The Tax Sharing System (TSS) Reform of 1994 brought China’s intergovernmental fiscal
system much closer to international practice. It also moved China out of the precarious
fiscal situation of the mid-1990s, and general government revenues as a share of GDP as
well as the center’s share has increased rapidly. At the same time, the fiscal disparities in
the system that prevailed at the time of introduction of the TSS, which were supposed to
be gradually reduced by expansion of the equalizing “Transitory Systems Transfer,” has
persisted until now. This paper argues that the unequal distribution of resources is a
major impediment to achievement of the goals of a Harmonious Society. However, a
more equal distribution of resources alone is not enough, and should go hand in hand
with better specification of expenditure responsibilities of the various levels of
government, and stronger mechanisms for holding local governments accountable for
those responsibilities.