Like many developing countries, China gets little money from the personal income tax, which provides 6.5% of government revenue. Most Chinese have never filed a tax return.
One implication is that a Chinese business slowdown and stock market crash would put a big dent in Chinese government revenue. That is from today’s Wall Street Journal, p.A12, "In China, Collecting Income Tax Proves Problematic."
The same goes for Yemen. I wonder how much of the “stupid” economic policies that this government pursues are because of their inability to collect taxes efficiently. It’s a double edged sword, they can’t collect income taxes, so they are forced to collect money in another way and that leads to weird distortions of markets and general distrust of the government. This government would be screwed up no matter how they got their money, but I wonder how many problems in developing nations can be ascribed to the government’s inability to collect taxes?
Isaac Crawford
Blogging in Yemen
http://www.isaharr.com
Even more horrifying is that is has been estimated that taken as a whole, the Chinese tax system is regressive – i.e. the poor fund the services provided for the rich…
1. Would a Chinese government with less funding be a bad thing?
2. As this is the case for many countries, what is the next best way to raise government revenue in developing economies?
The US did very well economically in the 19th century with taxes at a fraction of what essentially all countries in the world today levy. Other countries did well too with the same strategy.
Although calling it a strategy for most countries would probably be inaccurate. It was likely more a case of not being able to figure out how to tax their citizens even higher. It seems to me that unless a country is in an unusual situation culturally or constitutionally, that virtually countries, today and throughout history, all tend to tax as much as they can get away with.
As opposed to what is optimum for growth. Taxes are taxing, and the harm they cause is very real. Just because you can do something doesn’t mean that you should.
Jon Smith: I presume that the high VAT in Turkey is to counter the high level of tax evasion (both by individuals and small businesses). Regardless, the VAT could be blamed for the substantial black-market economy in the country.
One ponders; with every percentage increase in VAT, what proportion of total consumption is shifted to the black market? What is the point where VAT is so high that it no longer increases government revenues?
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