Administrative Decentralization and Tax Compliance: A Transactional Cost Perspective

University of Toronto Law Journal 65(3), pp. 186–238

60 Pages Posted: 12 Dec 2014 Last revised: 3 Jul 2015

See all articles by Wei Cui

Wei Cui

University of British Columbia (UBC), Faculty of Law

Date Written: December 11, 2014

Abstract

A common phenomenon in tax administration in developing countries is that tax is collected not according to the rules of law but according to informal agreements between taxpayers and tax collectors. This article offers a novel explanation of this phenomenon in the Chinese context in terms of administrative decentralization. Administrative decentralization is defined as the concentration of government functions at the lowest ranks of a geographically-dispersed bureaucracy. Decentralization increases communication costs associated with the implementation of law, and changes the structure of taxpayers’ costs in obtaining knowledge about the law. As a result, a “semi-compliant” type of behavior, involving many taxpayers who would have been compliant under a rule-based system, emerges where tax is remitted and collected despite both sides being under-informed about the law. The article argues that this dynamic has frustrated tax administration reform in China and, interestingly, explains the underdevelopment of the tax legal profession and of tax litigation.

Keywords: Decentralization, informal tax collection, rule of law, tax administration in developing countries, legal profession

JEL Classification: D73, K00, K34, K40, K42, O17

Suggested Citation

Cui, Wei, Administrative Decentralization and Tax Compliance: A Transactional Cost Perspective (December 11, 2014). University of Toronto Law Journal 65(3), pp. 186–238. Available at SSRN: https://ssrn.com/abstract=2536881

Wei Cui (Contact Author)

University of British Columbia (UBC), Faculty of Law ( email )

1822 East Mall
Vancouver, British Columbia V6T1Z1
Canada
6048274765 (Phone)

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