Essays on China's Tax System

The tax system is one of the best starting points for investigating China's transitional course because the transformation of a society always involves rapid changes in its old fiscal regime. Seeing central government, local governments and firms as three major players, this dissertation shows that interactions between them lead to the emergence of China's unique "central-local dual-track" tax system. The central government mobilizes local governments by fiscal decentralization, which results in growing local autonomy and thus drives them to maximize local tax revenues. They compete for mobile tax bases firms by manipulating local tax policies. Thus, in contrast to a formal and standardized national tax system overseen by the central government, informal and flexible local tax systems are operated by local governments. This dissertation consists of four essays. The first essay systematically analyzes the evolution history and status quo of China's tax system, which illustrates that the formal and informal interaction between the central government, local governments and firms shapes the institution building process of China's tax system. The second essay, then, examines the interaction between the former two players in fiscal decentralization and finds that it curtails the expansion of government size. The third essay models the interaction between the latter two players by a bargaining game in which a firm employs an exit and voice strategy to bargain with a local government for preferential tax treatments and thus explains the diversity of local tax systems. The last essay models changes of the tax system as a result of interaction between the above three players under various economic, political and social constraints; the changes reach a general equilibrium in which efficiency, power and legitimacy are balanced.

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