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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1657.
Find related papers by JEL classification: D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
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Krug, B. & Zhu, Z. & Hendrischke, H., 2004.
"China’s emerging tax regime: Devolution, fiscal federalism, or tax farming?,"
Research Paper
ERS-2004-113-ORG Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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