Changing central local relation in post reform China: a geographical perspective

This study examines the evolution of fiscal relations between the central state and local governments in China since the founding of the People's Republic The emphasis is placed on the changing arrangement for the central state's collection of taxes and allocation of capital among provinces The central local relation has experienced constant reorganization since 1949, but the tax division scheme introduced in the early 1990s represents the most significant change Prior to the 1990s, the central local fiscal relation was shaped by a highly centralized administrative and economic system without rational and scientific design for revenue collection and expenditure The financial responsibility system established after the reforms contributed to regional economic development during the first decade of reforms, but it was a temporary and transitional arrangement that does not meet the requirement of rational resources arrangement according to free market forces The implementation of the tax division scheme has stopped the decline of the ratio of fiscal revenue to gross domestic product, raised the percentage of central revenue in total national income, and strengthened the central function for macro economic control The mechanism for tax refund under the tax division scheme required further improvements Several proposals are made in this study: 1) tax classification should be adjusted according to administration; 2) a scientific and standardized system for regional transfer payment should be developed; and 3) the power for tax legislation should be delineated according to the rational division of administration between the central and local government