Abstract: This paper promotes a decomposition method of analyzing equalization effect of fiscal capacity in China, which is decomposed into two parts, one is horizon effect that comes from fiscal intervention of central government; and the other is vertical effect that comes from convergence tendency of provincial revenue. Applying the formula to 2001~2012 China’s relative data yields several interesting results as follows: fiscal transfer has a positive equalization effect on fiscal capacity of provinces, which has been increasing tendency; both of the horizon effect and the vertical effect have positive influence, Chinese government has realized the target of area equilibrial economical development by fiscal intervention and gap reduction of provincial revenue; to enlarge scale of fiscal transfer and to give more fiscal transfer share to less developed areas will be better for equalization of fiscal capacity of provinces.

Key words: Fiscal Transfer, Gini Index, Decomposition of Equalization Effect, Fiscal Intervention, Convergence Tendency