To date, China has maintained a variety of restrictions on its financial markets. In addition to imposing capital controls and regulating interest rates, the government controls both the set of firms that can sell equity on the domestic or foreign stock markets, and the amount they can sell. China is unique in that foreigners pay much less than domestic investors for intrinsically identical shares. In this paper, we show that these characteristics of the Chinese financial market are consistent with a government choosing regulations to maximize a standard type of social welfare function. The observed policy of charging much higher prices for equity sold to domestic than to foreign investors can simply reflect the more inelastic demand for equity by domestic investors. Under certain conditions, these regulations are equivalent to income taxes on business and interest income. The pattern of tax rates is not qualitatively different from those commonly observed elsewhere, particularly in other countries with capital controls. Given the ease with which firms and individuals can evade income taxes, however, indirect taxation through restrictions on the financial market may serve as an effective alternative.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7110.
Length: Date of creation: May 1999 Date of revision: Publication status: published as Gordon, Roger H. and Wei Li. "Government As A Discriminating Monopolist In The Financial Market: The Case Of China," Journal of Public Economics, 2003, v87(2,Feb), 283-312. Handle: RePEc:nbr:nberwo:7110
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Find related papers by JEL classification: G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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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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