Returning to Public Finance

Abstract

Abstract Because the decentralized “fiscal contracting system” of the 1980s benefited local officials, their motivation to undertake reform and development increased. However, the system also fostered local protectionism and market fragmentation. Problems were even more conspicuous in terms of the sharing of revenue. In 1994, the “all-round fiscal contracting” was replaced by tax sharing between the central and sub-central governments, based on a reasonable division of revenue and expenditures. The design of the new system allowed for numerous intragovernmental transfers to facilitate an equitable provision of public services. The tax-sharing reform was the most far-reaching institutional change after the establishment of the People’s Republic because it adjusted the distribution of existing interests. After this reform, China’s fiscal and taxation systems were compatible with institutions in the market economies.