TAXATION AND ACCELERATED INDUSTRIALIZATION *

UNDERDEVELOPED ECONOMIES ARE typically caught in the so-called "Cvicious circle of poverty," a circle running from low income to small savings to small capital accumulations to a continuation of low income. Taxation can be used to break the circle by forcing a higher rate of savings 4rom the meager income of these countries. During 1928-36, a period of nine fiscal years, the Nationalist government of China committed itself to a program of accelerated industrialization of the economy. To help finance this program, numerous reforms were made in the Chinese tax system in the direction of increasing its revenue productivity. Yet, even as late as 1936, the combined tax collections of all levels of the Chinese government amounted to no more than 4 per cent of China's gross national product. This fact is surprising, since the corresponding percentages for other underdeveloped economies (e.g., India, Guatemala, and Chile) have been found to be considerably higher. Why, then, was the Chinese tax system during the Nanking period' unable to absorb a larger percentage of China's gross national product? One possible answer to this query could be that the expenditures of the Chinese governments were not contributing much to the immediate consumption needs of the people. If that was the case, the proportionate taxable capacity would be low in a poor country like China. In this connection it is pertinent to note that the Chinese national government, which was financially far more important than the provincial and hsien (county) governments combined, devoted roughly 44 per cent of its total expenditures during the Nanking period to military purposes. But, while the heavy military outlays of the Nanking government did lower China's proportionate taxable capacity, the tax system itself was the primary cause of its low revenue productivity. In China, as in the United States, taxes were levied by three levels of government: the national, provincial, and ksien governments. The