Should China Revisit the 1994 Fiscal Reforms?

The 1994 Fiscal Reforms in China were spectacularly successful in meeting the immediate challenges that the economy faced at that time—a sharply dropping tax/GDP ratio, and limited ability of the central government to conduct macroeconomic or redistributive policies. The centerpiece of the reform was the VAT to be administered by the newly established State Administration of Taxation. Agreement for the reforms by the provinces was not easy—an involved guaranteeing 1993 levels of revenues, a share of the revenues from the VAT to benefit the high income regions, an equalization system for the less well to do regions, which was to receive more resources over time. The most interesting element was the “revenue-return,” which was ostensibly disequalizing but had the advantage of protecting the growth centers along the coast, and was a key element in providing continuing employment opportunities to migrant workers, leading to a sharp drop in poverty and rapidly increasing living standards.