Fiscal Capacity Of Local Governments In China: Theoretical And Empirical Study

In the theory circle, generally speaking, fiscal capacity of the local government is defined as the capacity of raising local revenues according to the legal tax rate and tax base within the area under its jurisdiction and is taken as the basic proof to determine intergovernmental fiscal transfer payment standard; In practice, to measure the strength of fiscal capacity of the local government, generally the index such as revenues of local government, or per capita income on which population factor is considered, or more generalized per capita taxable value of the assets is selected to represent.The content definition and measure standard above to the fiscal capacity of the local government have significant limitations theoretically. The finance originally is the activites that government derives resources and provides public goods to meet the public need. If the definition of fiscal capacity of the local government is only limited in fiscal resources the government may control, such capacity can neither reflect the effectiveness and extent of criterion of fiscal extractive capacity of the local government, nor reflect the effectiveness that the local government uses the funds to perform the fiscal functions so that the guide significance of fiscal capacity to the realistic is limited. Additionally, the local government is misled to pay high attention to revenue but to make light of expenditure and to ignore performing fiscal functions roundly and effectively.From the angle of effectiveness, this dissertation discusses fiscal capacity establishing on fiscal function.This paper is committed to reshaping the theoretical system of fiscal capacity of the local government and to endowing new contents and evaluation standards to fiscal capacity of the local government. With theories and analysis methods of economics and management, I define fiscal capacity of the local government as:the capacity that the local government extracts resources within the area under its jurisdiction according to tax rate and tax base provides public goods and performs local government functions. It displays for the effective degree that the function goal of local authority is realized. Accorrding to this definition,supply capacity of public goods and fiscal extractive capacity are the core of fiscal capacity of the local government; That is, the economical reason local authority exists is accepting delegation of resident, disposing and using tax which the taxpayer pays to provide "wholesale" desirable public goods or services and creating the good and indispensable and common external condition for the production or life of resident in the area of jurisdiction,reducing its transaction cost, improving its quality of life. Based on such understanding, discuss the internal action mechanism between fiscal capacity and fiscal functions of the local government and illustrate the bidirectional interactive influence between the two and emphasize fiscal capacity of the local government formed by effective fiscal activity within the function scope of the local government; put forward the features of effectiveness, limitation and dynamic variability of fiscal capacity of the local government for the first time and explain from different angles; prove institutional influence to fiscal capacity of the local government from historical angle by historically reviewing evolution of fiscal system, change of function orientation of the local government and change of fiscal of the local government since the founding of New China. When the function goals of the local government are consistent with the key points of examination of incentive mechanism, fiscal capacity of the local government can be fully motivated to exert effectively to promote realizing the function goals of the local government; when the key points of examination of the local government deviate from the functional goals of the local government, fiscal of the local government will be weakened.Based on the normative analyses, this dissertation selects the final effective output as the qualitative evaluation standard for fiscal capacity of the local government and establishes quantitative evaluation index system including multiple information and uses dynamic factor analysis method at home for the first time, and has implemented dynamic complex evaluation on supply capacity of public goods and fiscal extractive capacity of Chinese provincial level local governments from 2001 to 2006. The evaluation result shows that there is a great disparity between the Chinese provincial level governments in fiscal capacity. During this period, supply capacity of public goods presents the trend of convergence; Fiscal extractive capacity presents the development trend that "the strong is stronger and the weak is weaker".Differences of resource endowments and institutional environment are important factors to influence fiscal capacity of the local governments. I construct panel data model base on the fixed effect and have verified fiscal capacity of the local governments. I centre on analyzing the influence of fiscal decentralization and government preference to the change of fiscal capacity of the local government. The result shows that the fiscal decentralization makes for improving fiscal extractive capacity of the local government but makes against improving supply capacity of basic public goods of the local government. Political incentives from performance examination makes the local government have no obvious preference to promote effective supply of public goods, but preference of the local government to developing economy promoted improvement of fiscal extractive capacity. In addition, the economic development level, the economic openness, the urbanized level as well as the population factor have had the varying degree influence to the fiscal capacity of local government. In this dissertation, the policy suggestion is to define the division of responsibilities between the governments at all levels and to establish performance examination system that is consistent with the function goals of the government to provide proper incentives for the officers of the local governments and to improve the incentive structure of accountability and participation, which is an effective way to improve fiscal capacity and functional performance of the local government.