Research On Replacement Of China’s Special Transfer Payment

Since the tax sharing system reform in1994, transfer payments are widely used to balance the fiscal capacities between governments, among which special transfer payment has always made up a significant proportion. Considering the growing magnitude and vital function of special transfer payments to realize particular national policy objectives, higher request has been put forward on the usage efficiency of the funds. However, parts of the funds are not invested as expected and massive "replacement" phenomenon exits, confirmed by the financial capital audit reports. Due to what reasons local governments take this action, and how much effect of these factors exert on the decision making process, are the theoretical and practical issues required to be settled. Analyzing the reasons and factors influencing the special transfer payment replacement, is of great significance to standardize special transfer payment system, and promote the system to operate reasonably and efficiently.The thesis is composed of five parts. The preface introduces the whole study. It describes the background, defines the concepts, presents the framework and main points, and reviews the related literature. The second part analyzes theoretically the influence factors of the special transfer payment replacement, from the viewpoint of principal-agent theory. Firstly, the thesis discusses how the central and local governments set up material principal-agent relationship, states the interest orientation and expenditure preferences of central and local governments separately, to explain the subjective motive for local government to replace special transfer payments. Secondly, by comparing the tax rights and expenditure responsibilities between central and local governments, the thesis analyzes the realistic dilemma for local governments to leakage the funds. Thirdly, feasibility for the replacement brought by regulatory misconduct is considered, reflected by lack of supervision on funds allocation and budget management in advance, and poor disposal afterwards. The comprehensive analysis of the subjective and objective factors of the replacement provides a theoretical support of the following study. This chapter then builds a utility function of local government, and clarifies the incentives of local government for replacement without supervision from superior government, and then analyzes how the factors influence the replacement number of special transfer payments under supervision and uncertainty. The third part provides a quantitative study of the relationship between the factors and the replacement quantity, based on the theoretical model above, using China provincial panel data during year2003to2007. The practical results show that, expenditure preference、fiscal condition of local government, and supervision strength have significant influence on special transfer payment replacement. Preference on economical public goods and own financial scale impels the local government to do the replacement behavior, the relationship between finance income and the replacement quantity is uncertain, expenditure responsibility would remarkably promote the replacement, while supervision strength put opposite effect on it. The forth chapter put forwards countermeasures to perfect our special transfer payment system based on the analysis above. This thesis argues that, the incentive system should be reformed reasonably, to dissolve the local government preference distortion; the financial relationship between central and local government should be adjusted reasonably, and the proportion of special transfer payment in all transfer funds be reduced moderately; perfect the supervision and management system of the special transfer payments, forming an effective regulation on the funds.