Is fiscal revenue concentration ratio in China too high?

• DOI: http://doi.org/10.1111/twec.12780
• Author: Hongsheng Fang,Wenjun Shuai,Linhui Yu,Jun Zhang
• Published date: 01 July 2019
• Date: 01 July 2019

ORIGINAL ARTICLE

Is fiscal revenue concentration ratio in China too

high?

Hongsheng Fang

1,2

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Wenjun Shuai

1,2

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Linhui Yu

1,2

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Jun Zhang

3

1

School of Economics, Zhejiang University, Hangzhou, Zhejiang, China

2

Institute for Fiscal Big-Data and Policy of ZheJiang University, Hangzhou, Zhejiang, China

3

School of Economics, Fudan University, Shanghai, China

KEYWORDS

asymmetric degree of China's central fiscal revenue concentration ratio and expenditure concentration ratio, budgetary

concentration ratio, full-calibre concentration ratio, international comparison

1

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INTRODUCTION

It is well known that the essence of the tax‐sharing reform in 1994 is a reform of budgetary fiscal

revenue concentration, which, as agreed among scholars, dramatically strengthened the central gov-

ernment's abilities of macroeconomic regulation and control and income redistribution, contributed

to the equalisation of public services among various areas and the economic and political stability

of China (Fang & Zhang, 2013, 2014; Huang & Chen, 2012; Li & Shen, 2009, 2010; Li, Xu, &

Li, 2010; Wang, 2002; Zhang, 2012). However, since 2002, the reform has been called into ques-

tion. Critics argue that it has run out of local finance, which forced local governments to stretch

out a grabbing hand (Chen, Hillman, & Gu, 2002) and develop the real estate for more money

(Gong, 2012; Han & Kung, 2015; Lu, Yuan, Chen, & Lu, 2011; Wang & Tan, 2008; Wu & Li,

2010; Zhou & Du, 2010), resulting in farmer's poverty, corruption and uncontrollable high housing

prices. In other words, the tax‐sharing system is the institutional source of a series of livelihood

issues. This viewpoint is very popular both at home and abroad. However, has the tax‐sharing sys-

tem really run out of the local finance? or is China's fiscal revenue concentration ratio really too

high? In order to answer this question, we argue that it is necessary to estimate nominal and real

fiscal revenue concentration ratios first. Following Li and Shen (2010) and Li et al. (2010), we

define nominal budgetary fiscal revenue concentration ratio

1

as central fiscal revenue concentration

ratio after the primary distribution, while following Fang and Zhang (2013, 2014), we define real

budgetary fiscal revenue concentration ratio

2

as central fiscal revenue concentration ratio after the

first redistribution. We argue that compared with real fiscal revenue concentration ratio, nominal

fiscal revenue concentration ratio that does not take into account the process of the firs t redistribu-

tion of fiscal revenue (i.e., the ratio of central budgetary fiscal revenue to national budgetary fiscal

revenue) is likely to greatly overestimate fiscal revenue concentration ratio, resulting in the illusion

1

Nominal budgetary concentration ratio = central budgetary revenue/national budgetary revenue.

2

Real budgetary concentration ratio = (central budgetary revenue −tax rebates + total revenues turned over by the local

governments to the central government)/national budgetary revenue.

Received: 4 April 2018

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Revised: 14 December 2018

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Accepted: 15 December 2018

DOI: 10.1111/twec.12780

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© 2019 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2019;42:1932–1960.

that China's fiscal revenue concentration ratio is too high. Although Li and Shen (2010) and Li et

al. (2010) estimate real fiscal revenue concentration ratio, respectively, the former did not consider

tax rebates, while the latter did not consider budgetary revenues turned over by the local govern-

ments to the central government.

Second, as China's fiscal revenue can be measured at budgetary and full‐calibre levels, to dis-

cuss the question whether fiscal revenue concentration ratio in China is too high, we should not

only look at the narrowly budgetary fiscal revenue concentration ratio but also full‐calibre fiscal

revenue concentration ratio.

3

Therefore, this paper also estimates nominal and real full‐calibre fis-

cal revenue concentration ratios

4

for the years 1998–2016 carefully. As far as we know, Li et al.

(2010) and Gao and Yang (2014) also estimated a full‐calibre fiscal revenue concentration ratio.

Their work provides important references for this paper, but has three limitations. First, the former

only considers the government fund revenue, which is not full‐calibre fiscal revenue in the strict

sense. Although the latter is full‐calibre fiscal revenue in the strict sense, the repeated items were

not deducted from their estimation results. Second, the estimation was made for a short time per-

iod. The former only estimated nominal concentration ratio in 2008, while the latter only estimated

concentration ratio in the years 2010–12. Third, both studies only estimated nominal concentration

ratio rather than real concentration ratio.

Third, based on the estimation of China's full‐calibre fiscal revenue concentration ratio, this

paper makes a further international comparison. However, compared with the existing international

comparison literature (Fang, 2012; Li et al., 2010; Zhao & Guo, 2005), it makes the following two

improvements. First, it chooses all the data available in the GFS (Government Financial Statistic)

database as a sample for international comparisons to avoid sample selection bias. Second, it uses

more rigorous full‐calibre fiscal revenue concentration ratio for international comparison.

Based on the above estimation results, this paper finds five stylised facts and expresses serious

doubts about the statement that fiscal revenue concentration ratio in China is too high. First, bud-

getary fiscal revenue concentration ratio in China has been greatly overestimated by the nominal

concentration ratio. Second, although the budgetary nominal concentration ratio after tax‐sharing

reform was much higher than the nominal concentration ratio during the periods 1990–93, the bud-

getary real concentration ratio was significantly lower than the previous period. Third, both the

nominal and real fiscal concentration ratios after 2007 show a significant downward trend. Fourth,

from an international comparative perspective, no matter what dimension of concentration ratio is

measured, China has the lowest fiscal revenue concentration ratio among all countries. Fifth, from

the perspective of nominal fiscal revenue concentration ratio as a “wind vane”of reform, up to

93.2% of countries in the world have a nominal concentration ratio of more than 60%.

3

It is noteworthy that even if it is expanded to the full‐calibre fiscal revenue level, to discuss whether China's fiscal revenue

concentration ratio is too high is actually to discuss whether the tax‐sharing system has emptied the local finance. It is

because although the tax‐sharing system only adjusted the distribution of budgetary revenue (the direct effect of the tax‐

sharing system), the central government had to consider the strong resistance (such as the tax rebates is a result of a com-

promise between the central and the central governments) to the tax‐sharing system when considering the distribution of

non‐budgetary fiscal revenue (such as local government land transfer revenue). One of the observable results is that the ratio

of non‐budgetary fiscal revenue concentration ratio is significantly lower than that of budgetary fiscal revenue concentration

ratio, which is an indirect effect of the tax‐sharing system. We argue that this indirect effect of the tax‐sharing system

should be explored, when we discuss whether the tax‐sharing system has emptied the local finance.

4

Nominal full‐calibre concentration ratio = central full‐calibre revenue/national full‐calibre revenue; real full‐calibre concen-

tration ratio = (central full‐calibre revenue −tax rebates + total revenues turned over by the local governments to the cen-

tral government)/national full‐calibre revenue.

FANG ET AL.

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