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Central Transfer and Fiscal Capacity in China: Evidence from the Tax-Sharing System

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  • Meng Sun
  • Qichun He

Abstract

In 1994, the Chinese government introduced a new fiscal system. Using the provincial panel data during the following period 1995–2010, we find robust evidence that central transfer (measured as the ratio of net central transfer to budgetary expenditure for each province) has a significant, negative effect on the fiscal capacity of a province (the sum of budgetary and extra-budgetary incomes as a percentage of GDP). Therefore, when the central government favors the poor provinces in central transfers (the common pool problem), the rich provinces expand their extra-budgetary income more to avoid predation by the central government, which helps increase the fiscal capacity and thus the market-preserving behavior of the rich provinces. Our result helps explain China’s success, which has strong policy implications for other transitional economies.

Suggested Citation

  • Meng Sun & Qichun He, 2018. "Central Transfer and Fiscal Capacity in China: Evidence from the Tax-Sharing System," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(2), pages 393-409, January.
    • Handle: RePEc:mes:emfitr:v:54:y:2018:i:2:p:393-409
    DOI: 10.1080/1540496X.2017.1399356
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    Cited by:

    1. Qiao, Junfeng & Lyu, Jinbo & Yin, Xingyi, 2024. "Do intergovernmental transfers accelerate the formation of zombie firms? A study based on fuzzy regression discontinuity analysis," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 1241-1256.
    2. Qichun He & Meng Sun, 2018. "Does Fiscal Decentralization Increase the Investment Rate? Evidence from Chinese Panel Data," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 75-101, May.
    3. Liangliang Liu & Wenqing Zhang, 2022. "Vertical fiscal imbalance and energy intensity in China," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(2), pages 509-526, October.

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