Tax Collection in China

Relations between the local and central authorities in China have evolved over the centuries, but when it comes to tax collection, it seems that a new model had evolved since 1994.

That year, Beijing decided that, for the first time in China's history, the country should establish separate systems for collecting local and national taxes. Prior to that, all taxes were collected by local authorities, who in turn passed a portion of their collection to the central government. But the system also invariably created problems of leakage and misreporting at all levels.

After 1994, Beijing established a two-tier tax collection system - a state system specifically dedicated to collecting taxes for the Center, and a separate system in each province that collected taxes that could be used solely within the province.

To bring about these changes, Beijing first negotiated with the provinces in late 1993 and promised to phase in the adjustments in a way that would not take any current income away from the provinces.

As Lieberthal wrote: "As a result of these reforms ... the Center's revenue intake has significantly increased, but local government expenditures have also grown as the Center has remitted substantial funds back to lower levels."

This new system, Lieberthal concluded, not only gave the Center a surer fiscal base and a larger role in determining where public funds are allocated throughout the country, it also allowed provinces considerable flexibility on how to spend tax revenues in their own locales. By 2001, fiscal revenues were 90 per cent greater than in 1997 and 120 per cent greater than in 1996.

But clearly, these figures would have been much higher if not for widespread tax evasion as well as corruption.