County-Level Tax Sharing: A Statistical Basis for Measuring China’s Fiscal Decentralization

MaoJie(毛捷),LvBingyang(吕冰洋)andChenPeixia(陈佩霞)....................................................................

Abstract:

Controversies exist in literature regarding what indicators should be employed to measure China’s fiscal decentralization. This paper measures China’s fiscal decentralization by the sharing ratios of county-level VAT and corporate income tax (CIT). This approach avoids such problems as homogeneous denominator, and reflects the intricate interactions between governments at different levels. Based on extensive sources including the National Fiscal Statistical Information at Prefecture and County Levels and China County (City) Socio-Economic Statistical Yearbook over the 1998-2007 period, our estimation and analysis led to the following findings: (1) Since 2002, counties have retained a falling share of revenues; (2) a multidimensional horizontal comparison reveals a pattern in the county-level tax sharing ratio, i.e. counties in central and eastern regions retain a higher share of tax revenues compared with those in western and northwestern regions. These findings explain the fiscal difficulties at the grassroots level, and can be used to conduct a quantitative analysis of the determinants and economic effects of China’s fiscal decentralization.”

Keywords:

fiscal decentralization, tax sharing, VAT, corporate income tax (CIT) JEL Classification Codes: H71, H77, H11 DOI:1 0.19602/j .chinaeconomist.2019.3.0619602/ j .chinaeconomist.2018.09.02

1. Introduction

Given its importance, fiscal decentralization has been extensively studied in economic and political literature. The economic and political effects of decentralization cannot be evaluated without empirical evidence. The key to empirical research is to find appropriate indicators that can reasonably measure fiscal decentralization. Regretfully, scholars have different understandings or selective preferences on the definition of fiscal decentralization. As a result, they employed different indicators and reached different conclusions. This problem is evident in studies on China’s fiscal decentralization. Take the relationship between fiscal decentralization and economic growth for instance, different scholars reached opposite conclusions in their empirical tests. Some studies (Justin Lin and Liu, 20001; Qiao et al., 2008) consider that fiscal decentralization is positively correlated with economic growth. Other studies (Davoodi and Zou, 1998; Zhang and Zou, 1998) conclude that fiscal decentralization cannot promote growth. An