Tax Revenue in China and the Incentive to Declare Taxes: The Lottery Receipt Experiment

China’s economy shifted to a market economy in 1978 to include the rural contract work system and private companies as pointed by Lin (1992). Stock markets and special economic zones were founded in the 1980s. In 1994, decentralization separated the local and central governments, including the taxation system. As shown in Figure 7.1, after the 1978 shift to a market economy, high growth was realized for more than 20 years. In 2003, China experienced 8% economic growth, and achieved over 9% growth in 2004. However, as shown in Figures 7.2 and 7.3, the budget deficit has become a serious concern and total revenues are decreasing. Moreover, Figure 7.4 shows the transition of Gini’s coefficient, which measures the degree of economic inequality in China. Clearly, the degree of economic inequality in China is growing. To sustain future economic growth, these two significant issues must be resolved. The implementation of an efficient and fair tax collection system might serve as an effective and reasonable means toward solving China’s economic problems; however, at present, the country lacks such a tax collection system. Economists have warned of the seriousness of the deficit and inequality issues in China. In February 2004, Shiller (2004) provided six pieces of advice regarding the Chinese economy,2 and his first recommendation was the creation of an effective taxation system. Similarly, Krugman (2004) noted that “since there is no tax collection system anyway, a possibility that the China government itself will go bankrupt is not zero, either.”3