Fiscal Federalism: A Refined Theory and Its Application in the Chinese Context

China's central–local relations have been marked by perpetual changes amidst economic restructuring. Fiscal decentralization on the expenditure side has been paralleled by centralization on the revenue side, accompanied by political centralization. Hence, our understanding of China's fiscal relations is not without controversy. This paper aims to make a theoretical contribution to the ongoing debate on ‘fiscal federalism’ by addressing crucial questions regarding China's central–local fiscal relations: first, to what extent do Chinese central–local fiscal relations conform to fiscal federalism in the Western literature? Second, are there any problems with existing principles of fiscal federalism and, if so, how to refine them? Third, how are refined principles relevant to the Chinese case and what policies should the Chinese government pursue in the future? Based on an in-depth and critical review of the theories on fiscal federalism, we develop a refined prototype of fiscal federalism. The model shows that quasi-traditional fiscal federalism is a much closer reality in China, while we argue that the refined fiscal federalism should be the direction of future reform in China.