Local-central intergovernmental fiscal relations of China

For a large country like China, handling of intergovernmental fiscal relations must create compatible incentives to central and local governments. China initially created a fiscal management system characterized by tax sharing in 1994, basically meeting the needs of its socialist market economic system. Yet further improvements must be made to the assignment of administrative authority and expenditure responsibilities, revenue allocation and the fiscal transfer payment system. This paper is based on the author’s previous research and the recent situation of adjustment in China’s intergovernmental fiscal relations. The paper examines the problems of local-central fiscal relations: insufficient alignment between fiscal revenues and administrative authority; uncertainty of sharing the revenue from income tax and value-added tax; imperfect tax rebate and transfer payment system. Concludes that uncertainties of local fiscal resources inevitably affected the behavior of local governments. The paper describes the land sales revenues of local government as the example how the interplay intergovernmental fiscal relations with other systems threatens socio-economic sustainability of China. The following measures in tax reforming are suggested: increasing the share of local governments in VAT distribution; reducing the property tax rates; canceling tax rebates; endowing local governments with certain taxing authority, including legislation and tax rate adjustment. In handling intergovernmental fiscal relations, great attention must be paid to the system’s stability to give play to its function of incentives and restraints.