Yongzheng Liu

Direct versus Indirect Taxation: Trends, Theory and Economic Significance

One of the oldest questions in the theory and practice of taxation is that of the appropriate mix of direct and indirect taxes. The choice between direct and indirect taxes has contributed to a long animated debate, in political and academic circles, regarding the virtues and defects of those two forms of taxation. In this paper we provide an overview of the evolution of the ratio of direct taxes to indirect taxes across countries over the past three decades, the theorizing that has gone behind the alleged superiority of one form of taxation or the other, the determinants that appear to be behind the intensity with which both forms of taxation are used, and the economic relevance of the choice of tax structure in terms of economic growth, macroeconomic stability, the distribution of income, and the flow of foreign direct investment (FDI).

GROWTH-INEQUALITY TRADEOFF IN THE DESIGN OF TAX STRUCTURE: EVIDENCE FROM A LARGE PANEL OF COUNTRIES

Using a structural model and a large panel dataset for 150 developed and developing countries covering the period 1970–2009, the present paper examines the potential tradeoff between economic growth and income inequality in the design of tax structure. We find clear evidence of: (i) a tradeoff between growth and inequality for both direct and indirect taxes; (ii) heterogeneous growth and inequality effects of tax instruments measured by levels and rates (particularly corporate income tax); and (iii) heterogeneous effects of tax instruments on different definitions of inequality (i.e. gross income, net income or expenditure).

Did China's Tax-for-Fee Reform Improve Farmers' Welfare in Rural Areas?

Abstract China enacted a rural tax reform – the ‘Tax-for-Fee Reform’ (TFR) – in the late 1990s. A crucial but unanswered question is whether this reform improved farmers’ welfare in rural areas. This article uses village-level survey data from the Chinese Household Income Project in order to examine the effect of the TFR on farmers’ direct and indirect welfare. We find no evidence that the direct welfare effects improved farmers’ net income. In contrast, the reform appears to have reduced the villages’ financing capacity, and hence to have lowered their overall expenditures. These indirect effects have had significant negative impacts on farmers’ welfare.

Fiscal Decentralization, Equalization, and Intra-Provincial Inequality in China

Using a nationwide county-level panel dataset for the years 1995-2009, this paper conducts the first analysis in the literature to examine the impacts of fiscal decentralization and fiscal equalization, both measured at the sub-provincial level, on intra-provincial inequality in China. While fiscal decentralization offers significant advantages regarding public expenditure efficiency, a potentially large disadvantage is that it may lead to increased regional inequality. In this paper, in line with our theoretical hypotheses, we find that while fiscal decentralization at the sub-provincial level in China leads to larger intra-provincial inequality, fiscal equalization efforts performed by provincial governments tend to mitigate the detrimental effect of fiscal decentralization on intra-provincial inequality. Our results also indicate that the quantitative effects of fiscal decentralization on regional inequality tend to be larger when they are measured from the expenditure side, which is consistent with the fact that expenditure decentralization is a much more meaningful measure of decentralization in China. Overall, we provide evidence on the potential inequality costs of using fiscal decentralization as a development strategy. At the same time, we emphasize the importance of implementing a fiscal equalization program to ensure the overall success of decentralization policy.

Frozen in Time: The Much Needed Reform of Expenditures Assignments in China

China has been carrying out significant fiscal reforms on intergovernmental fiscal relations for over three decades. However, these reforms have largely concentrated on the revenue side of the budget, and generally have not been coordinated with an explicit strategy for the reform of functional expenditure assignments. Currently, there is large consensus that the weaknesses with the current assignment of expenditure responsibilities have become one of the most serious ob-structions---if not the most serious---to the further improvement of China fiscal system. In this paper, we provide a comprehensive review of the actual practice with expenditure assignment among different levels of government in China over the past decades. We highlight the most im-portant issues surrounding the current system qualitatively and quantitatively, and provide a road map and practical recommendations for its future reform.

Measuring the extent of fiscal decentralisation

The goal of this chapter is to develop a taxonomy of decentralisation measures and how they are related to each other. In addition to introducing a common language for the different strands of literature, this taxonomy is instrumental for studying the outcomes of decentralisation. Using cross-state data from the United States, we show that aggregating distinct dimensions of fiscal decentralisation into a single indicator inevitably leads to a loss of information in the form of lower explanatory power. We conclude that the distinct aspects of decentralisation should enter regression analyses separately, in the most flexible functional form possible. In particular, we find that revenue autonomy is virtually orthogonal to the subnational share of revenues and expenditures, suggesting that it carries additional information. In this chapter we show also how the conventional measures of decentralisation can be modified to account for the differing dependence on external grants.