How to explain the inverted U-shaped curve of tax centralization in China?

Abstract

This paper uses popular approaches to measure fluctuations in tax centralization and the decomposition of changes in tax centralization to explain the inverted U-shaped curve of tax centralization in China. The results show that 1) during the 2002–2007 period, the within-sector effect played a dominant role in the increase in tax centralization and 2) during the 2008–2016 period, the between-sector effect was the main reason for the continued decline in tax centralization. To avoid this continued decline in tax centralization, we argue that the central government should ensure that the within-sector tax centralization of other services is not lower than that of the industry sector.