Application Of Principal-agent Theory To Longitudinal Compartmentalization Of Tax Rights

Under the background of market economy, the division of fiscal revenue and expenditure between the central and the local governments has become an important incentive factor to local government behavior. The fiscal and tax system reform in 1994 played a certain role in strengthen the macro-control ability in the central government to the local governments. However, the longitudinal compartmentalization of tax rights in China still has many non-standard and unscientific places, so far, it hasn't formed its own independent tax benefit mechanism. Since tax rights configuration between the central and the local governments is a'zero-sum game', the central government gets more, the local governments will get few, and vice versa. Although tax-sharing reform makes most of the financial powers center in the central government, the local governments have the information superiority of public service status under their jurisdiction, they still can choose their own level in the course of executing central policy, then bring the deviation of policy implementation. As the central government is at the information disadvantage, if he want to guide the local governments select the action to consistent with his policy targets, he should pay a certain agent cost. Consequently, the benefit game problems in the longitudinal configuration of tax rights is existing between the central government and the local governments, these problems are mainly reflected as following: the tax legislation power is highly centralized in the central, the local fixed income are few, the local fiscal revenue can not cover the expenditure, the high proportion in tax revenue share, the central supervisory capacity is limited.The above-mentioned problems take place not only because of the unbalance of the compartmentalization of tax rights between the central government and the local governments, but also by the reason that the current running fiscal and taxation system still needs further improvement from more macroscopic view, which include the unbalance of the tax legislation power, the unreasonable compartmentalization of tax revenue, the financial powers out of step with the administrative powers, the imperfection of the shared tax system, the unsound supervisory and restrictive mechanism, etc. In the Principal-Agent theory, the local governments, as agents, have two constraint conditions: participation constraint and incentive compatibility constraint. As for the central government, who is considered to be a client, whether the mechanism that he designs meets the two constraint conditions from the different types of local agents, concerns whether the local agents can choose their expected actions, that is, whether the effective implementation of policy could be guaranteed. To extricate ourselves from the predicament of the deviation of public policy implementation and the gap between regions become more and more wide, we should straighten out the relations among different interests between the central government and the local governments.To straighten out the interest relations between the central government and the local governments in China, the foothold is the configuration of interest-balancing. For the current economic situation as well as the present situation of the uneven economic development and the income level in different regions of China, it's especially important to form a harmonious pattern of interests between the central government and the local governments. Through constructing the Principle-Agent model, providing an operable institutional arrangement to the action of local governments adverse selection, the conduct of moral hazard with hidden information, the behavior of moral hazard with hidden actions can resolve the problems which exist in the longitudinal compartmentalization of tax rights efficiently, realize the effective distribution of tax rights, make a service for the new taxation system reform in China in order that it can be carried out smoothly.On the basis of constructing the Principle-Agent model, the thesis put forwards the corresponding path choice: optimize the pattern in the compartmentalization of tax legislation power and endow the local governments with appropriate legislation purview permissions to exercise the income-generating initiative of local governments; adjust the tax revenue attribution and regulate the scale of non-revenue tax collection to make the local governments have the independent and stable source of fiscal revenue, which can solve the problems about the upward trend in the percentage of non-revenue in local fiscal revenue and the local governments excessive dependence on'land-based finance'; define the scope of the financial powers and the administrative powers, improve the equalization level of transfer payments, realize the utility maximization of financial transfer payment funds and maintain the sustainability of local government tax efforts are redound to achieve the unify fairness and efficiency in the public service; confirm the shared model of shared tax, consider value-added tax as a special shared tax of the central and the local, meanwhile, classify the corporate income tax into the central tax, also combine personal income tax and stamp duty on securities transactions as the central tax at the appropriate time, moreover, cultivate main taxes of the local tax according to the principle that the attribute and administrative power of taxation are combined with the expenditure responsibilities; establish effective supervisory mechanism as supplementary measures can constrain local opportunism behavior and expand local interests appeal channels.