Tax Sharing,Transfer Payment And Local Fiscal Sustainability

The economic downturn combined with the COVID-19 pandemic has made the financial situation of local governments in China not optimistic.As a result of the epidemic,economic and policy revenue reductions,prevention and control,countercyclical adjustments,and increases in basic support,local governments’ fiscal revenue and expenditure have become more prominent and their fiscal sustainability is facing challenges.In order to prevent and defuse systemic financial risks and improve the sustainability of local finance,the central government has issued documents one after another,requiring the improvement of the fiscal system and the reasonable setting of tax sharing schemes for provinces,cities and counties.It has repeatedly stressed the need to improve the system of transfer payments at and below the provincial level and optimize and adjust the structure of transfer payments at and below the provincial level.Theoretical analysis shows that increasing the proportion of tax sharing of local governments is helpful to improve their financial situation and enhance the sustainability of local finance,but tax sharing will also alienate the financial behavior of local governments to a certain extent,resulting in local fiscal gap.Although the transfer payment accompanied by tax sharing can make up for the financial gap,However,its "flypaper effect" and "fiscal illusion" will lead to the increase of local government financial gap,and then have an adverse impact on the sustainability of local finance.On the basis of theoretical analysis,this paper calculates the "effective fiscal space" of 285 prefecture-level cities in China to quantify the local fiscal sustainability according to the improved nonlinear fiscal response function,and uses the multidimensional data of tax revenue,transfer payments and government debt of these285 prefecture-level cities from 2012 to 2020.Through the dynamic panel model,a series of tests are carried out on the theoretical analysis.The research results show that:first,the current local government financial situation has been in the stage of "financial fatigue".The fiscal surplus not only has strong path dependence,but also the fiscal response function is nonlinear.Second,tax sharing has a significant promoting effect on the sustainability of local finance,but it has a stronger promoting effect on the regions with low economic development level.Thirdly,transfer payment has a significant inhibitory effect on local financial sustainability on the whole,but the effect intensity is different in regions with different economic development levels.Fourth,generally speaking,transfer payments can play a regulating role in the impact of tax sharing on local financial sustainability,and this regulating role has the heterogeneity of economic development level.At present,Chinese local governments are under great downward economic pressure and the contradiction between fiscal revenue and expenditure is prominent,which leads to the accumulation of systemic fiscal and financial risks.Improving the sustainability of local finance can effectively prevent and defuse systemic financial risks.Therefore,based on the theoretical analysis and empirical results,this paper obtains the following policy enlightenments: First,continue to deepen the reform of the fiscal and tax system and improve the local tax system.We should adopt scientific and reasonable methods to define the "fiscal power" and "administrative power" of governments at all levels,and build an inter-governmental fiscal and tax system that is compatible with "fiscal power" and "administrative power".At the same time,improve the local tax system,strengthen the construction of local financial resources.Second,the central government can adjust the proportion of tax revenue shared by local governments in a timely manner to enhance their financial security.Third,we will improve the system of transfer payments at and below the provincial level,optimize and adjust the structure of transfer payments at and below the provincial level,and strengthen the role of transfer payments in filling fiscal gaps.Fourth,strengthen policy linkage,improve policy efficiency,and give full play to the synergistic effect of tax sharing and transfer payment policies.Fifth,we will improve the early-warning mechanism for fiscal risks,innovate local financing models,and create sound fiscal space for local governments.