Vertical fiscal imbalance and local fiscal indiscipline: Empirical evidence from China |
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| Affiliation: | 1. China Financial Policy Research Center, School of Finance, Renmin University of China, China;2. China Financial Policy Research Center, School of Finance, Institute of Public Finance and Taxation, Renmin University of China, China;3. International Center for Public Policy, Georgia State University, USA;4. Department of Economics, Boston University, USA;1. Sao Paulo School of Economics, Fundação Getúlio Vargas, Brazil;2. Center for Engineering, Modeling and Applied Social Sciences (CECS) and PPGE, Federal University at ABC (UFABC), Brazil;3. Treasury Specialist at BRF, Brazil;1. Department of Public Finance, Poznań University of Economics and Business, al. Niepodległości 10, 61-875, Poznań, Poland;2. Department of Economics, University of Kassel, Nora-Platiel-Strasse 4, 34109, Kassel, Germany;1. Research Department, Budget Office, Ministry of Finance, Teatinos 120, Santiago, Chile;2. Facultad de Economía y Negocios, Universidad Andrés Bello, Santiago, Chile;1. Department of Economics, The Hebrew University of Jerusalem, Mount Scopus, Jerusalem 91905, Israel;2. Federmann School of Public Policy and Government, The Hebrew University of Jerusalem, Mount Scopus, Jerusalem 91905, Israel;1. Economics Experimental Laboratory, Nanjing Audit University, China;2. Department of Economics and Statistics, University of Siena, Italy;3. Department of Economics, Monash University, Australia |
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| Abstract: | Based on Chinese city-level panel dataset, this paper examines the effects of vertical fiscal imbalances (VFI) on local fiscal indiscipline in a partial fiscal decentralization setting. We find that higher VFI induces a form of fiscal indiscipline: a reduction of tax collection effort by local governments. In addition, by exploiting the unique Chinese fiscal institution of “extra-budgetary” revenues, we show that in this case higher VFI does not alter local governments’ tax collection effort. Even though local governments also possess full taxing power for “extra-budgetary” revenues, these revenues do not contribute to the determination of central fiscal transfers to local governments, thus creating very different incentives for local governments response to VFI. Our results shed light on the working mechanism of the VFI and provide significant implications for improving the design of fiscal decentralization policy in China and elsewhere. |
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| Keywords: | Vertical fiscal imbalance Local fiscal indiscipline Partial fiscal decentralization China H20 H71 H77 |
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