Abstract: At present, with the deepening of the aging population and the implementation of the “two child” policy, China’s population structure has undergone different changes, which have different impacts on local financial burden. Based on the three period OLG model, this paper studies the impact of population dependency ratio on the scale of local financial burden, and uses the provincial panel data (excluding Hong Kong, Macao and Taiwan) from 2002 to 2019 in China, constructs a PSTR model with indirect tax burden as threshold variable, and empirically studies the nonlinear characteristics of the impact of population dependency ratio on local financial burden. The results show that the child dependency ratio and the old-age dependency ratio have different effects on local financial burden at different levels of indirect tax burden. The child dependency ratio shows an inverted L-shaped relationship from negative to positive, whlile the old-age dependency ratio shows a “L” type relationship from positive to negative. Further research shows that the level of indirect tax burden and population dependency ratio affect the level of local financial burden through adjusting household consumption level and family resource allocation. Therefore, under the background of the increasing elderly population and low fertility rate, the key to realize the benign relationship between population dependency ratio and local finance is how the local government should support the fiscal policy of child and the elderly support according to local conditions, and adjust the indirect tax level according to the regional population dependency ratio.

Keywords: Population dependency ratio; Local financial burden; Indirect tax burden; PSTR model