The Incentive to Declare Taxes and Tax Revenue: The Lottery Receipt Experiment in China∗

We examine the validity of a new system of taxation called lottery receipts in China theoretically and empirically. Tax collection is difficult as the Chinese government difficultly monitors the actual economic dealings. To bring out the private information on transaction known only to a seller and a buyer, the government has set up a lottery receipt system which has been tried out in many areas. If the net revenue from a lottery receipt is invested in pure public goods, the lottery receipt will been purchased even if the consumer has expected quasilinear utility. By issuing a lottery receipt, the government may prevent tax evasion caused by conspiracies between firms and consumers and collect tax effectively. Estimation that avoided self-selection is performed based on panel data for different periods from a total of 39 districts in Beijing and Tianjin during 1998-2003. The lottery receipt system has significantly raised the operating tax, the real growths of operating tax and total tax revenues. JEL classification: H26, D81, D82, C23