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Taxes and Government Incentives: Eastern Europe vs. China


  • Roger H. Gorden
  • David D. Li


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 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.

Suggested Citation

  • Roger H. Gorden & David D. Li, 1997. "Taxes and Government Incentives: Eastern Europe vs. China," William Davidson Institute Working Papers Series 56, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1997-56

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    References listed on IDEAS

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    Cited by:

    1. Scott Gehlbach, 2003. "Taxability, Elections, and Government Support of Business Activity," Working Papers w0030, Center for Economic and Financial Research (CEFIR).
    2. Solanko, Laura, 2006. "Essays on Russia's economic transition," Scientific Monographs, Bank of Finland, number 2006_036, November.
    3. Solanko, Laura, 2006. "Coping with missing public infrastructure : an analysis of Russian industrial enterprices," BOFIT Discussion Papers 2/2006, Bank of Finland, Institute for Economies in Transition.
    4. Scott Gehlbach, 2003. "Taxability and Low-Productivity Traps," Working Papers w0029, Center for Economic and Financial Research (CEFIR).

    More about this item


    transition economies; government incentives; principal-agent models; taxes and economic behavior;

    JEL classification:

    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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