Research On Vertical Tax Competition Among Chinese Governments

With the development of the theory of fiscal federalism and the deepening of countries’practice, decentralized fiscal management system has gradually become the mainstream of the financial management systems. Since the 1970’s, China has also carried out the reform of decentralization in the financial management system. The reform is carried out from the graded contract system, to building the graded financial system between central government and sub-national governments based on the tax division to adapt to the socialist market economic system, and to building the public financial system. The reformation brought the obvious effects for the division of property rights and expenditure responsibilities between central government and sub-national governments is clear day by day, and the enthusiasm of sub-national government is greatly motivated. Just in the process of the financial power’s decentralization, the vertical tax competition among governments from different levels was born at the right moment. However, the fiscal decentralization in China is not a complete fiscal decentralization, and China’s vertical tax competition is not standard, which results in lots of negative effects such as the loss of local residents’ welfare.Based on the systematical summary of the vertical tax competition theory, this paper emphasizes the particularity of China vertical tax competition. The particularity is that different levels of governments compete with each other through non-tax means to achieve the purpose of increasing tax revenue, but the legislation to change the tax elements. The main factors leading to this particularity are top-down fiscal decentralization leading to tax right concentrated in the central government, local governments’competition impulse intensified by financial deficits and lacking of good legal environment. For the problems exposed in the vertical tax competition of China, this paper gives policy suggestions such as clearing the division of government’s fiscal powers and expenditure responsibilities, developing the local tax system, reforming the transfer payment system, enhancing the tax coordination among governments, improving the tax legislation level, delegating legislative power of tax, reducing the fiscal hierarchy and so on.This paper includes five parts. The first part is introduction, which contains background, significance, literature review, contents, methodology, innovations and deficiencies of the dissertation. The second part analyses vertical tax competition theory. This part focuses on the theoretical analysis of common vertical tax competition, which contains the competition’s origins, modes and effects. The third part explains the reason, constraint conditions and modes of vertical tax competition in China. Based on the general analysis of the vertical tax competition, this part emphasizes on the particularity of Chinese vertical tax, and makes detailed analysis of origins and modes. The fourth part is the empirical review. On the basis of the stressing on the effects brought by the vertical tax competition, this part makes an empirical analysis of three aspects such as local governments’non-tax incomes, sub-national governments’fiscal expenditure performance. The fifth part is the suggestions to normalize governments’vertical tax competition according to the results of empirical analysis.This paper’s innovations include three aspects. One is the expanding of the concept of tax competition’s connotation and extension, which are defined as government’s self-interested behaviors motivated by increasing tax Interest. Two is pointing out the uniqueness of the causes and restrictive factors and patterns of vertical tax competition among the Chinese governments. Three is reducing the negative effect of vertical tax competition by effective coordination between the national and sub-national tax authorities.