Abstract: The establishment of a fiscal relationship between the central government and the local governments with clear powers and responsibilities, financial coordination and regional balance is not only conducive to the regulation of the behavior of local governments, but also contributes to achieving long-term stable growth of the local economy. Based on the panel date of 30 provinces of China from 1998 to 2017, this paper investigates the mechanism and effect of vertical fiscal imbalance and tax efforts on local economic growth. The results show that the increase of VFI is harmful to the sustained growth of local economy, but VFI can indirectly promote economic growth through inhibiting local government's tax efforts. In addition, the promotion of the current tax efforts of local governments also shows an inhibitory effect on local economic growth. Therefore, it is necessary for the government to reasonably control the level of VFI, use appropriate imbalance to regulate local governments' behavior, and lay the institutional foundation for the long-term stable economic growth. The government should stabilize the local governments' revenue expectation, prevent the excessive tax efforts from inhibiting the production enthusiasm of the micro economic agents, pay attention to the differences in inter-regional development, and strive to avoid the development pattern similarity and resource waste caused by blindly pursuing the upgrading of industrial structure and deepening the degree of opening to the outside world.

Key words: vertical fiscal imbalance, tax efforts, local economic growth, the financial relationship between the central government and the local governments