Hello everybody,
welcome to the course of public finance and taxation.
It is the topic of intergovernmental fiscal relationship in China.
There are three focus questions need to be answered.
No.1,
How are the responsibilities for providing public goods and
services shared between the central government and
the provinces?
No2,
What are the economic principles ought to be govern the
assignment of responsibilities?
When can there be efficient decentralization of decision
making concerning the provision and financing of public services?
And No.3,
what role should be the central government undertake in
redistributing income from rich provinces to poor provinces?
How does the central government subsidize provinces now,
and how effective are these subsidies?
With these questions in mind,
let's take a look at the basic introduction of
intergovernmental fiscal relationship .
4.1 The introduction to intergovernmental fiscal relationship
Intergovernmental fiscal relationship describes the division of
economic labor----taxes, spending, regulation,
responsibility and transfer payment---among different levels of
governments within a country.
Take United states as an example.
Governments in a fedral system is a layer cake: overlapping federal,
state, and local layers held together
by intergovernmental grants,
tax-sharing schemes,
and coordinated government policies.
Throughout history,
there has been unending search for balance between
central authority and local diversity and flexibility,
in deciding which level of governments should collect
what kinds of fiscal revenues and carry out what kinds of
service provision.
In some countries, especially, smaller countries
but some larger ones as well,
the central government plays the primary role in
supplying everything from roads and prisons to health care
and education.
Local governments may have limited powers to raise and
spend revenues,
often under rules set by the central government.
Various countries make different choices about the assignment of
both revenues and service responsibilities.
Education through high school is a national function in France,
a primarily state function in some states of United States.
Such as Hawaii.
The sales tax,
in the form of a value-added tax,
is a central government tax in most of Europe and Latin America.
But it is a sharing tax between central government and
local governments in China.
All of these arrangements involving multilevel governments
are aspects of fiscal federalism,
which describes the ways in which revenues and
responsibilities are divided,
assigned, or share among different levels of government
within a given country.
As for centralization, and decetralization,
Different countries make different choices about centralization,
or concentration of authority and responsibility at higher levels
or in larger governmental units.
A highly centralized governmental structure is one that
concentrates much of the authority, power,
decision making,
and tax collection at a higher level of government.
When lower levels of government enjoy more autonomy,
authority, and independent sources of revenue,
the system is more decentralized.
For centralization,
just as American economist analyzed,
there are four advantages.
The principle economics advantage of centralization is that
the level and variety of public services that each citizen receives
do not depend on whether that person lives in a rich state or
a poor state,
a wealthy suburb or an urban ghetto.
All citizens are entitled to roughly the same quality of education
and other major public services.
A second economic advantage is that some services
have substantial economies of scale, that is ,
the average cost curve continues to decline
with a larger population or service area up to a very large number.
For examples, such services as water, sewer,
and garbage collection.
A third advantage of centralizing at least some services has to do
with capturing spillover benefits or taking the negative effects of
spillovers into account.
Spillovers of benefits of costs of activities
from one jurisdiction to another mean that
some beneficiaries are not made to pay
and some people who are negatively affected
by certain decisions have no voice.
By having the largest possible jurisdiction,
more of the affected parties,
both those who benefit and those who incur costs,
are included in paying their fair share
as well as in making their voices heard.
Finally, centralization is one way to prevent competition
among states from limiting the advantages
of a large national market for goods and services,
capital, and labor.
When workers and owners of firms know that
they will pay the same taxes and receive
pretty much the same services regardless of
where they are located in the country,
their location decisions will not be distorted.
However, for decentralization,
there are three advantages weighed against the advantages
of centralization.
The first is that decentralization is better suited to
accommodating diversity.
Different groups of citizens have different needs,
preferences, desires, and service demand.
By allowing citizens to make different choices in different Today,
we communities,
it is possible to accommodate, if not individual preferences,
then at least smaller group preferences.
Second is the positive value of competition,
which weighs in on behalf of both centralization
and decentralization.
For example,
seniors may choose retirement communities that offer more
recreational amenities and services to the elderly
but spend little on public schools,.
creating relatively homogeneous communities in terms of
these kinds of preferences increases citizen satisfaction.
Third is the value of innovation and experimentation.
It is less costly to experiment and fail in one state than
in every state.
States or provinces,
can serve as laboratories of federalism,
with the good ideas propagated or even adopted
by the central government and unsuccessful ideas discarded
without the high cost of trying them out everywhere.
States or provinces also learn from each other.
Now, Let us turn to the development of
intergovernmental fiscal relationship in China
China adopted a ¡°highly centralized¡±fiscal system
with ¡°unified control over government revenue and
expenditure¡±during the early years of its founding.
In view of the problems that existed in the fiscal system
during the early years of new china,
the chinese government had made several changes to its fiscal
system from late 1950s to the early stage of its reform and
opening up.
However,
affected by the planned economy,
the fiscal system during this period basically
just adjusted division of revenue and expenditures
between central and local governments,
and failed to fundamentally change the government¡¯s role in
allocationg economics resources through direct intervention
in the production process.
Since the reform and opening up in 1978,
the transition from a planned economy to a market economy
required corresponding reform in the fiscal management system.
Before the tax sharing reform in 1994,
china¡¯s fiscal system went through 3 major adjustments.
The ¡°eating from separate kitchens ¡±fiscal system introduced
in 1980,
the fiscal system of ¡°dividing revenue based on tax categories,
verifying all budgetary revenues and expenditures and
having governments at various levels take full responsibilities for
designated revenue and expenditure¡±initiated in 1985,
and the ¡°all round contract fiscal system ¡±launched in 1988.
although a series of fiscal system reforms have been carried out
in China,
which has aroused the enthusiasm of local governments for
economic development,
there are still some problems existed because the
fiscal decentralization has not been fully implemented.
First, division of revenue and expenditure
between central and local governments were uncertain and
non-standard.
Second, the distribution of fiscal resources between the central
and local governments is gradually out of balance.
Third, spending responsibilities of central and
local governments were confusing.
In order to make the perfect that the fiscal relationship between
the central government and the local governments,
on December 15, 1993,
the State Council issued the decision on the implementation of
the tax sharing system management.
The document decided to implement the tax sharing system
fiscal management system from January 1, 1994,
and standardize the fiscal distribution relationship
between different levels of governments.
It should be said that the tax separation system reform in 1994
involved the division of fiscal power and administrative power
between the central government and local governments of China.
It has become the largest, most extensive and
most abundant fiscal system reform since the founding of
the people's Republic of China.
It has established the basic framework of China's current
fiscal system and become the institutional guarantee for
stabilizing the fiscal relations between governments.
The tax sharing system has also played an important role
in the rapid growth of China's economy and fiscal revenue.
Even so, restricted by the historical conditions and
many other factors,
the tax-sharing system established in 1994 still had some problems.
First, the distribution of fiscal revenue
between the central and local governments
has not been fully rationalized.
The reform of the tax sharing system has improved the fiscal
resources of the central government,
but the independent local tax system
has not been really established.
Second, under the framework set initially,
areas with rapid economic development and higher tax revenue
enjoyed higher tax rebates than those with
lower economic growth rates and tax revenue.
Hence, under this system, the imbalance between
different regions became even more serious
instead of being alleviated.
Third, in the aspect of fiscal expenditure management,
the reform of tax distribution system in 1994 did not consider
how to rationalize the functions of governments
at all levels and their corresponding expenditure relations.
Through the above introduction,
we can find that there are still various problems and
deficiencies in China's Intergovernmental Fiscal Relations
after 1994, and China's tax sharing reform
is still in constant improvement.
In the Next section,
we will probe and review the reform in recent years.
in the
Ok, That all for today,see you next time.