A Few Thoughts on an Equalizing Transfer Payment System

The goal for the establishment of a transfer payment system has been reasonably clear, that is, to achieve an equalizing national level of public services. In other words, governments, through the transfer payment system, acquire the financial capacity to provide citizens in all regions with basic, standard (at different periods of time), and equal materials and services. In our opinion, this goal is what the transfer system will ultimately achieve in China, but it cannot be reached at present. This is because regional economic development is uneven and there is a great disparity in financial capacities across regions. Under these circumstances, the evening of the level of public services among regions requires radical changes in the current revenue distributive structure, which would no doubt be unsuitable to the development of the fiscal system in China and have unwanted consequences. The tax division system has been in operation for two years and its impact is beginning to show. Any major change in this situation would create great disturbances in the newly established order of revenue distribution and affect the stability of the fiscal system. In addition, there are financial difficulties in all regions, in both rich and poor areas, and the average financial resources merely enable government to keep the administration running and in some places this cannot even be guaranteed and, therefore, there are no extra financial resources to transfer. Furthermore, one outstanding problem in the distribution of financial resources in China at present is the insufficient effort to generate revenue in many regions. The solution to this problem is to find incentives for local governments to generate revenue. Once the revenue in every region has increased, the national financial capacity will be enlarged and the central government can acquire more financial resources. Otherwise, any unrealistic maneuvers to absorb financial resources from some regions on a large scale will severely obstruct the economic development in these regions and have a negative effect on the local incentives to generate revenue, ultimately affecting revenue growth at the central, as well as local levels. What then, should be the goal of the transfer payment system? In our opinion, it is ultimately the achievement of an equalizing level of public services on a national scale, but this achievement must go through a long process. At present, a short term goal is needed that is both practical and realistic and on the basis of which the transfer payment system can be designed.