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Vertical Fiscal Imbalance And Local Fiscal Discipline: Empirical Evidence From China, Junxue Jia, Yongzheng Liu, Jorge Martinez-Vazquez, Kewei Zhang

ICEPP Working Papers

Using a nationwide city-level panel dataset for China for the years 1999-2009, this paper examines the effects of vertical fiscal imbalances (VFI) on local fiscal discipline, and explicitly explores the institutional conditions under which these effects may take place. We find that higher VFI levels induce fiscal indiscipline by reducing tax effort of local governments. We exploit the unique Chinese fiscal institution of assigning taxing power for local taxes and shared taxes to two separate authorities (i.e., the local tax bureau and the central tax bureau, respectively) in several ways. We show that local governments respond to the presence of …