Paul L. Caron

Friday, February 17, 2023

Weekly SSRN Tax Article Review And Roundup: Elkins Reviews Morse's Tax Without Law: Cui's Administrative Foundations Of The Chinese Fiscal State

This week, David Elkins (Netanya, visiting NYU 2021-2023; Google Scholar) reviews a new paper by Susan Morse (Texas; Google Scholar), Tax Without Law: Book Review of Wei Cui, The Administrative Foundations of the Chinese Fiscal State, 26 Fla. Tax Rev. __ (2023).

Elkins (2018)

In this week’s feature article, Susan Morse reviews a new book by Wei Cui (British Columbia), The Administrative Foundations of the Chinese Fiscal State (Oxford University Press 2022). While it might be a bit unusual to review a review, I think that Professor Cui’s important book and Professor Morse’s insightful comments make it a worthwhile endeavor.

Professor Cui describes the Chinese fiscal system as divorced from the rule of law. No legal norms guide the tax administration, audits are practically nonexistent, and there is no meaningful judicial review. At the heart of the system are hundreds of thousands of revenue managers, each responsible for perhaps 1,000 taxpayers. One of their functions is to serve as a “nagging adult presence,” to make sure that taxpayers register and file on time. 

Beyond that function, revenue managers receive revenue targets. To meet those targets, a revenue manager may request that taxpayers reconsider their own tax liabilities. The request is not based upon an audit or any indication that the return filed by the taxpayer is inaccurate. Instead of being rule-based, the interaction between the taxpayer and the revenue manager is relationship-based.  While acknowledging that the discretion granted to such officials may seem irrational and conducive to corruption, Cui nevertheless contends that the system is an organized structure that works.

In recent years, China has introduced the Golden Tax Project (“GTP”), whose most important feature involves VAT collection. Billed as cutting-edge anti-fraud technology, the GTP requires large VAT-remitting firms to use special encrypted invoices and then regularly authenticates and cross-matches invoices between sellers and buyers. While the impersonal GTP may appear very different from the relationship-based revenue manager, there is according to Cui a common denominator, and that is the lack of any requirement that the system conform to the rule of law. Tax liability is determined strictly by the decryption of the storage device at the local office. No procedure is available to challenge that determination.

For his analysis of the Chinese system, Cui turns to a number of Western theories, involving evasion, entitlements, norms, administration, development, and rule design. He concludes that none of them is appropriate for the Chinese tax system because they all assume the importance of formal law, which is lacking in the Chinese tax system. Here, Professor Morse suggests that perhaps Cui overstates his case and contends that the rule of law has more traction on the ground that he give it credit for, although she agrees that at the end of the day, it is not the ultimate arbiter of the result. It is the political institutions, not the rule of the law, that shape the law on the ground in China.

As Morse describes it, Cui’s most provocative point is that a system based on a Western conception of law and legal norms is not necessarily more valid the than the Chinese system, based on negotiation, bureaucratic incentives, and computerized results. The key question is which works better in practice in promoting the goals of economic growth and redistribution of wealth.

Morse suggests that the book offers significant lessons for U.S. tax law scholarship. U.S. scholars tend to focus on formal tax law, what the law “is,” analyzing and critiquing statutory and regulatory rules, administrative rulings and court decisions. They devote relatively little effort to examining how the law actually plays out on the ground (although she does cite a number of noteworthy exceptions). However, she argues that efficiency and fairness, the mainstays of tax analysis, are at least as much a product of how the law plays out in practice as there are of the formal rules.

In his 1981 book, Entropy: Toward a New World View, Jeremy Rifkin defined a paradigm as a perspective that is so fundamental to our thinking that we do not even realize that it is there. To my mind, the most fascinating aspect of Professor Cui’s book and of Professor Morse’s review is their invitation to examine thoughtfully our paradigmatic belief that the rule of law is the necessary basis of a functioning administrative state in general and a functioning tax administration in particular. This does not of course mean that the examination might not end up reinforcing our belief in the rule of law and a rejection of the alternative. It does mean that we should not take such a position for granted. Specifically, we certainly should consider the possibility that a system that works in one society may not work in another with different cultural traditions. A U.S. revenue agent politely but adamantly requesting that a taxpayer reconsider his or her tax liability and perhaps add a bit more into the collective pot seems as incongruous as a Chinese taxpayer asking a revenue manager for the statutory basis of an assessment and petitioning a judicial forum to adjudicate any disagreement. Perhaps one system is objectively better. Perhaps not. However, I would posit that in any case it is a conversation worth having.

Here’s the rest of this week’s SSRN Tax Roundup:

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