Chapter 3 analyzes consumption-based taxes in China. The Chinese government now heavily depends on the consumption-type value-added tax (VAT) and the consumption tax, a special tax on specific goods such as alcoholic products, cigarettes, and automobiles. In addition, two additional taxes, urban maintenance and construction tax and the additional fee for education, also share the same tax base as the VAT. These consumption-based taxes account for more than half of China’s total tax revenue. Other taxes on goods and services, such as tariffs, vehicle purchase tax, resource tax, and environmental tax are also examined in this chapter. The advantages and disadvantages of consumption taxes are evaluated as well.Consumption taxes are favorable to savings and economic growth but are not favorable to income redistribution.

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.