China’s fiscal transfer system have an anti-equalized effect on imbalanced subnational fiscal revenue and expenditure. With respect of this anti-equalization feature, the present project attempts to shed light on its institutional basis behind fiscal transfer system in transitional China. The existing literature, highlighting the political logic of the institutional arrangement, emphasizes the central government has purposely designed the anti-equalized institutional arrangement. In other words, the exist studies think that the fiscal transfer system is the outcome that the center is reluctant to offend or cater to powerful players such as rich provinces.
However, this project argue that the formation and operation of the China’s current fiscal transfer system are a dynamic result of market transformation, the central reform strategy such as decentralization and government retreat, institutional change such as fiscal contract system and tax-sharing system, the interactions between the central government and sub-national governments. Therefore, while although fiscal transfer either in fiscal contract system (1979~1993) or tax-sharing system (1994 to date) has failed in carrying out the equalization target, but the operation mechanisms behind the two differ. Under the fiscal contract system, anti-equalized fiscal transfer is the outcome of the reduction of the central government’s revenue and government retreat (reduce spending) due to decentralized reform. In contrast, anti-equalized fiscal transfer under tax-sharing system result from the institutional design (tax rebates and specific transfer payments) formed the interaction between the central government and localities.
