Tax Sharing and Fiscal Imbalances: Reconstruction of the VAT Sharing System in China

Abstract Unreasonable distribution of regional fiscal revenue may lead to fiscal imbalance, while narrowing the fiscal gap will help to establish a modern fiscal relationship between the central government and local governments with financial coordination and regional balance. This paper examines the 2016 VAT sharing reform to study the impact of tax sharing on fiscal imbalances, and puts forward a new plan to reconstruct the VAT sharing ratio. It has been found out in the study that the VAT sharing reform has alleviated the vertical fiscal imbalances caused by the reform of “replacing business tax with VAT” to some extent, but has aggravated the horizontal fiscal imbalances and widened the regional fiscal gaps. The deepening of horizontal fiscal imbalances is due to the aggravated differentiation of regional fiscal capacity after the VAT sharing reform. The adjustment of the principle on which the VAT is levied and the way by which it is shared is conducive to reducing interregional fiscal imbalances. This research is of reference to rationalizing the intergovernmental fiscal relationship, which is helpful to further clarify the implications of modern intergovernmental fiscal relationship and promote the construction of a modern fiscal system.