Abstract
China’s fiscal system has been significantly improved since the tax-sharing system implemented in 1994 but has left many tough questions unsolved. The most urgent is the fiscal imbalance between expenditure and revenue assignments among sub-national governments and the assignment of expenditure responsibilities among central, provincial and local governments. Such questions lead to a large disparity in revenue sources and expenditure, income inequality and so on. Against this backdrop, the conference entitled “Local Public Finance and Property Tax in China” was held by Peking University and the Lincoln Institute Center for Urban Development and Land Policy in May 2008. Edited by Joyce Yanyun Man and Yu-Hung Hong, this book presents a collection of papers from the conference. It is a highly readable collection of original essays covering expenditure and revenue assignments, intergovernmental transfers, property taxes, local fiscal polices for economic growth and income redistribution, and public services.
Besides the overview of China’s local public finance in transition as part I, the book is organised in the following parts. Part II (chapters 2–4) describes the local expenditure situation including fiscal decentralisation, expenditure assignment and infrastructure financing practices. Chapter 2 presents an assessment of the assignment of expenditure responsibilities in China. The chapter provides a road map for the reform that is “setting up formal and stable expenditure assignments to clarify the responsibilities of all government levels” (p. 36). Chapters 3 and 4 focus on public infrastructure financing. Chapter 3 explores the patterns of financing infrastructure development in different cities and discusses the relationship between infrastructure investment and regional economic growth. Chapter 4 uses Guangdong province to examine the institutional arrangements and politics of the infrastructure financing mechanism and to provide recommendations for increasing the transparency of capital budgeting decisions and the oversight power of the People’s Congress under the current system.
Part III (chapters 5–9) presents the issues of local revenue sources, land finance and property taxation. Chapter 5 provides an empirical overview of seven provincial taxes from 1999 to 2005. Chapter 6 analyses the effects of taxation on economic growth. The results indicate that sustained growth may be achieved by lowering the overall tax burden and mobilising tax resources. Chapter 7 discusses the evolution of the fiscal system and introduces some political issues that exacerbate the problems in central–local fiscal relations. Chapter 8 summarises the major economic impacts of development fees and ad valorem property taxes with applications to the contemporary policy setting of China. Chapter 9 examines the possibility of taxing public leasehold land in China. Here, a number of factors should be considered before the implementation of property tax; they are
local government incentive to collect the new property tax; the utilization of property tax collections and the capitalization of public goods investment and tax liabilities into land and housing prices (p. 175).
Part IV (chapters 10–12) focuses on local intergovernmental transfers. Chapter 10 discusses the determinants of intergovernmental transfer—both total transfers and different types of transfers in China. The equalisation transfer equalises fiscal capacity, especially to the west and rural areas. Chapter 11 examines the determinants of central government transfers to provinces. The data from 1995 to 2004 for 31 provinces show that the transfer system is ineffective in reducing regional fiscal inequality. Chapter 12 explores the changes in township and village finance between 2000 and 2004. It suggests that the development of more responsive and sustainable local fiscal management in China will inevitably require both the devolution of more decision-making power over public finance to local governments and the development of local governments that are directly responsible to the local residents.
Part V (chapter 13) elaborates the fiscal reforms of the past and discusses the direction for future reform. It reviews the theory and practices of fiscal decentralisation, compares the international experience with the Chinese practice and examines the special role of the property tax in fiscal decentralisation among the OECD countries, low-income countries and China
China’s intergovernmental reforms must be part of a larger reform package that will define how provincial and local governments fit into the national economic development strategy (p. 268).
The author argues that international practice could provide good lessons to guide China with intergovernmental fiscal policy. At the same time, China provides one of the most significant practices of fiscal reform and the evolution of Chinese fiscal institutions will have constructive implications for the transitional economies.
The tax-sharing system reform did not substantially transfer expenditure responsibilities from local government. This revenue shortfall motivated local governments to exploit their control over land in order to generate both on- and off-budget revenue, so-called “land public finance” (p. 125). The existing transitional central and local fiscal problems are closely related to this. Public land ownership and the consequent issues—that is, the mismatch of state-owned urban land and community-owned rural land—are the core and essence of China’s problems. The book addresses some of this problematic, as chapter 7, but it should be examined further. The problem is likely to be a combination of the following issues that attempt to deal with the underlying imbalance between revenues and expenditures: to institute property tax as a new source of local revenue; to reform and enhance revenue transfers from the central government to local governments; and to revisit the assignment of expenditure responsibilities from local governments to the central government to align revenues and expenditures at the same level. Although it is too early to predict how and to what extent the measures and reforms may affect the fiscal reform, China is one of the most fascinating and dynamic places for continuing study of fiscal policy reform and socioeconomic transformation.
Overall, Joyce Yanyun Man and Yu-Hung Hong’s volume distinguishes itself from some others by its empirical data and case studies of the fiscal reform, the asymmetry of revenue and expenditure, their incompatibility as well as the future reform. It offers some original ideas to encourage fiscal reform to take into account China’s history, politics and economic reforms. It brings fresh insights to the issue of China’s transitional local finance, especially in relation to the compulsory land acquisition and its effects on China’s economy which is of wider significance for an understanding of the Chinese economy changing from a planned to a market economy. In this respect, this scholarly, comprehensive and readable original collection is a valuable reference work for government officials, public finance practitioners, academic researchers, university faculty and students, and others who seek a deeper understanding of Chinese government tax and expenditure policies and practices, as well as how its local governments function during the transitional period.