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Does Transfer Payment Mitigate the Vertical Fiscal Imbalance in China?

【Authors】
CHU Deyin & CHI Shuxian
【WorkUnit】
CHU Deyin (Anhui University of Finance and Economics, 233030)
CHI Shuxian (Shanghai University of Finance and Economics, 2004330)
【Abstract】

The vertical fiscal imbalance is an institutional characteristic of the country that implements the fiscal decentralization management system. If the vertical fiscal imbalance is too serious, it will not only affect the financial relations between the central government and the local government, but also undermine the construction of a modern financial system. The transfer payment system, as a policy tool to deal with the relationship between the central government and the local government, plays an essential role in coping with the vertical fiscal imbalance and the public product spillover in the area. On this account, firstly, this paper analyzes the mechanism of the transfer payment working on the vertical fiscal imbalance in theory. Secondly, the degree of the vertical financial imbalance in China is figured out. Furthermore we establish a static panel model and a dynamic panel model to analyze the total and structural effects of transfer payment on vertical fiscal imbalance. The results show that the transfer payments which in theory have the function of balancing the economic development of the region worsen fiscal vertical imbalance. Additionally, transfer payments exercise a structural impact on the vertical fiscal imbalance. Although both general transfer payment and tax returns can mitigate the vertical fiscal imbalance effectively, special transfer payment has the opposite effect. These results illustrate that the reason why the transfer payment system could not address the vertical fiscal imbalance lies in the irrational structure of the transfer payment. Last but not least, the vertical fiscal imbalance has an inertial deferred effect. Therefore, to use the transfer payment to modify the vertical fiscal imbalance is essential to improving the financial relations between the central government and the local government. This study sheds light on the improvement of the transfer payment system and the establishment of a modern financial system.
 
JEL:E62, H72, H77

【KeyWords】
Vertical Fiscal Imbalance, Transfer Payment, Overall Effect, Structural Effect