|Author Name||MENG Jianjun (Visiting Fellow, RIETI)|
|Creation Date/NO.||April 2017 17-J-030|
|Download / Links|
Since the foundation of the People's Republic of China (PRC) in 1949, systemic reforms have been carried out repeatedly with respect to the fiscal relationship between the central and local governments. Therein the introduction of a tax sharing system in 1994 is one of the most revolutionary examples of institutional design in terms of the structural transformations in China's economy. However, although this system has contributed to sustaining stable economic growth and securing the tax revenue of central government finances in China, it has involved structural problems for local governments which assume heavy responsibilities and has caused an acute lack of tax revenue due to the longstanding doctrine of centralization and institutional flaws on its own. Furthermore, with the addition of the expansion of budget deficits and increases in the government debt, the central government has come under pressure to reform the tax sharing system with respect to the fiscal relationship between the central and local governments.
In November 2013, the central government presented a policy direction for fiscal system reform to address the problems caused by the tax sharing system, which has promoted concrete steps toward its institutionalization. In August 2016, the State Council of the PRC officially announced a fiscal policy at the national level to stipulate a new fiscal relationship between the central and local governments. The fiscal system reform focusing on these tax system revisions was the first attempt at institutional design to integrate fiscal authority and administrative power in China. Against such background, this paper aims to investigate the political intention of reforming the fiscal system and reconstructing the fiscal relationship between the central and local governments. Specifically, by examining the background and factors behind the central government's fiscal system reform, this paper will consider the development of a new fiscal system which could reinforce local governance toward improving local government finances.