Abstract

A common phenomenon in tax administration in developing countries is that tax is collected, not according to the rules of law, but according to informal agreements between taxpayers and tax collectors. This article offers a novel explanation of this phenomenon in the Chinese context in terms of administrative decentralization. Administrative decentralization is defined as the concentration of government functions at the lowest ranks of a geographically dispersed bureaucracy. Decentralization increases the communication costs associated with the implementation of law and changes the structure of taxpayers’ costs in obtaining knowledge about the law. As a result, there emerges a ‘semi-compliant’ type of behaviour, involving many taxpayers who would have been compliant under a rule-based system, where tax is remitted and collected despite both sides’ being under-informed about the law. The article argues that this dynamic has frustrated tax administration reform in China and, interestingly, explains the underdevelopment of the tax professions and of tax litigation.

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