The Impact of Fiscal Inequality on Economic Growth: Evidence from Shifts in China's Fiscal System

This paper examines how fiscal inequality affects regional economic growth in China through two fiscal systems using an event-study approach. The "event" is the 1994 tax- sharing reform that transitioned from the Fiscal Responsibility System (1987-1993) to the Tax Sharing System (1994-present). It presents three primary findings: Firstly, fiscal inequality positively impacts economic growth before 1994, but the effects become negative, albeit close to zero, thereafter. Secondly, there is no significant economic growth gap between "rich" and "poor" provinces before 1994; however, this gap widens post-1994. Finally, the use of extra-budgetary funds does not mitigate the economic growth gap.