Working Paper: CEPR ID: DP1657
Authors: Roger H. Gordon; David Li
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.
Keywords: transition economies; government incentives; principal-agent models; taxes; economic behaviour; eastern europe; china
JEL Codes: D78; H3; P51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Source of Tax Revenue (H20) | Behavior of Local Officials (H70) |
| Behavior of Local Officials (H70) | Economic Growth of New Firms (M13) |
| Tax Policies (H29) | Incentives for Officials (Z22) |
| Support of Local Officials (H70) | Economic Growth of New Firms (M13) |
| Obstructive Behavior of Officials (D73) | Economic Growth of New Firms (M13) |
| Raising Effective Tax Rates (H29) | Support of Officials for New Firms (M13) |
| Financial Interests of Officials (G18) | Obstructive Behavior of Officials (D73) |