Research On The Impact Of Replacing Business Tax With VAT On China’s Fiscal Imbalance

Finance keeps the fundamental and essential pillar of national governance,a scientific fiscal and tax system is an essential institutional guarantee for achieving high-quality development of the national economy.As an important link in the construction of China’s modern fiscal and tax system,the comprehensive of “replacing business tax with value-added tax(VAT)” not only releases the vitality of market entities and promotes the upgrading of industrial structure,but also has a policy impact on China’s intergovernmental fiscal relations.Fiscal imbalance proves a common phenomenon in countries around the world that implement fiscal decentralization systems.It includes both vertical fiscal imbalances among different levels of government,as well as horizontal fiscal imbalances among governments at the same level.A moderate level of fiscal vertical imbalance is conducive to enhancing the central government’s macro regulatory capacity,but if the level of vertical imbalance maintains at an excessive level,it will distort local government behavior and reduce the efficiency of resource allocation.Excessively high level of horizontal fiscal imbalances will hinder the coordinated development among regions.The tax reduction effect and the weakening of local government tax autonomy of“replacing business tax with VAT” will,to a certain extent,exacerbate the level of fiscal vertical imbalance.Under the realistic background of different levels of economic development and industrial structures among regions in China,the implementation of the comprehensive "replacement of business tax with VAT " will aggravate the differentiation of local governments’ financial capacity,increase the degree of deviation between VAT revenue and tax sources,as well as expand the level of horizontal fiscal imbalance between provincial governments.Putting “replacing business tax with VAT”and fiscal imbalance under the same framework,and analyzing the impact mechanism of“replacing business tax with VAT” on fiscal imbalance with relevant theories,this thesis uses China’s provincial panel data from 2011 to 2020 to construct a weighted variation index to measure the level of fiscal imbalance in China.Regarding the comprehensive "replacing business tax with VAT " as a quasi-natural experiment,the thesis empirically studies the impact of the comprehensive implementation of “replacing business tax with VAT” on the degree of fiscal imbalance in China with the help of dual difference modelThe study shows that the implementation of the "replacing business tax with VAT " has significantly pushed up the degree of fiscal imbalance between vertical and horizontal fiscal imbalance in provinces with high dependence on business tax in general.The tax reduction effect of the "business tax reform" has a short-term impact on the financial resources of local governments and weakened their tax autonomy;the fiscal capacity of local governments at the provincial level has been further divided after the reform,and the deviation of VAT tax revenue from tax sources has increased.In response to the above issues,this thesis puts forward the corresponding policy suggestions on the basis of China’s national conditions and the experience of international construction of tax system.Firstly,in the future construction process of China’s local tax system,it can be considered to delegate consumption tax to local governments to enhance their fiscal self-sufficiency rate and alleviate the degree of vertical fiscal imbalance.The second one is about optimizing the scheme of the VAT revenue sharing.For vertical sharing,it is necessary to design a regulation mechanism for fixed VAT payments,which can compensate for local financial losses in the short term by negotiating fixed VAT payments.Long-term vertical sharing needs to adhere to the principle of “determining revenue based on expenditure” and achieve the combination and linkage of financial power and expenditure responsibility between central and local governments,which can alleviate the degree of vertical financial imbalance.Horizontal sharing requires a gradual transition from the current principle of production location to the principle of consumption location.It is possible to use the “total retail sales of social consumer goods and services” as a reference index for horizontal distribution of VAT,or establish a mechanism for cross regional liquidation and horizontal tax refund of VAT,which can mitigate the rise of the level of horizontal fiscal imbalance after the reform.