Excessive Government Fee Collection in China

I. INTRODUCTION There has been growing criticism from business enterprises and farmers regarding excessive fee collection in China. As China's former Premier Zhu (1998) mentioned, the fee revenue was greater than the tax revenue and the people were boiling with resentment. The government launched fee reforms several years ago, but limited progress has been made in solving this problem. Recently the new Chinese administration called for further fee reforms (People's Daily, April 3, 2003). This article discusses the characteristics of fee collection in China, examines the main reasons for the growth of fees and the consequences of excessive fee collections, and provides some policy recommendations. Governments all over the world need to collect revenues to finance expenditures. Revenues can be from taxes, fees and user charges, and net earnings of state-owned enterprises. Taxes are collected to finance public goods and services, to reallocate resources, and to redistribute income. Fees are collected to fully or partially finance the goods and services immediately provided to individuals by government. In decentralized free market economies, such as the United States, taxes are the main source of government revenue. In centrally planned economies, such as the former Soviet Union and China before economic reforms, net earnings from state-owned enterprises were the main source of government revenue. Fee collection has never played an essential role in government revenue raising in other countries. (1) Discussions of fee financing of public works and public institutions can be traced back to Adam Smith (1776, pp. 325-34). He suggested that "A highway, a bridge, a navigable canal, for example, may in most cases be both made and maintained by a small toll upon the carriages which make use of them: a harbor, by a moderate port-duty upon the tonnage of the shipping which load or unload in it." The reason is that these goods are "immediately and directly beneficial to those who travel or carry goods from one place to another and those who consume such goods." Smith also realized that abuses in the management of tolls in Britain existed, such as collecting tolls much higher than what was necessary for maintaining the roads. Since then, economists have developed a number of criteria for financing government provided goods by fees (Fisher, 1996). First, a fee should be charged to the direct users of a good or service to provide correct signals to indicate the quantity and quality of items citizens desire. Second, to achieve economic efficiency, the fee charged should be equal to the marginal cost of providing the good or service. Third, user fee financing is more effective in achieving efficiency when demand for a good or service is price elastic (if demand is perfectly inelastic, then the level of fee does not affect the equilibrium quantity of the good or service). (2) Prior studies on fee collection in China have documented the seriousness of arbitrary and unlawful fee collection problems in China (Gao, 1999; Jia, 2000; Wu, 1997). It is now well-known that many local governments and central government agencies ignored the central government's rules on fee collections and set up their own fees. (3) Some economists, including Fan (1998), emphasize the positive side of fee collection by arguing that fee collection provides local governments with needed fiscal autonomy. Most economists are critical of large, arbitrary, and unlawful fee collections (Wu, 1997; Zuo, 2000b) and believe that forcing local governments and government agencies to follow the central government rules and regulations on fee collection is an important solution to solve the problem. Local fiscal autonomy is needed, but must be lawful and must accept the supervision of the local public. While numerous examples of arbitrary and unlawful fee collections have been provided, in-depth economic analyses of excessive fee collection are still limited. …