Fiscal federalism and provincial foreign tax policies in China

Journal of Contemporary China

Volumn 15, Issue 48, 2006, Pages 479-502

  Zheng, Yu ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

AUTONOMY; ECONOMIC CONDITIONS; FEDERAL SYSTEM; FOREIGN POLICY; GLOBALIZATION; TAX SYSTEM;

ASIA; CHINA; EURASIA; FAR EAST;

EID: 33749063990     PISSN: 10670564     EISSN: 14699400     Source Type: Journal    
DOI: 10.1080/10670560600736509     Document Type: Article

References (46)

1. Shah Anwar, ed., Fiscal Incentives for Investment and Innovation (Washington, DC: Oxford University Press, World Bank, 1995).
2. Surveys of investors tend to rank incentives quite low as determinants of investment. See Louis Wells, Nancy Allen, Jacques Morisset and Neda Pirnia, Using Tax Incentives to Compete for Foreign Investment: Are They Worth the Costs? (Washington, DC: The International Finance Corporation and the World Bank, 2001).
3. Author's calculation based on data from China Statistical Yearbook (1993-2001) and Taxation Yearbook of China (1993-2001).
4. The classic definition of fiscal federalism is 'a public sector with both centralized and decentralized levels of decision-making in which choices made at each level concerning the provision of public services are determined largely by the demands for these services of the residents of (and perhaps others who carry on activities in) the respective jurisdiction'. See Wallace Oates, Fiscal Federalism (Harcourt Brace Jovanovich, Inc., 1972), p. 17.
5. Roy Bahl, 'Central-provincial-local fiscal relations: The revenue side', in Donald Brean, ed., Taxation in Modern China (New York and London: Routledge, 1998).
6. Chongqing became the fourth municipality in 1997, which means no statistical data existed before 1997. Since 1984, nine cities have gradually acquired direct fiscal relations with the central government, making their budgetary status equivalent to that of provinces. The number of 'provincial level' budgetary units is currently 39. In this paper, for the purpose of consistence, I still use the administrative units (provinces and municipalities) as the basic units. The tax revenues of those nine cities are included in the tax revenues of their superior provinces.
7. Chinas intergovernmental fiscal system has experienced some major changes since 1980. In the early 1980s, four major contract-based revenue-sharing systems were applied in different provinces. These contracts stipulate a target revenue-sharing base, on which a fixed share or quota is remitted. Above the base figure, the marginal retention rate is typically much higher, up to 100%. Between 1985 and 1987, three types of revenue sharing were adopted: The first category specified a fixed percentage retained by provinces, the second allowed provinces to retain their own revenues and pay a fixed amount to the central government; the third allowed provinces to retain all of their revenue and the central government paid a subsidy equivalent to the size of the approved deficit. See Roy Bahl, Fiscal Policy in China: Taxation and Intergovernmental Fiscal Relations (San Francisco: The 1990 Institute, 1999). From 1988 to 1993, five different fiscal contracts were applied: (1) basic sharing contracts allowed provinces to retain a fixed proportion of all revenues; (2) basic sharing with growth contracts allowed provinces to retain a fixed proportion of revenues up to a specified target figure plus a stipulated annual growth. Revenues in excess of this target were retained entirely by the provinces; (3) fixed quota delivery specified a nominal remittance quota, with no annual adjustments; (4) fixed quota with growth contracts specified a nominal remittance for the first year, with the remittance quota adjusted upward each year by a specified rate; (5) fixed quota subsidies specified a nominal subsidy each year, with no growth adjustments. See Christine Wong, ed., Financial Local Government in the People's Republic of China (Oxford: Oxford University Press, 1997).
8. See Chen Jiahai and Chen Haihong, 'China's intergovernmental transfer payment: 1952-1997', Shanghai jingji yanjiu [Shanghai Economic Studies] 10, (1999), pp. 37-42.
9. See Ehtisham Ahmad, Li Keping and Thomas Richardson, Conference on Fiscal Decentralization: Recentralization inChina (IMF, 2000), available at: http://www.imf.org/external/pubs/ft/seminar/2000/fiscal/ahmad.pdf.
10. Author's calculation based on data from China Statistical Yearbook 2001.
11. There are seven different types of nationally approved special economic zones in China, including 5 administratively special economic zones, 14 open coastal cities (OCCs), 54 economic and technological development zones (ETDZs), 53 high-tech industrial development zones (HTIDZs), 15 free trade zones (FTZs), 17 exportprocessing zones (EPZs), and 15 border economic and cooperative zones (BECZs).
12. The marginal retention rate refers to the portion of extra revenue a provincial government can retain out of the marginal revenues beyond the benchmark revenue, baseline figure (jishu), ranging from 100% to a fixed portion, depending on different central-provincial contract-sharing arrangements.
13. For a detailed analysis, see Christine Wong, Christopher Heady and Wing Woo, Fiscal Management and Economic Reform in the People's Republic of China (Oxford: Oxford University Press, 1995); and Philip Hsu, 'Deconstructing decentralization in China: Fiscal incentive versus local autonomy in policy implementation', Journal of Contemporary China 13(40), (August 2004), pp. 567-599.
14. See Ahmad et al., Conference on Fiscal Decentralization.
15. Bahl, Fiscal Policy in China.
16. The measures of effective foreign tax rates are discussed below.
17. Oates, Fiscal Federalism.
18. See Barry Weingast, 'The economic role of political institutions: market-preserving federalism and economic development', Journal of Law, Economics, and Organization 11, (1995);
19. Gabriella Montinola, Yingyi Qian and Barry Weingast, 'Federalism, Chinese style: The political basis for economic success in China', World Politics 48, (1994); and
20. Yingyi Qian and Barry Weingast, 'Federalism as a commitment to preserving market incentives', Journal of Economic Perspectives 11(4), (1997), pp. 83-92.
21. Yingyi Qian and Gerard Roland, 'Federalism and the soft budget constraint', American Economic Review 88(5), (1998), pp. 1143-1162.
22. Jonathan Rodden and Erik Wibbels, 'Beyond the fiction of federalism: macroeconomic management in multitiered systems', World Politics 54, (July 2002), pp. 494-531.
23. Erik Wibbels, 'Federalism and politics of macroeconomic policy and performance', American Journal of Political Science 44(4), (2000), pp. 687-702.
24. Rodden and Wibbels, 'Beyond the fiction of federalism'.
25. Jonathan Rodden, 'Reviving leviathan: Fiscal federalism and the growth of government', International Organization 57, (Fall 2003), pp. 695-729.
26. Daniel Treisman, 'Political decentralization and economic reform: A game-theoretic analysis', American Journal of Political Science 43(2), (1999), pp. 488-517.
27. David Zweig, Internationalizing China: Domestic Interests and Global Linkages (Ithaca and London: Cornell University Press, 2002).
28. Morris Goldstein, Donald Mathieson and Timothy Lane, Determination and Systemic Consequences of International Capital Flows (Washington, DC: IMF, 1991).
29. Layna Mosley, Global Capital and Domestic Governments (Cambridge: Cambridge University Press, 2003).
30. Richard Baldwin and Paul Krugman, 'Agglomeration, integration, and tax harmonization', NBER Working Paper 9290, (2002).
31. Miles Kahler, Modeling Races to the Bottom, unpublished manuscript (UCSD, 1998).
32. Ronald Rogowski and Jeffry Frieden, The impact of the international economy on national policy: An analytical overview', in Robert Keohane and Helen Milner, eds, Internationalization and Domestic Politics (New York: Cambridge University Press, 1996).
33. See for instance, Susan Shirk, 'Internationalization and China's economic reform', in Keohane and Milner, eds, Internationalization and Domestic Politics; and Zweig, Internationalizing China.
34. Hongyi Harry Lai, The Political Economy of China's Reforms: National and Provincial Policies toward Non-State Industry, Ph.D. Dissertation (UCLA, 2000).
35. Yasheng Huang, Selling China: Foreign Direct Investment during the Reform Era (Cambridge: Cambridge University Press, 2003).
36. See, for instance, Duane Swank, 'Funding the welfare state: globalization and the taxation of business in advanced market economies', Political Studies XLVI, (1998), pp. 671-692;
37. Lai Hongyi, The Political Economy of China's Reforms; and Baldwin and Krugman, 'Agglomeration, integration, and tax harmonization'.
38. By definition, FDI flows describe the current attractiveness of countries and sectors for new investments as well as withdrawal of investments, whereas FDI stocks measure the share of foreign ownership in the national enterprises and national ownership in foreign enterprises. See OECD, OECD Investment Policy Review China: Progresses and Reform Challenges (Paris: OECD, 2003), p. 39.
39. In fact, FDI stocks have been greatly overestimated in China. According to Huang Hai, an assistant Minister of Commerce of China, the total amount of FDI stocks was roughly about $250 billion at the end of 2003, only half of $500 billion, the amount of accumulated actual use of foreign capital in the same period. See Huang Hai, FDI Stock in China Greatly Overestimated (Ministry of Commerce, 20 December 2004), available at: http://huanghai2.mofcom.gov.cn/aarticle/ speech/200503/20050300020636.html.
40. See Sylvie Demurger, Jeffrey Sachs, Wing Thye Woo, Shuming Bao, Gene Chang and Andrew Mellinger, 'Geography, economic policy, and regional development in China', NBER Working Paper 8897, (2002), p. 25.
41. While ETDZs and SEZs can offer almost the same preferential treatment to FIEs, SEZs cover much larger areas than ETDZs. OCCs can offer essentially all the preferential policies toward foreign investment as SEZs except for the income tax. Typically, FIEs in OCCs need to pay income tax at a rate of 24%, somewhere between the rate of SEZs and elsewhere in the country. See Table 3 for more detailed comparison.
42. Nathaniel Beck and Jonathan Katz, 'What to do (and not to do) with time-series cross-section data', American Political Science Review 89(3), (1995), pp. 634-647.
43. The regression results are not shown.
44. Baldwin and Krugman, 'Agglomeration, integration, and tax harmonization'.
45. A key content in the incentive package is an exceptional generous tax treatment. The income tax will be exempted for five years followed by 50% reduction in the next five years (wumian wu jianban). Conventionally, local government can only offer two years of income tax exemption followed by 50% income tax reduction in the next three years (lianmian san jianban). Author's interview, Chengdu, 12 September 2004.
46. Author's interview, Beijing, 25 September 2004.