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Abstract
While, politically speaking, China has a centralized government structure with
strong top-down mandates, under the country’s current fiscal system, local governments
are responsible for providing most local public goods and services. Large differences in
economic structures and revenue bases exist, however, causing the implicit tax rate and
fiscal burdens in support of local government functions to vary significantly across
jurisdictions. Regions initially endowed with a broader nonfarm tax base do not need to
rely heavily on new and existing firms to finance public goods provision, which creates a
healthy investment environment in support of nonfarm sector growth. In contrast, local
governments in regions where agriculture is the major economic activity spend the
majority of their resources on their own operating costs, leaving little for public
investment. Because of the relatively high transaction costs associated with collecting
taxes from the agricultural sector, local governments tend to levy the existing nonfarm
sector heavily, thereby greatly inhibiting its growth. As a result, regional differences in
economic structures and fiscal dependent burdens may translate into widening gaps in
equality.