Tax assignment system

Definition

The tax assignment system is a fiscal arrangement in China where the central government assigns tax revenues to local governments, determining how much each level of government can collect and retain. This system plays a crucial role in center-local relations, as it influences local governments' revenue generation capabilities and their ability to deliver public services.

5 Must Know Facts For Your Next Test

1. The tax assignment system was formally established in the early 1990s as part of China's broader economic reforms aimed at improving local governance and service delivery.
2. Under this system, local governments are given specific tax sources that they are allowed to collect, while the central government retains control over major revenue sources like income tax and value-added tax.
3. This system has led to significant variations in fiscal capacity among local governments, creating disparities in public service provision across different regions.
4. Local governments often resort to alternative revenue-generating methods, such as land sales and fees for services, to supplement their assigned tax revenues due to budget constraints.
5. The tax assignment system is a key factor in the complex relationship between central authority and local autonomy, often resulting in tensions over fiscal responsibilities and resource allocation.

Review Questions

• How does the tax assignment system influence the financial autonomy of local governments in China?
  • The tax assignment system directly impacts the financial autonomy of local governments by limiting their ability to generate revenue independently. By assigning specific taxes to local governments, the central authority controls how much money these governments can collect. This arrangement creates disparities between localities based on assigned tax revenues, which can hinder some regions' capacity to fund public services effectively.
• Discuss the implications of the tax assignment system for intergovernmental relations in China.
  • The tax assignment system significantly shapes intergovernmental relations by establishing a framework of dependency between local and central governments. Since local governments rely on assigned taxes for funding, this can create a power dynamic where central authorities exert influence over local administrations. Additionally, disparities in fiscal capacities among regions can lead to tensions, as wealthier localities may push for greater autonomy while poorer areas struggle to meet their obligations.
• Evaluate how the tax assignment system affects local government financing strategies and public service delivery in various regions.
  • The tax assignment system profoundly influences local government financing strategies by determining available revenue sources and levels of fiscal capacity. As a result, many local governments have developed alternative funding strategies such as land sales and service fees to supplement their assigned revenues. This dependence on non-tax revenues often leads to uneven public service delivery across regions, as wealthier areas can invest more in infrastructure and social services compared to their less affluent counterparts. This creates significant challenges for equitable development throughout the country.

Related terms

fiscal decentralization: The transfer of financial responsibilities and resources from central to local governments, allowing them more control over budgeting and taxation.

intergovernmental relations: The interactions and relationships between different levels of government, particularly regarding the distribution of powers, responsibilities, and resources.

local government financing: The methods and sources through which local governments raise funds to finance their operations and public services, including taxes, grants, and loans.