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Transfer-based decentralisation, economic growth and spatial inequality: Evidence from China’s 2002–2003 tax sharing reform

Fan Fan, Ming Li, Ran Tao and Dali Yang
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Fan Fan: Renmin University of China, China
Ming Li: University of Pennsylvania, USA
Ran Tao: Renman University of China, China
Dali Yang: The University of Chicago, USA

Urban Studies, 2020, vol. 57, issue 4, 806-826

Abstract: China has adopted a transfer-based fiscal decentralisation scheme since the mid-1990s. In the 1994 tax sharing reform, the central government significantly raised its share of government revenue vis-à -vis local governments by taking most of the newly created value-added tax on manufacturing. One aim for the adoption of the transfer-based fiscal scheme was to channel more funds to less developed regions and rural areas, and to alleviate growing interregional inequality and urban–rural income disparity. In 2002 and 2003 the Chinese central government further grabbed 50% and 60%, respectively, of the income taxes previously assigned only to local governments while providing more fiscal transfers to the country’s poor regions and the countryside. Utilising the 2002–2003 change in China’s central–local tax sharing regime as an exogenous policy shock, we employ a Simulated Instrumental Variable approach to causally evaluate the effects of the policy shock on growth, interregional inequality and urban–rural disparity. We find the lower local tax share dis-incentivised local governments and led to lower growth. Although higher central transfers helped to reduce interregional inequalities in per capita GDP and per capita income, the equalising effects were only present for urban incomes. We argue that transfer-based decentralisation without bottom-up accountability was detrimental to economic growth and had limited impact on income redistribution.

Keywords: economic growth; income inequality; local accountability; transfer-based decentralisation; ç» æµŽå¢žé•¿; æ”¶å…¥ä¸ å¹³ç­‰; 地方问责制; åŸºäºŽè½¬ç§»çš„è´¢æ”¿åˆ†æ ƒ (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:sae:urbstu:v:57:y:2020:i:4:p:806-826

DOI: 10.1177/0042098019856780

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