It is a daunting task to explain to readers interested in taxation or contemporary China the actual practice and essential features of Chinese tax administration. Wei Cui's new book on Chinese taxation is an important pioneering work built upon an enormous amount of solid research. Its central thesis is that the Chinese tax regime cannot be understood without an appreciation of the tax administration system, in particular its operation at the very bottom level of the administrative and political hierarchy. Cui does an excellent job explaining China's tax collection capacity, claiming the country has a relatively high level of tax revenue relative to GDP (p. 1), albeit with a level of ambiguity as to some of the comparator jurisdictions on which this claim is based.
The book focuses on China's grassroots tax administration across approximately the past two decades, especially its “revenue manager system,” a system in which tax administrators or revenue managers were required to manage a large population of taxpayers to ensure they carried out their compliance activities, “generally without using audits and imposing penalties” (pp. 46–47). Cui compares the compatibility of this system with the features underpinning modern tax administration in advanced economies – truthful reporting, self-assessment and auditing – and considers the implications of this system for tax policymaking and the development of the rule of law. An important understanding that flows from Cui's analysis is that China's tax administration may be unique from a comparative point of view, but it is not that unique from a historical perspective.
Cui starts his discussion with the tax administration reform of 1997. This reform attempted to modernize the tax administration structure and process, moving towards modern accounting and administration practices, including accounting-based audits for efficient, effective tax administration and improved compliance. Cui notes that the effort was short-lived and was followed by a retreat to pre-reform practice, albeit with some adjustments. Ironically, the 1997 retreat from the foundation of modern tax administration based on accounting records and audit was not the first missed tax administration modernization opportunity in China. Left out of the analysis by virtue of Cui's starting date are accounts of earlier Chinese attempts to move in the direction of modern tax administration, such as in the municipality of Wuhan in the early 1950s. Sadly, the achievements of increased use of accounting records and a strong tax collection capacity in the municipality were largely lost by subsequent decentralization and re-centralization of tax administration.
The use of the revenue manager system reveals some important features, and puzzles, of Chinese taxation. First, the level of truthful reporting and thus (intensive) tax compliance has been low. It is surprising that after 70 years there are still widespread problems with uniform accounting and reliable reporting. The contemporary reliance on the revenue manager system suggests a setback from the early success of reliable tax returns and earnest enforcement of audits and punishment in the 1950s. An intriguing question is why the level of reliable accounting is low: why it is so difficult to attain levels of bookkeeping and reliable accounts comparable to those of advanced economies. Will it ever be possible to build up a modern tax administration system relying on self-assessment and ex-post audits with the rapid development of modern technologies in the country? Cui's book has not fully addressed these questions.
Second, the revenue manager system suggests that despite a unitary state and centralization of tax powers, China's tax administration is characterized by decentralization. This is neither surprising nor unique to taxation in contemporary China. Decentralization has long been a feature underpinning not only China's tax systems but also inter-governmental fiscal relations. Studies on the Ming dynasty's taxation and government finance have noted the phenomenon of using a hierarchy of tax-collecting units to organize taxation and generalized this as “centralized directing with decentralized handling.” What implications would the entrenched decentralization within a politically and constitutionally centralized state have for state capacity building and for the rule of law? Cui has attempted to address the question through analysing China's fiscal politics, joining a continuing effort by scholars to untangle the puzzles of China taxation and its fiscal capacity in order to understand Chinese taxation and development.
In both Cui's and earlier studies on taxation, “state capacity” is noted as an important objective of development, particularly for developing countries. Cui does not explain how the term should be understood but emphasizes that it is necessary to analyse the mechanisms underlying such capacity. Earlier studies have offered a definition of the term and argued that fiscal capacity can serve as the best possible indicator of a state's overall capacity. The revenue manager system and similar earlier systems created strong fiscal capacity, a product of massive investments of resources in the state structure. On the other hand, the system may render law relatively unimportant in tax administration and compliance, yielding a system Cui describes as “atomistic coercion” (p. 22). A range of factors no doubt explains the balance found in any society between law and unwritten administrative practices; and it is not entirely clear whether the significant weighting of the latter in China is the result of its suitability to the task or simply reflects the nature of Chinese tax law as too general to apply directly.
Overall, Cui presents an engrossing story of the operation of the Chinese tax and fiscal systems. The rich empirical data, the refreshing perspective from which the subject matter is examined, and its novel arguments make a valuable contribution to the field. Readers familiar with taxation or Chinese legal systems will appreciate the author's mastery of his materials as well as his ability to identify key features from an array of discrete and complex information sources and to interpret those features in familiar terminologies to readers outside China.
