The Inefficiencies of Legislative Centralisation: Evidence from Provincial Tax Rate-Setting

Legislative power in China is centralised to an unusual degree. This arrangement is both positively and normatively significant, but has received little attention in prior scholarship. The authors devise a novel method for analysing the consequence of centralisation by examining the provincial rate-setting for vehicle and vessel tax (VVT). As all provinces have assigned the revenue and administration of the VVT to sub-provincial governments, provincial rate-setting represents centralised, and not decentralised, decision-making. Using spatial econometric analyses, the authors find that provincial tax rate choices fail to reflect local economic and demographic conditions and display traces of tax mimicking. The authors’ analyses support the hypothesis that provincial officials lack information and incentives to formulate effective policies.