Abstract: The contract theory shows that if there are large differences in regional resource endowment and economic development, these regions should have different tax retention rates, and this kind of setting will be efficient. Many kinds of contracts can achieve this differential retention rate, but we need to choose the appropriate contract base on weighing the contract cost and incentive effect according to net revenue maximization. In practice, China has two kinds of contracts, one is directly realizing local tax retention rate differential by setting different tax sharing ratios, the other is indirectly realizing local tax retention rate differential by different scale of transfer payment. In comparison, the tax sharing system is an appropriate form which can balance the cost and incentive effect of tax division so as to realize differential local tax retention rates. But there are some shortcomings in the current share system contract, it is necessary to realize the goal of net revenue maximization of inter-governmental tax division contracts in two ways: one is to reduce the proportion of local expenditure responsibility in order to reduce the scale of transfer payments, the other is to increase the fixed tax items of local governments in order to reduce the proportion of value-added tax sharing.

Key words: inter-governmental tax division; tax sharing system; contract costs; incentive effect