Template-type: ReDIF-Paper 1.0

Author-Name: Junxue Jia
Author-Workplace-Name: Renmin University of China

Author-Name: Yongzheng Liu
Author-Workplace-Name: Renmin University of China
Author-Workplace-Email: yongzheng.liu@ruc.edu.cn

Author-Name: Jorge Martinez-Vazquez
Author-Workplace-Name: International Center for Public Policy, Georgia State University, USA
Author-Workplace-Email: jorgemartinez@gsu.edu

Author-Name: Kewei Zhang
Author-Workplace-Name: Boston University, USA

Title: Vertical Fiscal Imbalance and Local Fiscal Indiscipline: Empirical Evidence from China 

Abstract: Based on a 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 efforts. 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 VFI and provide significant implications for improving the design of fiscal decentralization policy in China and elsewhere.
Length: 75 pages 

Creation-Date: 2020-04

File-URL: https://icepp.gsu.edu/files/2020/04/paper2006.pdf
File-Format: application/pdf

Handle: RePEc:ays:ispwps:paper2006