Abstract: Whether the dependence of local finance on the central transfer payment (CTP) inhibits or fosters the tax competition among the local governments still remains a relatively greater dispute at present. Based on the special situation of Chinese style fiscal decentralization, this paper tries to construct a new theoretical model of local tax competition containing the endogenous impact of CTP. The findings of the theoretical analysis show that the three types of CTP, i.e., the public investment supporting type, the balanced local financial resources type and the tax contribution reward type, can all prompt the rational local governments to adopt more radical tax competition behaviors and lower the effective tax rate grabbed from the enterprises at Nash equilibrium. This empirical analysis sanely confirms that CTP cannot effectively relieve the local tax competition, instead, it produces significant intensifying effect. In addition, this effect has significant single threshold attenuation characteristics and heterogeneity in tax types and time. For this purpose, it is necessary to appropriately control the overall scale of CTP, strengthen the performance evaluation of the special transfer payment, adjust the allocation criteria for the general transfer payment and reinforce the vertical tax decentralization management of tax preference, so as to establish a central-local fiscal relationship with clear rights and liabilities, coordinate financial resources, and regional balance.

Key words: Chinese style fiscal decentralization, central transfer payment, tax heaven, local tax competition