The relationship between tax administration and tax policy is highly endogenous: policy decisions can directly affect the structure of tax administration, which in turn constrain subsequent policy options. Chapter 6 explore this relationship. For example, political decisions to cut the personal income tax for the rich in China directly undermined PIT administration, which in turn made it seemingly infeasible to expand the PIT. I also offer a novel explanation for the low levels of enforcement of urban employment-based social insurance (SI) schemes: conflicting incentives among the central and provincial government, not enforcement capacity, lie at the root of perennially lackluster enforcement. But the subtlest, yet most pervasive, causes of information constraints in Chinese tax policy are the structures of relentless delegation and governance through atomistic coercion. In the largest sphere of Chinese taxation—business taxation—information bottlenecks imply that considerations of economic efficiency are rarely applied. Instead, raising or reducing the overall level of taxes is the chief policy lever. This introduces tremendous instability to the fiscal system.

This chapter explore some implications of the book for scholarship on Chinese law and politics. Many legal scholars speculate about whether China might adopt “rule by law” without embracing “rule of law.” This stylized discourse, however, assumes that the Chinese government is willing and able to implement “rule by law.” However, because coercive substitutes for the law are often available and preferred, even “rule by law” is optional, and discussions of rule of law norms are on even shakier grounds than legal scholars realize. I suggest that the economic and ideological contests between China and Western countries will increasingly depend not on who better represents the rule of law, but on who has more inclusive institutions. Should the Chinese government maintain its tax capacity and be willing to engage in redistributive social spending on the poor, its domestic legitimacy will strengthen. The book thus suggests that both policy makers and social scientists should pivot away from studying the Chinese state’s predilections for the rule of law and toward its capacity and willingness for inclusivity and redistribution.

Atomistic coercion generates an “equilibrium:” it would not make sense for any actor to change their behavior unless all actors change their behaviors at the same time. Chapter 4 demonstrate this with a recent, provincial tax administration reform. Echoing the 1997 tax administration reform agenda (which nationally had been abandoned), tax administrators in Jiangsu advocated “returning responsibilities to taxpayers,” i.e. enforcing the norm of truthful reporting. But reformers faced a predicament. Inaccurate information on tax returns makes it difficult to improve audits. The government’s capacity for observing most taxpayers could thus not hope in the short term to surpass that of revenue managers. But if direct personal monitoring of taxpayers declined because of reform, the government risked lowering compliance. The paramount objective of securing tax revenue pressures tax administrators to continue relying on traditional means of coercion, which undermines the government’s ability to threaten punishment for non-compliance beyond the traditional set of requirements. The objective of holding taxpayers accountable for truthful reporting thus remains elusive. Chapter 4 illustrates this dynamic through a novel dataset on the outcomes of a new type of audit function, “intermediate risk response,” that Jiangsu reformers instituted.

The revenue management system engenders non-rule-based tax collection. The strongest concern they raise is not corruption, but the conversion of what would have been compliant taxpayers into “semi-compliant” ones, i.e. compliant with the dictates of government employees rather than the requirements of law. I lay out a conceptual framework for analyzing the revenue management system, captured by “atomistic coercion.” “Atomism” means that (i) instead of a government organization, the authorities that taxpayers obey are individuals; and (ii) tax collectors acquire taxpayer information that they need not share with the state apparatus. “Coercion” conveys the idea that taxpayers perform compliance activities only because they are monitored by government authorities, not because of some social norm of complying with the law. Coercion secures compliance through government observation and intervention. Intervention can secure compliance along behavioral margins that are accurately observed. But as the state’s powers of observation and intervention are bounded, compliance can prove very low along the vast portions of taxpayer behavior not observed by the state or where the state’s capacity for intervention is constrained. This is illustrated by several examples, most importantly the phenomenon of taxpayers formally registering with tax authorities while dodging most specific compliance obligations.

Chapter 5 examines the complex performance incentives used within China’s tax bureaucracy. There is substantial heterogeneity as one moves down the bureaucratic hierarchy. When the national State Administration of Taxation (SAT) evaluates the performance of provincial bureaus, the metrics deployed are few and equalize outcomes. By contrast, provincial performance evaluations of city-level tax bureaus are comprehensive and detailed. Intriguingly, meeting revenue targets receives little weight. The lowest tiers of management in tax agencies—and the “foot soldiers” in revenue management and tax inspection units—face yet another, completely different set of incentives. While promotion opportunities are scarce, they extract financial rewards from the lowest-ranked leaders in the political branch of the state, who are more motivated than tax agency leaders to meet revenue targets. At the same time, they are subject to performance targets in respect of other tax administration outcomes. Maintaining such metrics facilitates top-down management, and keeps enforcement discretion at the grassroots. Overall, it is imperatives from the political organization of the state that ultimately determine the character of tax administration, not the instrumental relationship that the latter bears to policy implementation.

This chapter identifies the book’s two basic aims: (1) explaining what policy makers and scholars interested in building tax capacity in developing countries may learn from the Chinese experience; and (2) articulating a framework for understanding the politics of taxation in China. It then explains how the unique approach of the book, which focuses on ground-level tax administration, serves these two aims. In relation to the first aim, the book will argue that contrary to assumptions in the current literature, there are fundamentally different types of state capacity in taxation, which follow potentially irreconcilable choices in the face of difficult trade-offs. In relation to the second aim, the book uses the structure of tax administration to illustrate the heterogeneity of political incentives within the Chinese state, critical information bottlenecks, and the political motives behind invocations of law. Unifying the pursuit of these two aims is a reflective conception of law as a special form of securing social order, which sees legal ordering as fundamentally different from social ordering based on state coercion. A summary of the ensuing chapters follows.

Chapter 2 offers the first full illustration of the trade-off between raising revenue and enforcing the norm of truth reporting. In traditional theories of tax compliance, audits are the primary tool of enforcement. It has been assumed that audits in China are carried out by tax inspection (jicha) bureaus. However, drawing on archival material and a novel dataset, I show that the practice of mandatory taxpayer “self-inspections” predominates in the jicha system. Self-inspections allow the tax authority to raise revenue by foregoing penalties on noncompliant taxpayers, but threaten to erode the government’s deterrence power. By making self-inspections a perennial and integral part of enforcement, Chinese tax inspectors largely abandon the goal of enforcing the norm of truthful reporting. Chapter 2 then pivots to the much larger segment of Chinese tax administration called “revenue management.” Although revenue managers routinely process tax returns, they are even less likely to enforce truthful reporting norms, because of the competition with tax inspection to meet revenue targets and because of a lack of specialization. Therefore, what one might have thought was an immutable component of tax administration – audits – is largely absent from Chinese practice.

Chapter 8 explores the implications of the book’s narratives for the study and practice of taxation in developing countries. China has adopted taxes that are designed to be administered through self-assessment, while minimizing reliance on self-assessment. This essential modification of the modern tax paradigm has radical implications. First, it suggests substantial revisions to economic theories of tax administration and compliance. In particular, because self-assessment is quintessentially about complying with legal norms, modern taxation is deeply intertwined with legal systems: the Chinese case demonstrates how profoundly different a tax system is when severed from the legal system’s support – an idea that economic theories have ignored. Second, the evolution of Chinese tax administration both affirms and enriches a theory in political economy, namely that, to properly study tax and development, one must consider not only state capacity in tax collection, but also view such state capacity as endogenous with politics. Finally, one may query whether Chinese taxation will converge with more familiar tax paradigms. I argue that, to the contrary, technological developments could strengthen the tendency of China’s tax system to continue on its recent path; one can even ask whether other countries will converge to China’s model.