Convergence and Divergence: China's Development Path to a Modern Tax System

With the shift from a socialist economy to a state-controlled market economy, China’s tax system has been restored as the primary source of government revenue. Superficially, the system of income and consumption taxes has become increasingly aligned with conventional norms and practices applied in Western countries. The implementation of the system, however, has revealed three features that may distinguish the Chinese system from many of its Western counterparts: the role of informal taxation, unequal distribution of tax burdens and a high level of administrative discretion. This article explores key features of Chinese taxation and examines how they have endured for more than two millennia, despite dramatic political changes in that period. It considers the prospect of China jettisoning the legacy of its imperial past and shifting towards institutional structures and norms that are more in line with the modern rule of law principles in taxation. It suggests important institutional paradigm shift would be needed for such a change to occur.