Tax-sharing System Research Articles

Trump’s Supreme Court Justices Must Kick Him Off the Ballot

The 1994 Reform of Tax Sharing System (TSS) of China changed the current Chinese society a great deal. This paper starts with issues revealed from present news, by discussing the causes and effects of the Reform of Tax Sharing System, and therefore takes relatives issues such as the Fiscal Responsibility System (FRS),the Land Finance(LF),the Local Debt(LD) into consideration. This paper intends to analyze such issues in the perspective of legal system and eventually summarize them using Lewis Coser’s Combination of Structural Functionalism and Social Conflict Theory, i.e. the theory emphasized in The Function of Social Conflict. The history showed in this paper, concerns the evolution of Chinese legal system including the Chinese Constitution. Meanwhile, the theory combined Structural Functionalism and Social Conflict Theory offers quite some explanation power when analyzing issues above. Besides, this paper is more like a report of syntopic reading about a series of articles and books concerning TSS, FRS, LF and LD.

Does Tax Sharing Matter for Export Quality Upgrading? Evidence from China

Tax policy is critical for business operations and export decisions. However, the relationship between tax sharing and export has been less frequently discussed. This paper explicitly examines the underexplored tax-sharing system’s effect on manufacturing exporters’ export quality and develops four hypotheses. We use data on Chinese manufacturing exporters and prefecture-level tax-sharing from 2008 to 2013 and employ an instrumental variable approach to alleviate the endogeneity problem. The empirical evidence supports our hypotheses. We find that an increase in the prefecture-level government tax-sharing ratio significantly reduces export product quality of firms. This quality effect can occur through channels, including tax burden effect, production scale effect, and innovation effect. Moreover, more productive firms and those operated in cities with stronger intellectual property protection can face a smaller quality-reducing effect. Our findings offer policy implications for improving China’s modernized tax system and trade upgrading. Policymakers should recalibrate the tax-sharing system to reduce the tax burden on manufacturing exporters, particularly for innovative and high-productivity firms, and bolster intellectual property rights to enhance export quality and support China’s trade and economic modernization.

A Historical Study on the Introduction of Tax Sharing System during the Late Qing Dynasty and the Beginning of the Republic of China

A Historical Study on the Introduction of Tax Sharing System during the Late Qing Dynasty and the Beginning of the Republic of China

Study on the Path of Sustainable Financial Development in Resource-based Regions

In recent years, China's economy has shifted from a high-speed growth stage to a high-quality development stage. The transformation of economic development mode, optimization of industrial structure, and transformation of growth momentum are important ways for high-quality development, and this is also true for resource-based regions. Resource-based regions have inherent advantages in development, but as mineral resources are continuously excavated and exploited, many resource-based cities are facing serious economic decline, unemployment, and environmental degradation. Therefore, the transformation of resource-based cities and the sustainable development of the ecology and economy are highly valued by the country. In particular, China is currently in a stage of high-quality development, and resource-based cities should closely follow the national development direction and explore a new path suitable for their own sustainable development. This article takes the resource-based city of Ordos as an example to conduct comprehensive analysis on its fiscal revenue and expenditure data from 2011 to 2022 and points out the problems in the process of sustainable development of fiscal in resource-based regions, mainly including inadequate regional economic momentum, unreasonable fiscal sources, unreasonable industrial structure mainly relying on resource-based industries, and high concentration of tax revenue under the "tax-sharing system" fiscal system affecting the ability of municipal level coordination. This article proposes countermeasures and suggestions for the sustainable development of fiscal in resource-based regions, mainly including optimizing the business environment, promoting the integration of digital industry and physical industry, adjusting fiscal and tax policies, and developing local main tax categories.

A study on promoting the intensive use of industrial land in China through governance: A game theoretical approach

Extensive use of industrial land has been typical for many cities in China since the end of the previous century. One of the most important reasons is the local governments’ strategy choice in land use. In this research, a governance structure from the view of the tax-sharing system and the performance appraisal system is constructed to explain the causes of extensive land use using game theory analysis. The key finding is that the governance structure in industrial land use is an organizational structure composed of the central government, local government and the market, and these three participants hold inter-conditioned relationships so as to form a closed loop. However, a bottom-up relationship chain from the market is absent in this structure, which makes it difficult to rely on local governments to implement intensive use of industrial land by themselves. Game equilibrium analysis shows that if a performance penalty coefficient is considered to refine the existing performance appraisal system to help produce a market feedback, the possibility of local governments adopting extensive land use strategies will be reduced.

How do fiscal decentralization and intergovernmental fiscal transfers affect energy consumption in China?

Since the reform of the tax-sharing system in 1994, the regulation of the central government to local governments has relied on the mean of intergovernmental fiscal transfers (IFTs) to a certain extent. However, the existing literature has not yet explored the influence of fiscal decentralization (FD) on energy consumption in the presence of IFTs. Thus, this study empirically examines the influences of FD and IFTs on energy consumption by using panel data for 30 Chinese provinces during the period of 1998–2019. Results indicate that FD and IFTs have positive effects on energy consumption. Moreover, the positive influence of FD on energy consumption is strengthened by the improvement in IFTs. In addition, FD and IFTs affect energy consumption through industrial structure upgrading. In terms of policy implications, this study suggests that China may further reduce energy consumption by appropriately reducing the degree of FD, optimizing the intergovernmental fiscal transfer system, and promoting the upgrading of industrial structure.

Tax competition for FDI: China’s exceptional approach

In this Policy Watch study, we explore the different approaches to corporate income tax (CIT) setting in three economically significant regions: USA, EU, and People’s Republic of China (PRC). We characterize tax-setting in the three regions as occurring at three hierarchical levels and examine the impact of this on tax competition. We find that there is considerable heterogeneity across the regions. The approach in the PRC is particularly notable. While the PRC has established centralized rate of CIT at the highest level, it is unique in having a tax-sharing system with its lower tiers of government. This connection between the different levels of government within the PRC plays a crucial role in China’s unique CIT rate-setting agenda that results in intense and tacit inter-jurisdictional tax competition.

Can Market Reforms Curb the Expansion of Industrial Land?—Based on the Panel Data Analysis of Five National-Level Urban Agglomerations

As China entered marketization in the late 1980s, it soon established a market economy system and implemented tax-sharing reforms. Driven by the marketization, local governments have rapidly developed the economy under the pressure of fiscal competition caused by the reform of the tax-sharing system. Industrial land is an important factor of local economic development, and it enables local governments to invest heavily in the industrial sector to promote economic development, leading to urban expansion. In order to shed light on the relationship between the market reforms implemented by the Chinese government and the expansion of urban industrial land, this paper used the data of 77 prefecture-level cities in China’s five national-level urban agglomerations as research samples from 2007 to 2018. We first constructed the marketization rate of industrial land (MIL) and used the panel data model to examine whether China′s market reform will curb the expansion of industrial land. The results showed that: (1) land market reform can restrain the scale of industrial land expansion, and the impact is different in different urban agglomerations; (2) under the effect of marketization, foreign direct investment (FDI) has restrained the expansion of industrial land to a certain extent. The amount of industrial investment (AII), the ratio of secondary industry to GDP structure (RSG), and the number of industrial enterprises (NIE) will aggravate the expansion of industrial land. We suggest that the Chinese government should deepen the reform of land marketization and develop a differentiated land market mechanism. It is also necessary for local governments to develop stock land, improve the efficiency of industrial land use, increase the investment in advanced technology, and improve the intensive utilization of industrial land. The research provides a reference for other countries in the world that are developing in a transitional period to restrain unlimited land expansion and save land resources in the process of economic development.

From the tax-sharing system to the program system: Institutional evolution and organizational mechanism

Soon after implementing reforms to the tax-sharing system, the People’s Republic of China (PRC) implemented public budgeting reform, and thus formed a new kind of state governance system, the program system (PS). There are three categories of program expenditures available to local governments: “earmarked grants” from higher-level authorities; “non-grant program funds” from higher-level authorities; and program funds from same-level government departments. The convergence and reorganization of these three categories of program expenditure at the local level has, to a great extent, molded the fiscal structure of grassroots government in the PRC. The PS in essence does not mean discarding or surpassing the bureaucratic state system, rather, it is the active improvement and supplementing of the bureaucratic system by the state: a continuation and development of state regime construction. The overt purpose of the PS is to “solidify” budgetary constraints, while the underlying purpose is to enhance the government’s ability to respond to society. The two purposes present some tension in practice, as the rationalized and professionalized forms of governance that result do not necessarily enhance the ability to respond to public needs; in fact the reverse is quite possible.

Why China’s Re-centralisation Emerges in the Age of Globalisation?

Although involved in the age of globalisation,1 China has become more centralised. After the decentralisation from 1978 to 1993, the trend of centralisation2 has been once again strengthened since 1994, which was called re-centralisation by some scholars. Many scholars only focus on the period since the 18th CPC National Congress in 2012, but they fail to find out the root cause for re-centralisation. They ignore the fact that the 1994 Tax-sharing System Reform is an important sign of China’s re-centralisation, the answer may lie in it. In this article, we analyse the 1994 Tax-Sharing System from the perspective of Weber’s theory of domination and find out that the anxiety of the new Chinese central government in the early 1990s was the motivation for both tax reform and re-centralisation. At that time, the new central government could rely on none of Weber’s types of legitimate authority to maintain efficient operations because the charismatic authority3 of central leaders had weakened since the era of Deng Xiaoping, and the new type of authority had not been established. In these circumstances, the central government was eager to reshape the authority to stabilise the centralised order, which was also the basic motivation for Tax-Sharing System Reform.

Fiscal Decentralization, Urban-Rural Income Gap, and Tourism

The reform of China’s tax-sharing system in 1994 has not only had a profound heterogeneous impact on the control level of fiscal resources by local government but also might exert a negative effect on the sustainable development of tourism. Based on this hypothesis, this paper uses 1993–2018 data from 31 Chinese provinces to examine the dynamic relationship between China’s fiscal decentralization, income gap, urbanization, and tourism growth using a panel co-integration model. Our results show that there is a stable co-integration relationship between fiscal decentralization, income gap, and tourism growth. In general, the impact of fiscal decentralization and income gap on tourism development varies across regions. However, in most provinces, urbanization helps the development of tourism. Urbanization and fiscal decentralization also help reduce the income gap. This shows that the inter-regional government competition promotes not only the growth of tourism but also income equality. To achieve the sustainable development of tourism, China should not only take the advantage of local governments’ incentives for economic growth but also handle the income gap problem considering local conditions.

Research on the Poverty Reduction Effect of Fiscal Transfer Payment: An Empirical Study Based on National Poverty-stricken Counties

Since the reform of tax-sharing system in 1994, the central government has begun to implement large-scale fiscal transfer payment to the poor areas in central and western China, but no consensus has been reached on the effect of fiscal transfer payment on poverty reduction. However, in previous studies, public transfer payment refers to the urban public relief system, agricultural subsidies, rural old-age security, urban and rural subsistence security, etc., not including other types of inter-governmental fiscal transfer payment; the data used are mainly from micro-survey data, and focus on the income level of poor population, household income, labor supply and so on, not involving the macroeconomic indicators of poor areas, and lacking inspection on the ability of “blood transfusion” and “blood-making” of fiscal transfer payment.In this paper, the intergovernmental fiscal transfer payment is selected as the core indicator, and it is no longer limited to the public transfer payment for families. Then, we construct a multi-dimensional index system reflecting the poverty reduction effect of poverty-stricken areas, and analyze the effect of fiscal transfer payment on poverty-stricken areas from a macro perspective. Firstly, the impact of fiscal transfer payment on absolute indicators such as poor population, poverty incidence rate, per capita GDP, rural per capita electricity consumption and total mechanical power per household in poverty-stricken areas is more significant. The poverty reduction effect of fiscal transfer payment is better, but there is also the situation that GDP grows rapidly in some regions, but the per capita financial income “does not rise but falls”, that is, the efforts of fiscal revenue are relatively low. Secondly, the effect of fiscal transfer payment on poverty reduction is not ideal or even significantly negative for the ratio of per capita GDP, per capita fiscal income and per capita electricity consumption. This shows that although fiscal transfer payment improves the absolute production and living standards of poor areas, compared with the national average level, it does not increase significantly, but decreases. Solving the problem of relative poverty is still the focus of all future work. Thirdly, in the study of classified transfer payment, the effects of tax return, general transfer payment and special transfer payment are obvious, and the effect of special transfer payment is better than that of general transfer payment.The academic value of this paper is mainly reflected in three aspects: Firstly, it is conducive to improving the current fiscal transfer payment system. Under the background of enhancing the general transfer payment and reducing the special transfer payment, we need to focus on the characteristics of poor areas, do not take “one-size-fits-all” reform measures. Secondly, it is beneficial to enhance the poverty reduction effect of fiscal transfer payment in poor areas and bring into play the use efficiency of fiscal transfer payment. Thirdly, it is conducive to objectively evaluating the poverty reduction effect of fiscal transfer payment. Through the construction of multi-dimensional index system, this paper can objectively reflect the economic development status of poverty-stricken areas and the regional gap with other regions, and provide certain reference for building a long-term mechanism to solve relative poverty in the “post-poverty era” in 2020.

Land finance dependence and urban land marketization in China: The perspective of strategic choice of local governments on land transfer

In the context of tax-sharing system, the issue of using profits from land transfers to cover local government deficits has attracted widespread attention. However, research on how local governments contingently choose different types of urban land transfer methods and the transfer volumes remains limited. This paper utilizes China’s transfer of land parcels data from 2007 to 2016 to calculate the marketization level of different types of urban land, and investigates the driving forces of urban land marketization in China, paying special attention to land finance dependence and urban land marketization. We find that urban land marketization level is increasing. Among different urban land types, residential land has the highest marketization level, while industrial land has seen the largest increase in marketization. The results of a spatial lag model also show that when local governments increase the level of land marketization, governments in neighboring regions react correspondingly. Judging from the status quo of economic development in most cities, local governments usually tackle financial deficits by vigorously promoting urban land marketization, but they tend to prioritize residential and commercial land transfers for their own interests given the degree of land finance dependence. This study broadens our understanding of the heterogeneous nature of land marketization and the role of local government behavior in the urban land market in China.

Real Estate Cycle，Local Government Fiscal Pressure and LGFVs’ Land Purchasing

Since the reform of the “tax-sharing system” in 1994, the problem of “unbalanced fiscal revenue and expenditure” of local governments has increasingly become a hot topic of concern to many observers. This is mainly reflected in the lack of budgetary fiscal revenue caused by the mismatch between financial power and responsibility. On the other hand, under the long-term promotion mechanism based on local GDP growth, local officials have continued enthusiasm for “investment attraction” and fixed asset investment. In the context of the central government’s “four-trillion” fiscal stimulus plan in 2008, a large number of local government financing vehicles（LGFVs hence after）have sprung up, and funds have been obtained through bank loans and “Municipal Investment bonds” to support infrastructure construction and stimulate local economic growth. The disorderly expansion of the financing vehicle business also inevitably accumulates a large amount of debt, which makes local governments face the pressure of debt repayment either explicitly or implicitly.Faced with “budgetary pressures within the budget” and “debt pressures” outside the budget, local governments have increasingly relied on land sales for more than a decade. Land transfer income can not only supplement the local fiscal gap, but also become the most credible source of debt service income for local governments. In addition, land assets are the most important financing collateral for financing vehicles. Land income and land assets have become the most important means for Chinese local governments to make up for fiscal pressure and maintain local debt.However, the income from local government land sales is not always stable, but is often affected by shocks from the housing demand side. In order to “cool down” the long-term “overheated” real estate market, the central government announced more than 30 national real estate regulation and control policies between 2003 and 2016. The most typical example is the two waves of “Purchase Restriction” during 2010 and 2013. These regulatory policies have caused short-term negative impacts on the real estate market and the land market, and have significantly reduced the land sales revenue of local governments. Faced with this situation, local governments with greater financial pressure will strive to find other ways to increase land sales income.Under the above background, this article hopes to answer the following important economic question: What measures will local governments that rely on “land finance” take to smooth out fluctuations in fiscal revenue in the face of adverse real estate market shocks? Under the guidance of this goal, this article identifies and analyzes a potentially important mechanism: Chinese local governments use LGFVs to obtain land transfer fees and “feed back” budgetary fiscal revenue. Using micro data from land transfer and LGFVs, we find that the proportion of land purchased by LGFVs in Chinese cities for goods and services has a significant “reverse cycle”, that is, the proportion of transaction volume（area）during the real estate market adjustment period has increased significantly. Further analysis shows that for cities with greater “financial pressure” and higher incentives for local officials to promote, this “countercyclicality” is more intense. Secondly, the funds for land acquisition by LGFVs mainly come from the increase of debt, instead of the subsidies of local governments in the later period, which may further increase local hidden debt. Finally, the above “countercyclicality” mainly comes from the central and western regions and the small cities. The findings of this article are of great significance for the in-depth understanding of the operation mechanism of the “land finance” of local governments and the interactive relationship between “fiscal pressure” within the budget of local governments and “hidden debt” outside the budget.

China’s Central-Local Government Relationship from the Fiscal System Perspective

Different fiscal systems may shape different relationships of the central-local government. The transition of the fiscal system is an important perspective to interpret the changes of the relationship between the central and local governments. From the perspective of historical institutionalism, this paper analyzes the changes of China’s fiscal system and the corresponding central-local relationship since the founding of the People’s Republic of China. Since 1949, China’s fiscal administration system has undergone a continuous change process: the fiscal system characterized by “unified revenue and unified expenditure” in the prime of the founding of China, the fiscal system characterized by “fiscal responsibility” in 1980s (the reform and opening-up) and the fiscal system characterized by the tax-sharing system gradually improved. Accordingly, with the evolution of the fiscal system, the central-local relationship characterized by “centralization of authority”, “decentralization and profit sharing” and “grant decision in economy” have been formed respectively. In view of the above, the conclusion is drawn: with the constant reform of the fiscal system, the relationship between the central and local governments is gradually moving from “‘control’ and ‘being controlled’” towards “synergy and cooperation” in China. Finally, they will achieve a benign development.

Political decentralization and the path-dependent characteristics of the state authoritarianism: an integrated conceptual framework to understand China’s territorial fragmentation

ABSTRACTChina’s city regionalization aims to remedy the negative effects of territorial fragmentation in search of coordinated development across various jurisdictions. Scant research systemically examines fragmentation in China with particular reference to its mechanisms and solutions. This article formulates a conceptual framework capable of dissecting China’s territorial fragmentation based on three institutional designs, namely—the central-dominated administrative system, the pro-growth cadre evaluation system, and the twofold tax-sharing system. Under this framework, this article deciphers territorial fragmentation in China from the perspectives of the centrally initiated political selection, cadre reward, and socioeconomic regulatory mechanisms. These three aspects help coordinate pro-growth-induced political decentralization which, at the same time, reveals the path dependence of Maoist state authoritarianism to solid regulatory powers of the central state. The framework allows us to pinpoint clearly three administrative solutions to mitigate the negative effects of fragmentation for future institutional design: the adjustment of jurisdictional boundaries, setting-up of interjurisdictional partnerships and regional institutions, and formulation of a regional spatial plan.

Transfer Payment Uncertainty and Local Fiscal Expenditure Bias in China

Government revenue is the source of funds for local governments to arrange fiscal expenditures and provide public services.With the completion of tax-sharing system reform in 1994, the financial capacity of the central government has been rapidly improved, but local governments face with increasing pressure on their budgets. The transfer payment system plays an important role in narrowing the gap among regions in economic development and public services. However, the problems with China’s transfer payment system are very obvious. In addition to the unreasonable structure, potential problems such as irregular allocation, opaque implementation and lacking supervision in the transfer payment budget management process are usually mentioned in the literature. These problems exist in the transfer payment system may directly restrict its effectiveness. Differing from previous studies that focus on the economic effects of the scale and structure of transfer payments, this paper discusses the impact of transfer payment volatility on fiscal expenditure bias from the perspective of uncertainty, which is a relatively new perspective. As a whole, transfer payment volatility caused by the inadequate management of government budget increases the uncertainty of local government revenues, leading to a decline in the expected utility of local governments. To avoid the utility loss, local governments tend to increase productive expenditures to stimulate regional economic development and maintain fiscal revenue stability. In detail, this paper builds a theoretical framework to demonstrate how transfer payment volatility affects local governments’ fiscal expenditure bias in China, and then uses the county-level data to examine their relationships. The empirical results show that transfer payment volatility significantly aggravates local governments’ fiscal expenditure bias towards productive activities, and the effect manifests an asymmetric feature, which is more prominent in central and western areas, and regions with lower net inflow of transfer payments and fiscal self-financing rates. In addition, the results pass through a series of robustness checks, including an instrumental variable method, adjustment of core variable measurement and accounting for other major events. Therefore, our findings reveal that, transfer payment volatility will further aggravate the insufficient supply of social public goods by local governments. In order to achieve the policy goal of equaling basic public services among regions during the period 2020-2025, which was mentioned in the report of the 19th National Congress of the Communist Party of China, besides making steady progress in reforming the division of administrative authority and spending responsibilities between the central government and local governments, it is also necessary to standardize the budget management system of transfer payments to reduce the transfer payment uncertainty of local governments.

Research on Reform of Tax-sharing System in the Background of Tax and Charges Reduction

Since 2015, Chinese governments at all levels have been advancing high-frequency tax and charges reduction, and the frequency of charges reductions is surprising. China has continuously deepened reform of tax-sharing system, constantly expanding local government power and increasing economic vitality. In order to promote the sustained and healthy development of China's economy, we should maintain a reasonable scale of government charges, adjust the charges range of the central and local governments, and further improve China's fiscal decentralization system and government charges management mechanism. In this paper, it mainly researches two-way interactive effect between financial decentralization and public service charges. The data of 31 provinces in China from 1999 to 2017 was used to construct the simultaneous equations model for financial decentralization and public service charges, and then the empirical test was carried out for the interactive effect between the two with 3sls method. The research results show that there is a positive interaction between financial decentralization and public service charges. That is, the public service charges is decreased with the increase of the degree of financial decentralization. Local governments gain more power, lower fees and promote economic development. The degree of financial decentralization is increased with the decrease of public service charges. Lower fees mean less government intervention in the economy and the degree of decentralization increases. In addition, the effect degree of the control variables related to financial decentralization and public service charges was analyzed in this paper.

The Governance Model of Project Institutions and the Expansion of Local Government Debt

With the completion of tax-sharing system reform in 1994, the financial capacity and governance capacity of the central government have been rapidly improved. In order to encourage the local government to actively achieve the goal of promoting economical growth and maintaining people’s livelihood”, after 2002, the central government gradually came to allocate the transfer payment in the form of projects” downward. The special transfer payment allocated by the project application increased rapidly from 37.5 billion yuan in 1995 to 1894.1 billion yuan in 2014, with an average annual growth rate of 22.93%. The huge amount of the special transfer payment has strengthened the governing effect of the central government in relying on the top-down system and gradually formed a unique governance model of project institutions”. Project institutions establish the hierarchical governance mechanism between the central and local governments, which not only fully arouses the enthusiasm of local governments to carry out the campaign of project competition and develop regional economy, but also increases the debt financing needs of local governments. Actually, project institutions form a financial capital chain with the project as the carrier, the central special transfer as the guide, and the local supporting funds, bank loans and other funds extensively involved. By constructing the dynamic game model which reflects the relationship between central and local governments, we analyze the impact of project institutions on financing decisions of local governments. Then based on the special subsidy and local debt data of 278 cities, we test the expansion effect on the debt of project institutions and the mechanism. The research shows that project institutions significantly promote the expansion of local debts. The effect, on the one hand, comes from the increase of debt financing of public investment demands; on the other hand, comes from soft budget constraints of the special subsidy, which may induce local governments to carry on moral risk behaviors on debt financing, and the effect is more pronounced in poorer regions. The policy implications of this paper include the following: first, a transparent and scientific project application mechanism should be constructed; second, the central government should clearly define the inter-governmental authority and expenditure responsibility as soon as possible; third, the central government needs to tighten budgetary constraints on local governments, and makes its attitudes clear at local debts and reduce the expectations for aids. The potential contributions of this paper lie in two aspects: First, previous literature is mainly based on the perspective of central-local relations, which studies the causes of local government debts, generally emphasizes the influence of the decentralization governance model characterized by lumpism”. However, it ignores the possible debt expansion effect of project institutions, which is more characterized by centralism. Second, existing empirical literature mostly uses the data of provincial government debts or chengtou” debts to calculate the total amount of local government debts, but the main body of Chinese government debt issuance is the local government below the provincial level, the main source of debt funds is bank deposits, and the direction of investment of debts is mainly municipal infrastructure construction projects. Therefore, we select the sum of various types of long and short term debts of urban financing platforms and fixed assets investment of municipal public facilities construction from bank loans as the agent variable of local government debts, so as to make the empirical results more reliable.

Fiscal decentralization, fiscal reform, and economic growth in china

In 1994, after a period of substantial fiscal decentralization that has been credited with leading to historically unprecedented growth rates but significant fiscal decline, China introduced a new fiscal system that recentralized the collection of tax revenues. The economic and political consequences of this new Tax Sharing System (TSS) have been debated extensively in the literature, especially because of the renewed interest in fiscal federalism and its interaction with political institutions and economic outcomes. The question central to this debate has been whether the TSS constitutes a significant departure from decentralization with adverse effects on fiscal federalism or whether the recentralization of revenues under the TSS corrects for the overshooting in decentralization with beneficial economic outcomes. This paper exploits the staggered introduction of the TSS across regions and over time for econometric identification purposes and finds robust causal evidence that the TSS had a positive impact on economic outcomes.