Research On The Reform Of Local Tax System In China

As an important part of a country’s tax system and finance system, a scientificand normative local tax system, under the multi-level governance framework, can notonly provide necessary tax revenues for the governance of local governments, butalso give local taxes full play in regulating the function of distribution and achievingstructural optimization, which is of vital significance for coordinating the taxdistribution relationship between the central and the local governments, andeffectively motivating the latter. China’s current local tax system took shape initiallywhen the1994tax assignment reform was launched throughout the country. Thissystem, which has run for20years, has played an important role in achieving awin-win goal between the augmentation of local governments’ financial resources andthe rapid development of local economy. However, with changes of the situation, thecurrent local tax system has not been fully adapted to the need of further coordinatingthe tax distribution relationship between the central and the local governments.Furthermore, some outstanding contradictions and problems in the current economicand social development are closely related to the local tax system. That is why theThird Plenary Session of the18th CCP called for the improvement of the local taxsystem. Under this context, it is of great theoretical and practical significance to makean in-depth research on the establishment and reform of China’s local tax system bydesigning a basic logical structure and making suggestions on reforms that conform tothe new normal economy. This thesis makes an in-depth research and analysis into thereform of the local tax system from following respects:Firstly, it reviews the existing theoretical results of the research on theestablishment and reform of the local tax system. As the opposite concept to centraltaxes, local taxes have not only the inherent feature of tax, but also fulfill the uniquefunctions closely related to the performance of local governments. Therefore, the local tax system can be seen as a set of institutions implemented for the purpose ofraising local tax revenues, adjusting income distribution and optimizing the economicstructure for local governments. Given the important role of the local tax system todeal with the tax distribution relationship between the central and the localgovernments, scholars at home and abroad have made in-depth researches fromdifferent perspectives whose research results include fiscal decentralization theory,tax division theory, theory of local tax revenue scale evaluation, etc., which have laida theoretical foundation for the analytical framework of this thesis.Secondly, the thesis puts forward the theoretical framework of local tax systemfrom the political economies perspective. Based on the existing research results, thisthesis builds up a theoretical framework of local tax system from the Marxist PoliticalEconomics perspective, which includes the theoretical basis, the fundamentalcontradictions, the realistic foundation and the institutional arrangements. In the firstplace, the local tax system, which fulfills the state function, arose from the emergenceof multi-level governments as well as decentralization between the central and localgovernments. In the second place, the games between the central and localgovernments and the competition among the local governments have evolved into thefundamental conflicts to be resolved through the establishment of the local tax system.In the third place, it is imperative to moderately divide the power between the centraland local governments, i.e., to determine size of a government according to itsresponsibilities while making sure the taxing power can also be matched with them.Finally, drawing on the New Institutional Economics theory, this thesis analyzes thepower source basis, the principle of legality as well as the institutional transition andequilibrium of the local tax system.Thirdly, the thesis systematically examines the process of the reform of China’slocal tax system. By reviewing the historical development, the thesis summarizes thedifferent stages of development of China’s local taxes. In particular, the paperanalyzes the historical context of the1994tax reform when the local tax systemstarted to take shape. Although the current local tax system has proved to beremarkably effective, there are still many problems, such as low level of legislation,insufficient tax revenues, and unsatisfactory adjustment of tax categories as well as backward tax administration measures. These problems have led to manycontradictions in our economic life, i.e., excessive reliance on the centralgovernment’s financial transfer payments, excessive debts incurred by localgovernments, redundant development and excess capacity of local industries, to namejust a few. The above-mentioned issues are prompting the implementation of a newround of local tax system reform.Fourthly, the thesis conducts a comparison and reference on the establishmentand reform of the local tax systems in some countries. On the one hand, it draws onthe research results by some OECD member countries on local tax autonomy, whichindicates that decentralization has stopped to be the focus of theoretical and practicalresearches. On the contrary, all the countries are exploring the content and degree ofdecentralization according to their national conditions. On the other hand, the thesisdiscusses the revelations for China’s reform of the local tax system by making acomparative study on the establishment of the local tax system in two countries fromthe federal system and the unitary system respectively. To be more specific, the fiscalfederalism should be adopted, the principle of legality should be embodied ininstitutional arrangements, the local governments should be granted more taxautonomy, the local tax categories should be put in place in accordance with theireconomic nature, and the local tax administration should live up to the needs oftaxing power division.Fifthly, the thesis makes concrete propositions on the future reform of China’slocal tax system. On the one hand, it puts forward the objectives and principles to beset during the reform of the local tax system, i.e., the boundary of local governmentfunctions is to be reasonably defined, the local governments’ financial resources are tobe fully guaranteed, and the function of taxation is to be given to full play. On theother hand, the specific measures and recommendations include improving the legalframework of local taxes under the context of advancing rule of the country by law inan all-round manner, optimizing the structure of local tax categories by taking theopportunity of achieving full coverage of VAT in2015, as well as perfecting taxadministration systems and taxpayer service together with the establishment andimprovement of supporting measures. In general, adhering to the basic framework of Marxist Political Economics, thethesis makes an intrinsically analysis to the reform of the local tax system. Followingthe multi-disciplinary theory model of the Game Theory, the New InstitutionalEconomics and the Science of Law, and making use of different research methodssuch as historical analysis, comparative analysis, game analysis as well as thecombination of qualitative and quantitative analysis, the thesis establishes thetheoretical framework and concrete approaches of the reform of local tax system. Ithas attempted to make innovations in the following three aspects:Firstly, probing from the perspective of Political Economics, into the theoreticalbasis, the fundamental contradiction, the power allocation and the institutionalframework of local taxes, this paper builds up the theoretical framework the local taxsystem. In addition, it explores the interest game between the central and localgovernments by virtue of the researching methods of the Game Theory as well as thepreference series model, the bargaining model and the principal-agent model, thuslaying an analytical foundation for the division and matching of taxing powers andresponsibilities later in the paper.Secondly, systematically reviewing the emergence and development of localtaxes since China’s feudal societies, the thesis comes to the conclusion that eachreform, evolving from the economic system, fiscal system, and local tax system to thetax administration model, has always been a process that is positively triggered, andreversely guaranteed.Thirdly, by building up the theoretical framework, reviewing the historicaldevelopment, and drawing on the research on tax autonomy data by OECD membercountries as well as the experience of developed countries, the thesis suggests that theoverall design of China’s local tax system be focused on resolving the problems ofambiguous division of responsibilities between the central and local governments,lack of tax autonomy by local governments and failure to put in place the principle oflegality, which provides a valuable insight for the top-level design of China’s local taxsystem.