiscal capacity and power between the central government and local governments, which can be listed as follows: the central government adjusts the configuration of fiscal revenues, and centralizes relative fiscal capacity; the central government insists on the coordination between the responsibility and the business power, and transfers the business power; the central government stick to the coordination between the business power and the fiscal power, and transfers the fiscal power; the central government adjusts the configuration of fiscal transfer, and executes fiscal regulation.Chapter Five Qualitative Analysis and Quantitative Analysis: The Considerations about Deciphering"the Center Having its Policies and the Localities Having their Counter-Strategies"This chapter combines qualitative analysis and quantitative analysis, and aims at figuring out the solution to"the center having its policies and the localities having their counter-strategies". In qualitative analysis, this paper takes the illegal construction of Xinfeng power plant in Inner Mongolia as a case, and analyses its fiscal origins. This paper believes that the centralized fiscal power of the central government is the important factor that resulted in the illegal construction at Xinfeng power plant in Inner Mongolia, and that is also the main inducement that resulted in"the center having its policies and the localities having their counter-strategies". In quantitative analysis, this chapter regards the correlation analysis between the centralized percentage and the expansion of the extra-budgetary funds of the local governments as the basis, and explores the relations between centralization, decentralization and the expansion of the extra-budgetary funds of the local governments. This paper believes that the centralized percentage is correlated prominently to the expansion of the extra-budgetary funds of the local governments whether the centralized percentage is high or low. Therefore, we can make such deduction, not only under the situation of centralization, the extra-budgetary funds of the local governments will expand, and"the center having its policies and the localities having their counter-strategies"prevails, but also under the situation of decentralization, the extra-budgetary funds of the local governments will also expand, and"the center having its policies and the localities having their counter-strategies"will still prevail. On this basis, this chapter provides the considerations about deciphering"the center having its policies and the localities having their counter-strategies"through theoretical and empirical aspects.