Intergovernmental fiscal transfers and local tax efforts: evidence from provinces in China

Abstract

This paper explores the incentive effects of total central fiscal transfers and its components – tax rebates and equalization grants – on provincial tax efforts in China. Our theoretical model predicts negative impacts on provincial tax efforts from both total fiscal transfers and equalization grants, while the effects of tax rebates are theoretically unclear. Using Chinese provincial panel data from 1995 to 2007, our empirical study provides significant evidence on the theoretical implications.

JEL Classifications:

• H39
• H71
• H77

Keywords:

• fiscal transfers
• tax rebates
• equalization transfers
• tax effort

Acknowledgements

This paper is a shortened version of our working paper, which contains more extensive discussion and citations on several issues. We would like to thank Professor Jorge Martinez-Vazquez and the Editor of the journal for their helpful comments. We also benefited from the participants at the 2011 Allied Social Science Association Annual Meeting.