The Tax Sharing System And Urbanization In China

By 2011, the rate of urban population in China had reached 51.27% and it was the first time in China that urban population exceeded rural population. It took China 23 years to finish this process. Considering the great scale of economic and city construction during the past 23 years, the urbanization in China is a marvelous miracle. Joseph Eugene Stiglitz, the famous American Economist and Nobel Price winner in Economics, once said that China’s urbanization and America’s science development would become the most important two matters in 21 century. Although China has made a great success in urbanization, there are still many problems waiting to be solved and it will ask for a long period of time. The most obvious problem is that the speed of urbanization of lands is much quicker than that of population. From 2001 to 2012, urban land in China raised from 24 thousand square kilometer to 46 thousand square kilometer, its rate of urban land expansion reached 6.2% per year. However, the rate of urban population expansion was only 3.6% per year from 2001 to 2012 and the urban population was raised from 0.48 billion to 0.71 billion. In 2013, China’s resident population urbanization rate was 53.7% and census register population urbanization rate was almost 36%.China’s urban population percentage is not only far below the number of those developed counties, which reaches 80%, but it is also less than other developing countries like China, which reaches 60%. Regional imbalance is another great problem in China’s urbanization, along with more and more people get into several big cities, “urban disease” like congestion of traffic and environment pollution emerges more and more frequently.In the process of urbanization in those developed countries in America and Europe, the power of market leaded the urbanization process. In China, because of the household registration system and land public owned system, the power of government determines the process of urbanization. To understand the reason of the very behavior of Chinese government, it is essential for us to realize the Fiscal decentralization theory. Market-preserving Federalism considers that decentralization gives the local governments more economic incentives and freedom so that they become more inclined to promote economic reform and develop their economic. Under the performance assessment mechanism based on GDP, the fiscal decentralization drives local governments to compete with each other to get a faster economic growth. Since the local officials consider the urbanization as an important way to stimulate domestic demand in the long term, the local governments are keen on promoting the urbanization one after another. Thanks to the tax sharing system reform in 1994, China’s decentralization turned into Economic decentralization from Administrative decentralization, which had a profound and lasting affect on the relationship between central government and local governments. The main content in the tax distribution system reform is thedistribution of taxes between central government and local governments. The central government obtains most of the fiscal revenue and the local governments still afford most of the expending duties. The balance of revenue and expenditure was broken. In this background, this text discusses the influence of financial and taxation systems on the development of urbanization. Comparing with the previous literatures, the article mainly did the following work:First of all, this article reviews the financial and taxation systems reforms and urbanization progress since the founding of new China in 1949. The first stage was the urbanization and financial and taxation systems during the planned economy time; the second stage was the recovery of urbanization and financial contract system from 1978 to 1993; the third stage was the rapid development of urbanization after the tax sharing system reform in 1994. We also compare the relationship between urbanization stage and economy development in different counties. Using the panel datum of 142 countries and a quantitative model with quadratic term and cubic term, we find that after the per capita GDP reaches 12000 dollar, the push effect of economy growth on urbanization starts to slow down.Secondly, the article discusses the reason why the speed of urbanization of lands is much quicker than that of population from the aspects of household registration system and land system and we construct the corresponding theory model. We discuss the reason why the speed of urbanization of lands is much quicker than that of population from three aspects, competition between local government, need to retain more financial revenue and need to decrease local financial expenditure. In the mathematical model which including the aspects of household registration system and land system, we draw a conclusion that local governments will heighten the threshold(k k*, k means human capital) to get residence qualification so that affordable financial expenditure will decrease. The local governments will also expand the city radius(x x?, x means city radius) so that more lands can be used to promote the economy growth and local government can receive more financial revenue from selling lands.Then,we discuss the reason why the speed of urbanization of lands is much quicker than that of population from the aspects of financial revenue distribution between central and local governments. We empirically study the effect of initial financial revenues distribution and the second time financial revenue distribution on the speed of two kinds of urbanization. Using the lag term of local governments’ budgetary revenues, per capita tax revenues, structure of tax revenue and the fixed effect model, we find that budgetary revenues, proportion of local governments’ financial revenues and per capita tax revenues have negative influence on the disconnect of the speed of urbanization of lands and the speed of urbanization of population. In the constitution of tax revenues, the bigger percentage of added-value tax is, the bigger the difference between the speeds of the two kinds of urbanization is and the percentage of sales tax has a contrary effect. What’s more, the losses of tax and financial self-sufficiency rate have the positive effect on the difference between the speed of urbanization of lands and the speed of urbanization of population. Judging from these findings, it’s not difficult for us to say that the revenue centralization after the tax distribution system reform makes local governments have a preference for the urbanization of lands instead of the urbanization of population.After the tax sharing system reform in 1994,Chinese government starts to implementgovernmental transfer as the second-time revenue distribution between central government and local governments. In the beginning, tax return was the main constituent part of the fiscal redistribution. The proportion of financial transfer payment and special transfer payment increased gradually later. Aiming at Chinese cities at prefecture-level or above, we study the influence of the proportion of fgovernmental transfer and different kinds of governmental transfer on the gap between the speeds of two kinds of urbanization. The conclusion shows that fiscal redistribution helps to narrow the gap between the speeds of two kinds of urbanization. On the one hand, it keeps down the speed of urbanization of the land. On the other hand, it accelerates the speed of urbanization of population. Different kinds of fiscal redistribution have different influence on urbanization. Tax return broadens the gap, while financial transfer payment and special transfer payment narrow the gap. Different regions have different fiscal redistribution component. The main proportion of governmental transferin the east area is tax return, in the middle area is financial transfer payment and special transfer payment in the west area.Last, we discuss the relationship between the scale of local governments and the size of urban population,size of urban spatial scale. In China, government and its policies lead the distribution and development of cities. The expansion of government scale has two sides effect on the size of urban. On one hand, the bigger the government is, the more economic resources it will have and the resources can be devoted to the development of cities and make the cities larger. On the other hand, a large-scale government requires more fiscal expenditure and may bring about more disturbs to the market so that private investment will decrease because of the crowd-out effect and corporations will face more tax burden. To empirically study which effect takes the wind, we used the city panel datum of Chinese cities at prefecture-level or above. We find that the scale of local governments has a negative correlation with the size of urban population and the size of urban spatial scale. Then we explain the empirical conclusion from the aspect of regional disparity.It is the key period for the development of urbanization at present. There are great chances in the urbanization progress and we need to get a clear understanding of the new trends and new features of urbanization and properly handling the risk in it. The public finance system fits the economic growth driven by investment, but it can’t fit the coming society of higher urbanization rate. During the progress of urbanization, the responsibility of fiscal revenue and expenditure between governments should be adjusted and more fiscal redistributions should be used to keep balance between governments to help the development of Chinese economy. Our research makes great sense to the reform of fiscal system so that it can be more conductive to the urbanization development and economic transition.