Fiscal Effort And Transfers

Large fiscal capacity disparities among counties in China have existed due to the large disparities in environment, resources and economies, etc. Fiscal transfers play an important role in decreasing the disparities. When studying and discussing the fiscal capacity disparities, more attentions are put on the relationship between fiscal capacity disparities and fiscal and tax systems, including fiscal transfer system. Though those studies are useful to decrease the disparities, local fiscal effort is another important reason. Research on fiscal effort and the relationship between transfers and fiscal effort will be of realistic significance to know true reasons caused the fiscal capacity disparities and shrinking measures, and also to improve the fiscal transfer system. The empirical studies before in the area only based on province data. But the county finances are the bases in China, because about one forth revenues and one third fiscal expenditures are realized from county finance. Accordingly, it is very necessary to do the research on fiscal effort and the relationship with transfers at county level.So this paper tries to use fiscal data in more than 2000 counties in China from 1997 to 2003, makes an empirical analysis and estimate fiscal effort of counties. Then base on the theoretical model created by Baoyun Qiao, Jianyong Fan and Jing wang, to exploit the relationship between fiscal effort and transfers, and how Tax rebate affects fiscal effort. Prove if transfers have converse stimulation to fiscal effort and provide demonstration references for transfer system improvement and formulation reform. The results indicate that the overall fiscal efforts are low across China, and rural area's are higher than urban area's. There exist fiscal effort disparities across counties, and this is one of important reasons of fiscal capacity disparities. The overall fiscal transfer indeed decrease fiscal effort, but Tax rebate can stimulate fiscal effort. Consequently fiscal effort equalization is one of main measures of fiscal capacity equalization. Improve taxation enthusiasm, especially the counties with lower fiscal effort and increase the proportion of Tax rebate appropriately are the possible solutions. Furthermore, fiscal effort should be considered in the fiscal transfer system when planning.