Social Sciences in China

Vol. 35, No. 3, 2014

Land Finance and the Tax-sharing System: An Empirical Interpretation

(Abstract)

Sun Xiulin and Zhou Feizhou

How has regional competition between local governments contributed to rapid economic growth in China? That is an issue deserving further exploration. The behavior of local governments has been influenced by central-local relations, especially by the fiscal and taxation reforms undertaken since the implementing of the tax-sharing system. After financial authority was centralized through the tax-sharing system, local governments gradually adopted a development model focusing on land appropriation, development and transfer, i.e., land finance. On the basis of Chinese provincial-level annual data, we can show that there is a close relationship between the tax-sharing system and land finance. Regardless of how we evaluate the land finance development model, the tax-sharing system represents a more rational institutional reform than the old system, because it has created a stable framework of interaction between the central government and local governments. The land-centered urban expansion model is an unforeseen consequence of this reform.