The Road to Efficient Taxation in China

The recent economic history of China is simply fascinating. During the last quarter of a century, China’s GDP has been growing at an average rate of 9% a year, driving China to the top five world economies with a GDP per capita of 1,410 US$ in 2005. What account for such a rapid development? Institutional changes without doubt! Indeed, during that period, The People’s Republic of China has engaged in profound reforms on almost every front, from property laws (with a large programme of privatization), to competition law, and has opened itself to globalisation. Tax laws are no exception to that rapid structural change. China has undertaken major tax reforms in 1978, 1983, 1994 and 2004 and, to some observers, that reform alone could explain the striking difference between Russia and China’s development trends: in Russia where no clear tax reform has been implemented, GDP growth has been so far much slower than it was in China. The design of a “good” fiscal system requires obviously many things, among which the choice of what we could call “a political vision”—i.e., what kind of society we wish to live in. It is not the purpose of that paper to discuss alternatives visions. But, to develop a vision, awareness of the incentive dimensions attached to each alternative fiscal system is necessary in order to avoid the vision to turn into a mere illusion. The goal of that paper is precisely to describe, relying on well established economic principles, the main incentives associated with various fiscal systems. Instead of considering state’s production and state’s redistribution as two separate topics, we propose the following, progressive approach.