ABSTRACT
China’s financial and taxation system in the past few decades has lagged behind the country’s comprehensive economic reforms and therefore created serious problems at both the macro- and microeconomic levels. One indicator for this structural weakness was the decreasing share of the central state’s tax revenue in the GNP. The main reason for the erosion of the central state’s tax base was the fiscal contract system between the central and local governments, which in many cases was the result of a long process of bargaining. 1
