Discussion Paper Details

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Title: Taxes and Government Incentives: Eastern Europe vs. China

Author(s): Roger H Gordon and David Daokui Li

Publication Date: June 1997

Keyword(s): Government Incentives, Principal-Agent Models, Taxes and Economic Behaviour and Transition Economies

Programme Area(s): Transition Economics

Abstract: Local officials in China have strongly supported new non-state firms, yet other officials in transition countries have often strongly hindered them. We argue that a likely cause of these sharp differences in behaviour is differences in the source of government revenue. Local revenue in China came from profits and other taxes on new entrants, while elsewhere in transition countries tax revenue came disproportionately from the old state enterprises. All these officials can easily draw on public funds for personal use. As a result, local Chinese officials have a personal interest in encouraging the development of new firms, while other officials have a financial interest in suppressing new firms. To induce officials to be supportive of new firms, the model suggests raising the effective tax rate on them. Surprisingly, past work has ignored the role of the tax system in influencing the incentives faced by government officials.

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Bibliographic Reference

Gordon, R and Li, D. 1997. 'Taxes and Government Incentives: Eastern Europe vs. China'. London, Centre for Economic Policy Research.