Taxes and Government Incentives: Eastern Europe Versus China

CEPR Discussion Paper No. 1657

Posted: 19 Sep 1997

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

David D. Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: June 1997

Abstract

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 behaviour 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 them. Surprisingly, past work has ignored the role of the tax system in influencing the incentives faced by government officials.

JEL Classification: D78, H3, P51

Suggested Citation

Gordon, Roger H. and Li, David Daokui, Taxes and Government Incentives: Eastern Europe Versus China (June 1997). CEPR Discussion Paper No. 1657. Available at SSRN: https://ssrn.com/abstract=11085

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-4828 (Phone)
858-534-7040 (Fax)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Daokui Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
(852) 2358-7610 (Phone)
(852) 2358-2084 (Fax)

HOME PAGE: http://home.ust.hk/~davidli

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