Taxation in decentralizing socialist economies : the case of China

The authors analyze the tax system in China, where reforms designed to move the economic system toward a market economy have been occurring for more than a decade. The authors characterize the comprehensive changes in the tax system that could be undertaken in the presence of system-wide reform, especially of prices and enterprises, as well as of more moderate reforms that must suffice in the absence of reforms elsewhere in the economic system. In connection with tax reform per se, they emphasize that it is possible to simplify significantly the rate structure for indirect taxes in the presence of price controls, but a unified rate for value-added tax is undesirable without full decontrol of prices. They also found that the state's role as owner of enterprises must be treated separately from its role as tax collector. All enterprises should pay statutory profits taxes. Negotiation (of the kind that characterizes the contract responsibility system) should be confined to the payments to government from after-tax profits. Those payments could be set to balance incentives to enterprises with the need for the state to earn a return on assets historically provided free to those enterprises. The mode of analysis developed in this paper can be applied to a wider range of economies - whether emerging from a socialist past or not - that are progressing at varying speeds in the interlinked areas of tax reform, price reform, and enterprise reform.