China & World Economy / 24–40, Vol. 26, No. 4, 2018

Intra-provincial Revenue Sharing and the Subnational Government’s Fiscal Capacity
in China: The Case of Zhejiang Province
Tao Qian, Qi Zhang

Abstract

This study investigates whether the tax-sharing system has deteriorated the fiscal capacity of subnational governments by analyzing how fiscal revenues are divided between provincial and sub-provincial governments. Our study of county-level fiscal data from Zhejiang Province in China during 1994–2007 shows that intra-provincial revenue-sharing rules favor county governments in two ways: (i) they improve county governments’ fiscal autonomy in terms of using their own revenues; and (ii) they enhance county governments’ fiscal capacity through province-to-county general transfers. In addition, we find that intra-provincial fiscal revenue-sharing rules and transfers reduce fiscal disparity between counties.

Key words: fiscal capacity, intra-provincial fiscal system, local government
JEL codes: H11, H71, H72