Local Tax Effort in Shanghai, 1987-93: Decentralization vs. Local Fiscal Balance

Abstract

This article seeks to link two major research trends in recent literature on PRC central-local relations: the growing attention to local governments `fiscal conditions, and the rising impact of local governmental behavior and strategies on the course of the nation`s overall reform program. The goal is to explore the relative explanatory power of two competing effects-localfiscal balance ex ante and the momentum ofdecentralization throughout the nation—on local tax effort at a given point of time. Chronological comparison is made of tax-collecting behaviors of the municipal government of Shanghai (a province-level entity) in the area of turnover taxation on state-owned enterprises (SOEs) during 1987-88, 1990, and 1992-93. The major discovery is that decentralization overrides local fiscal balance in dictating local behavior an insight which supports the theoretical vitality of factors derived uniquely from the PRC`s political landscape and reveals the weaker explanatory power of general theories in political science.