Taxes and Government Incentives: Eastern Europe vs. China
نویسندگان
چکیده
Local o cials in China have strongly supported new nonstate rms, yet other o cials in transition countries have often strongly hindered them. We argue that a likely cause of these sharp di erences in behavior is di erences in the source of government revenue. Local revenue in China came from pro ts and other taxes on new entrants, while elsewhere in transition countries tax revenue came disproportionately from the old state enterprises. All these o cials can easily draw on public funds for personal use. As a result, local Chinese o cials have a personal interest in encouraging the development of new rms, while other o cials have a nancial interest in suppressing new rms. To induce o cials to be supportive of new rms, the model suggests raising the e ective tax rate on these rms. Surprisingly, past work has ignored the role of the tax system in in uencing the incentives faced by government o cials.
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