Should the General Purpose Transfers be Strengthened? -An Analysis Based on Distortionary Tax and the Flypaper Effect
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| Title | Should the General Purpose Transfers be Strengthened? -An Analysis Based on Distortionary Tax and the Flypaper Effect
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| Author | Mao Jie and Lv Bingyang |
| Organization | University of International Business and Economics; Renmin University of China |
| Email | maojie@uibe.edu.cn，zjumilesark@126.com;lby@ruc.edu.cn |
| Key Words | General Purpose Transfers; Distortionary Tax; Flypaper Effect; Price Effect |
| Abstract | From a view of distortionary tax, this paper analyzes theoretically and empirically the internal mechanism for the Flypaper Effect of the general purpose transfers (or unconditional transfers) by using China’s county-level data from 2000 to 2007. Our theoretical research finds that the Flypaper Effect of the general purpose transfers results from the price effect caused by local government’s using distortionary taxes to collect public funds. Under some conditions in which the price effect is strong, the Flypaper Effect will appear once distortionary taxes are used. Our empirical study shows that it is the interaction of the general purpose transfers and distortionary taxes that leads to the Flypaper Effect, which is consistent with the theoretical finding aforementioned. We conclude that it deserves careful thinking whether the scale and percentage of the general purpose transfers should be increased, while it is urgent to reform local tax systems and the indirect tax system. |
| Serial Number | WP374 |
| Time | 2012-09-27 |
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