Social Sciences in China (Chinese Edition)

No.4, 2013

Land Finance and the Tax-Sharing System: An Empirical Explanation

(Abstract)

Sun Xiulin and Zhou Feizhou

The regional competition between local governments has facilitated the rapid growth of Chinese economy. However, the working mechanism for it still needs to be explored. Local governmental behavior is influenced by the central-local relationship, particularly by the reform in fiscal and taxation systems since the implementation of the tax-sharing system. By centralizing the financial power, the tax-sharing system gradually led local governments to adopt the development model of land appropriation, development and transfer, hence the emergence of land finance; our study verifies the close ties between the two by using annual provincial-level data. In all cases when the development model represented by land finance is evaluated, the tax-sharing system is a more rational reform than the financial contracting system, for it has established a stable framework of interaction between the central government and local governments. And yet, the land-centered urban expansion model was an unexpected outcome of this reform.