Abstract: There may exist an inverted U-shaped relationship between the fiscal revenue ratio and the economic growth rate, which is termed as the generalized Laffer Curve. Through constructing a theoretical model, this paper adopts the method of panel smooth transition regression (PSTR) to conduct an empirical analysis. The findings show that the generalized Laffer Curve does exist in China; between the fiscal revenue ratio and the real GDP growth rate there is a non-linear relationship with one threshold value and two kinds of systems, and this relationship is of the inverted U-shape. Within a reasonable domain of definition, the fiscal deficit ratio will change together with the optimal value. By carrying out a robustness test on the full aperture fiscal revenue that includes the governmental fund income, the operating income of the state-owned capital and the social security fund income, it draws the conclusions that are consistent. The positions of the U-shaped curve and the optimal values are different in different provinces; the advanced provinces should adhere to the idea of “small government”, handing the decision-making power of resource allocation over to the market. The theoretical optimal value of fiscal revenue is somewhat lower than the real average value. Therefore, the structural tax reduction and the proactive fiscal policy are favorable for the continuous growth of Chinese economy.

Key words: generalized Laffer Curve; revenue; fiscal revenue; economic growth rate; fiscal deficit ratio