A Chinese Model for Tax Reforms in Developing Countries?

Abstract

Effective taxation is essential for achieving sustained growth in third world countries as many lack adequate financial resources to provide basic public goods. Advice from international development agencies has recently shifted away from the Washington Consensus towards a model that stresses institutional building and contextualized tax policy-making and implementation. Against that backdrop, this essay reviews the tax reforms in China for the past three decades, explores their structural determinants, and attempts to draw lessons for the least developed countries seeking to strengthen their extractive capacity. The review indicates that in reforming its tax system, the Chinese government engages in constant pluralistic learning, target setting and making incremental changes based on trial and error. The Chinese model of tax reform, however, may not be broadly transferrable as most other developing countries do not share its structural premise. Moreover, the model loses much of its glamour if examined from a comparative perspective. Nonetheless, the Chinese experience sheds light on several key questions regarding tax reforms in the least developed countries such as the role of the state, the importance of timing, and priority setting in institutional building.