Taxes and Government Incentives: Eastern Europe vs. China
AbstractLocal 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 behavior 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 these firms. Surprisingly, past work has ignored the role of the tax system in influencing the incentives faced by government officials.
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Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 56.
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transition economies; government incentives; principal-agent models; taxes and economic behavior;
Find related papers by JEL classification:
- P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
- D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-04-03 (All new papers)
- NEP-EEC-2002-04-03 (European Economics)
- NEP-ENT-2002-04-03 (Entrepreneurship)
- NEP-PBE-2002-04-03 (Public Economics)
- NEP-SEA-2002-04-03 (South East Asia)
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- Scott Gehlbach, 2003. "Taxability and Low-Productivity Traps," Working Papers w0029, Center for Economic and Financial Research (CEFIR).
- Scott Gehlbach, 2003. "Taxability, Elections, and Government Support of Business Activity," Working Papers w0030, Center for Economic and Financial Research (CEFIR).
- Krug, B. & Zhu, Z. & Hendrischke, H., 2004. "Chinaâ€™s emerging tax regime: Devolution, fiscal federalism, or tax farming?," Research Paper ERS-2004-113-ORG, 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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