Intergovernmental fiscal transfers and local tax efforts: evidence from provinces in China

This paper explores the incentive effects of total central fiscal transfers and its components - tax rebates and equalization grants - on provincial tax efforts in China. Our theoretical model predicts negative impacts on provincial tax efforts from both total fiscal transfers and equalization grants, while the effects of tax rebates are theoretically unclear. Using Chinese provincial panel data from 1995 to 2007, our empirical study provides significant evidence on the theoretical implications.