Public Finance and Economic Development: Reflections based on Experience in China
Public finance pressures are a central concern in developing countries. With large informal economies, the tax base is narrow and the resulting revenue on average only about half the fraction of GDP seen in developed countries. In response to the resulting tax distortions favoring the informal sector, countries commonly impose a variety of restrictions favoring the formal sector and hindering the entry of new firms that likely join the informal sector. While these policies help protect the country's tax base, they also unfortunately can hinder economic growth, by discouraging entrepreneurial activity.The experiences in China show this trade off dramatically. When restrictions on firm entry were eliminated, economic growth rates jumped but tax revenue fell by two-thirds, since the growth largely took place in sectors that were hard to tax.How should a country then handle these revenue costs of growth-promoting policies? The choices are few: cut expenditures, borrow in the hopes of higher revenue in the future, come up with new sources of revenue such as user fees, or undertake only partial reforms that yield some growth but also help preserve the existing tax base. The paper argues that the latter approach is likely to be the most successful, in spite of the lower resulting growth rate.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 1 (2010)
Issue (Month): 1 (January)
|Contact details of provider:|| Web page: http://www.degruyter.com|
|Order Information:||Web: http://www.degruyter.com/view/j/jgd|
When requesting a correction, please mention this item's handle: RePEc:bpj:globdv:v:1:y:2010:i:1:n:7. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.