Abstract: Against the backdrop of advancing the strategies for common prosperity and integrated urban-rural development, optimizing intergovernmental tax sharing has become a key policy entry point for adjusting the income distribution pattern. This paper constructs a theoretical model to systematically elucidate the intrinsic relationship between tax sharing and the urban-rural income gap, and conducts empirical tests using panel data from prefecture-level and higher cities from 2010 to 2022. The results indicate a U-shaped nonlinear relationship between the urban-rural income gap and tax sharing, meaning that an increase in the tax sharing ratio first narrows and then widens the urban-rural income gap, with an optimal level of tax-sharing existing. Endogeneity analysis and robustness tests suggest that the core findings of this paper are reliable. Heterogeneity analysis reveals that this effect exhibits certain regional variations. In regions with higher levels of human capital and marketization, the effects of tax sharing are more pronounced; conversely, in regions with lower levels of human capital and marketization, the effects of tax sharing are relatively limited. The policy implications of this study suggest that, in advancing the process of common prosperity, appropriately adjusting local tax sharing policies can effectively promote the convergence of urban-rural income gaps. At the same time, policy adjustments should be tailored to regional development realities, optimizing sharing arrangements on a case-by-case basis.
