Reassessing the Fiscal Equalization Effects of Transfer Payments under the New Classification System

In the governance of a large country, transfer payments constitute a foundational institutional arrangement for promoting coordinated regional development. In 2019, China reformed its transfer payment system by establishing transfer payments for shared fiscal responsibilities and adjusting the composition of general and earmarked transfer payments, with the aim of balancing fiscal capacity across regions and improving the modern state governance system. However, the underlying mechanisms of this reform have also profoundly reshaped the incentive structures and behavioral patterns of local governments, necessitating a cautious assessment of its effects on local fiscal capacity. Existing studies evaluating the fiscal equalization effects of transfer payments have mostly adopted the perspective of total fiscal capacity, while little research has examined whether transfer payments can enhance local own-source fiscal capacity and promote its equalization. Accordingly, this paper focuses on the three categories of transfer payments under the new classification system and evaluates their fiscal equalization effects along two dimensions: total fiscal capacity and own-source fiscal capacity. After systematically examining the mechanisms through which transfer payments affect fiscal equalization and proposing theoretical hypotheses, this paper conducts empirical tests by combining Gini coefficients under a counterfactual framework with instrumental variable regressions. The results show that net general transfer payments and transfer payments for shared fiscal responsibilities exert strong equalization effects on both own-source and total fiscal capacity, although their specific institutional designs lead to differences in fiscal effort, economic development, and other respects. This paper provides a new research perspective and methodology for evaluating the fiscal equalization effects of transfer payments and offers useful policy implications for further optimizing the transfer payment system.