The Impact of Vertical Fiscal Imbalances and Local Government Tax Efforts on the Quality of Economic Development—A Study Based on Threshold Regression and Simultaneous Equation Models

Abstract

China’s economy has been growing at a rapid pace in recent years, but the quality of economic development has not been consistent with the quantity, which is not conducive to sustainable economic development. How to improve the quality of economic development and achieve sustainable economic development has become an urgent economic issue for the Chinese government to address. Utilizing panel data encompassing 30 provinces in China from 2008 to 2022, we explore the mechanisms and impacts of vertical fiscal imbalances and tax efforts on the quality of local economic development. For this purpose, this investigation employs threshold regression and three-stage least squares methodologies. The results of the study show that an increase in the level of vertical fiscal imbalance does not contribute significantly to the improvement of the quality of local economic development. However, a vertical fiscal imbalance can suppress the level of tax effort of local government. Moreover, a reduction in local government tax efforts has a favorable effect on the quality of local economic development. As such, a vertical fiscal imbalance promotes economic development indirectly. Therefore, it is necessary to reasonably control the level of vertical fiscal imbalance, build a fiscal relationship between the central and local governments with clear powers and responsibilities, coordinate financial resources and regional balance, and prevent excessive tax efforts from suppressing the production enthusiasm of microeconomic subjects to improve the quality of China’s economic development and realize the sustainable development of the local and national economies.