Accounting, Organizations and Society 48 (2016) 17e30

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Accounting, Organizations and Society

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Taxation and state-building: The tax reform under the Nationalist

Government in China, 1928e1949
Yin Xu a, *, Xiaoqun Xu b
a
School of Accountancy, Strome College of Business, Old Dominion University, Norfolk, VA 23529, USA
b
Department of History, Christopher Newport University, 1 Avenue of the Arts, Newport News, VA 23606, USA

a r t i c l e i n f o a b s t r a c t

Article history: Using primary sources and drawing on insights from the new accounting history and the new fiscal
Received 11 August 2014 sociology, this paper examines the tax reform launched by the Nationalist Government in China during
Received in revised form 1928e1949 as a case study to enrich an understanding of the relationship between taxation and state
30 October 2015
building. Among other things, the paper reveals a shift from the traditional Confucian ideology of “low
Accepted 31 October 2015
Available online 11 December 2015
taxes” to the Western-derived ideology of “good taxes,” used by the state to justify new taxes. It discusses
how the Chinese Civil War and the Sino-Japanese War differently affected the Nationalist Government's
political legitimacy and state finance and taxation. It analyzes how tax compliance was pursued by the
Keywords:
Accounting history
Nationalist Government through state-society negotiations and compromises over taxation, in the
Taxation absence of representative political institutions, as well as coercive enforcement of tax laws and regu-
State building lationsethe two approaches together actualized and delimited the new tax regime and the growing state
State legitimacy power (legitimacy and capacity). These history/culture-specific features may be understood as variations
State capacity to a general historical pattern of taxation and state building based on European-American experiences.
© 2015 Elsevier Ltd. All rights reserved.

1. Introduction foremost in the increasing power of a central government, either a

Research on accounting history, especially “the social science-
influenced ‘new accounting history’” since the mid-1980s (Napier,
2006, p. 468), has greatly broadened our understanding of the
role of changing accounting techniques and the rise of the ac-
counting profession in, and their interactions with, the political,
economic, technological, and social changes or changes in gov-
ernment regulations, accounting rules, economic organizations,
and societies at large over time and space around the world (see
Napier, 2006; Cooper & Robson, 2006; Burchell, Clubb, & Hopwood,
1985). In this broad scholarly development, one important but still
understudied area of research is taxation as accounting history.
Based on primary sources, the present study is to enrich the liter-
ature with an analysis of how tax systems developed in tandem
with modern transformation of the state in early twentieth-century
China.
A body of scholarship on taxation and state building in Western
countries has formed a general historical understanding: The
emergence of modern states in Europe was manifested first and
* Corresponding author.
E-mail addresses: yxu@odu.edu (Y. Xu), xxu@cnu.edu (X. Xu).
monarchy or otherwise, to tax people and economic activities
across the territory it ruled. Historically, wars and commerce played
a key role in the rise of the “tax states” or “fiscal states”. In the
process of taxation, the legitimacy and capacity of the state would
reinforce one another and grow hand in hand. The growing state
legitimacy involved imposing new taxes or higher rates of taxes
and promulgating and enforcing tax laws, which taxpayers were
persuaded or compelled to accept and comply with. The growing
state capacity was manifested in the evolution and expansion of tax
collection apparatus from tax farmers and other amateurish, part-
time operators to full-time, salaried tax professionals who were
trained for and made their careers in this growing field of state
functions.1 In short, successful imposition and collection of taxes by
a centralized authority was one of the essential features of state
making or state building (e.g., Tilly, 1975, 1985; Braun, 1975;
Webber & Wildavsky, 1986; Brewer, 1990; Kiser & Schneider,
1
A tax farmer was a private person or entity that pays the ruler or the state a fee
in return for the right to collect taxes on behalf of the ruler or the state. An alter-
native was for the private person or entity to pay in advance an amount of money
that was expected from the taxes to be collected, usually at a discount for collection
cost and profit.

http://dx.doi.org/10.1016/j.aos.2015.10.008
0361-3682/© 2015 Elsevier Ltd. All rights reserved.
18 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
1994; Bonney, 1995; Douglas, 1999; Yun-Casalilla, O'Brien, &
Comin, 2012).
How would this historical pattern apply to China where a
centralized imperial dynasty was founded over two millennia ago
and succeeded by many, but the significant transformation of state
and society into modern forms took place in the twentieth century?
If the pattern is applicable to modern China, were there any history/
culture-specific features or variations? How did taxation actually
interact with modern state building in the Chinese context? These
questions have not been squarely addressed in the scholarship. This
paper seeks to fill that lacuna by examining a crucial moment in
China's experience of taxation and state building, i.e., the tax re-
form under the Nationalist Government during 1928e1949.
After the fall of the last imperial dynasty, the Qing (1644e1911),
and the founding of the Republic of China in 1912, the promise of a
functioning parliamentary government was quickly turned into a
deep disillusionment for Chinese citizens. With the passing of the
authoritarian presidency of Yuan Shikai in 1916, warlords domi-
nated the political scene, fighting one another for the control of the
national capital and various provinces and revenues there. China's
domestic disorder did not help its international standing. It failed to
recover full national sovereignty from the unequal treaties with
Western Powers and Japan dating back to the nineteenth century.
Japan stepped up its encroachment on mainland China by taking
over the German leasehold in Shandong province and imposing the
Twenty-One Demands on China in 1915. China's failure to regain
the German leasehold in Shandong at the Paris Peace Conference in
1919 set off a high tide of Chinese nationalist movement with twin
goals of anti-imperialism and anti-warlordism. It culminated in a
military campaign against warlords led by the Nationalist Party and
the founding of the Nationalist Government in 1927. In the mean-
time the Chinese Communist Party (CCP) was founded in 1921 as a
participant in the nationalist cause, with a Marxist-Leninist ideol-
ogy. The Nationalist Party-Government initially cooperated with
the CCP (1924e1927) and then turned against it. Through a pro-
longed civil war, suspended during the Second Sino-Japanese War
(1937e1945) and resumed in 1946, the struggle between the
Nationalist Government and the CCP resulted in the latter's victory
and the founding of the People's Republic of China in 1949.
Given the turbulent history sketched above, it is not difficult to
understand that in the first half of the twentieth century, while
searching for a modern form, the Chinese state was under severe
financial strains and constantly struggling with revenue extraction.
After the Nationalist Government came to power in 1927, it began
to reform the tax system, preceded by a recovery of tariff autonomy
and a currency reform. From 1936 to the late 1940s the government
instituted new categories of taxes, including income tax (both
personal and business), estate tax, stamp tax (for print matters),
and business tax.
Through examining how the tax reform unfolded, this paper
makes empirical and theoretical contributions to the accounting
history literature. Empirically, this is another case study, based on
primary source research, of the relations between taxation and
state building in one of the major non-Western countries. In the
past fifteen years or so the literature has seen several studies on
taxation, such as tax assessment and collection in ancient Egypt
(Ezzamel, 2002), the emergence of the Exchequer in medieval En-
gland (Jones, 2010), assessment and accounting of profit income tax
in mid-nineteenth century England (Lamb, 2001), the resistance to
the whiskey tax of 1791 in the United States (Krom & Krom, 2013),
and the increase of stamp tax on newspapers in Britain during the
French Revolutionary War (Oats & Sadler, 2004). Overall, however,
studies on “taxation framed as accounting historical research”
(Lamb, 2003; also see Lamb & Lymer, 1999) remain to be
strengthened. The present study adds a significant piece to the
literature.
Theoretically, the paper draws on insights and findings from the
“new accounting history” (Napier, 2006) and the “new fiscal soci-
ology” (Martin, Mehrotra, & Prasad, 2009) and applies them, with
modifications, to a country-specific case to reach additional in-
sights into the relations between taxation and state building.
Consistent with the findings in the previous literature, this paper
explicitly treats state building as growth of state legitimacy and
capacity or state power, and treats taxation as state building (or an
integral part of state building), not just for state building or vice
versa. The paper engages the “theory of predatory rule” (Levi, 1988).
On the one hand, it uses concepts from the theory such as the state/
ruler's bargaining power, transaction costs, and discount rate (see
the Literature review section below), and on the other hand, it
differs from the theory in two important aspects illustrated by the
Chinese case. First, it analyzes how ideology on taxation as
discursive resource added to the state's political resource or bar-
gaining power, and second, it analyzes how Chinese state-society
negotiations and compromises over taxation, in the absence of
representative political institutions typical of Western experiences,
both actualized and delimited the growth of state power in
Nationalist China. At the same time, the paper supports an
important viewpoint in the literature, i.e., how civil war and in-
ternational warein our case the Chinese Civil War and the Second
Sino-Japanese Waredifferently affected state legitimacy and state
finance and taxation.
The rest of the paper is organized as follows: Section 1 “Litera-
ture on Taxation and State Building” reviews relevant literature in
the new accounting history and the new fiscal sociology and situ-
ates this study in the literature; Sections 2 “Finance & Taxation in
Late Imperial & Early Republican China” provides a historical
background for our case study; Section 3 “A New Ideology on
Taxation” deals with the shift from the Confucian ideology of “low
taxes” to the Western-derived one of “good taxes” to justify tax
reform under the Nationalist Government; Section 4 “New Taxes
and Revenue Increase” discusses the adoption by the state of new
categories of taxes and the resulting revenue increase; Section 5
“Taxation as State Building” looks into the growth of state legiti-
macy and capacity through building tax apparatus and training and
monitoring tax agents; Section 6 “StateeSociety Interactions over
Taxation” analyzes the state's efforts at tax compliance through
state-society negotiations as well as enforcement of tax laws and
regulations, which manifested a particular political ecology in a
non-Western society. A brief conclusion will summarize our
findings.
2. Literature on Taxation and State Building
Tax research as accounting history benefits from the intellectual
concerns and theoretical approaches of the new accounting history
and the new fiscal sociology. As Napier (2006) has outlined, unlike
the traditional views of accounting, the new accounting history
pays greater attention to the social environment with which ac-
counting interacts, manifesting several research concerns. First of
all, from its perspective, “accounting is not just reflective but
constitutive: it is not merely a passive effect of its environment but
works to shape this environment. The constitutive power of ac-
counting arises not just in the context of the individual organiza-
tion, but also in a wider social context” (Napier, 2006, p. 456).
Secondly, it re-conceives what accounting was in different histor-
ical circumstances. With an “anti-essentialist” nature, it has “an
awareness that the bundle of practices (calculative or otherwise)
that happened to be labeled as accounting at any point in time and
space is contingent (delineating a specific bundle and documenting
the conditions of its emergence provides a problem for historical
 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
accounting research)” (Napier, 2006, p. 457). Thirdly, identifying
accounting as social as much as technical locates accounting in
wider arenase“new accounting history brings into its exposition
new actors: the state, institutions such as employer collectives and
trade unions, the academy, the media, and so on” (Napier, 2006. p.
458). Fourthly, such research concerns, including studying “en-
sembles of practices and rationales,” “have tended to relocate the
focus of research away from the detailed technical practices
themselves to the discourses in which these practices are located at
a particular point or period in time” (Napier, 2006, p. 462).
One example of the new accounting history relevant here is
Miller's (1990) study on the interrelations between accounting and
the state. Using innovations in accounting and other practices of
government in the “Colbert period” of Louis XIV's reign
(1661e1683) in France as an illustration, Miller presents a key
argument that the relationships between accounting and the state
are not those between two given and discrete entities, but “recip-
rocal relationships between and within two loosely assembled sets
of practices' (p. 316). The argument is predicated on his defining
“accounting” and “the state” each as a changing or evolving
“complex of practices and rationales” that interacts with and
shapes one another (p. 316). Miller further differentiates the pro-
grammatic and technological aspects of what and how the state
would govern: the former, “political rationalities,” is made of
statements, claims, and prescriptions, as discursive matrices, about
the objects and objectives of government; and the latter, “tech-
nologies,” is a body of “techniques that makes the objects and ob-
jectives of the government amenable to interventions”ethe two
aspects were also reciprocal (Miller, 1990, p. 317). With these
theoretical constructs, Miller demonstrates how a discourse valo-
rizing “order” in accounting and commerce led to innovations in
administrative practicesewhat he called “government by inquir-
y”ethat required accounting techniques (Miller, 1990, pp.
321e333).
Adding to the new accounting history, in research concerns and
methodologies, and more closely relating to tax research is the new
fiscal sociology, a rich variety of studies in social sciences that deal
with sources of taxation, taxpayer compliance, and social conse-
quences of taxation from different perspectives (Martin et al., 2009,
pp. 11e26). The fiscal sociology of the early twentieth century went
into decline in the mid twentieth century as a result of the growth
and separation of academic disciplines. “Many questions at the
intersection of these disciplines consequently fell through the
cracks that opened when they pulled apart” (Martin et al., 2009, p.
6). Remedying the situation, the new fiscal sociology has come
forward since the late twentieth century on the basis of, and by
integrating, several earlier scholarly traditions in separate academic
disciplines: 1) the modernization theory that dealt with public
finance as resulting from economic development, 2) the elite the-
ory that addressed the issue of taxpayer consent by emphasizing a
fundamental conflict of interest between rulers and subjects and by
theorizing how the elite devised ways to conceal taxes and to
redistribute resources for the benefit of an elite minority or special-
interest groups, and 3) the militarist theory that explained the rise
of taxation in the context of wars and military rivalries. In aggre-
gate, the scholarship in the new fiscal sociology pays keen attention
to 1) comparative studies of varied historical contexts and idio-
syncratic developmental paths and “path dependence,” 2) informal
social institutions that were involved in shaping, and were shaped
by, tax policies, 3) macro social-economic phenomena measured by
the level of the society rather than the individual, and 4) relation-
ship between taxation and the big questions in social sciences such
as the rise of the state, the development of democracy, the sources
of social solidarity, and so on (Martin et al., 2009, pp. 12e14).
Campbell's (1993) review of the fiscal sociology over twenty
19
years ago (when it was not labeled “new” yet) captured advances
and inadequacies in the field. Campbell pointed out that addressing
the previous neglect of tax policy, some sociologists began to pay
attention to the determinants and the effects of tax policy. With
regard to the determinants of tax policy, several issues are of con-
cerns to this paper. First, scholars agreed that states would extract
more revenue during the war, but public choice theorists, neo-
Marxists, and rational choice theorists differed on why that was
the case. Scholars were also divided on whether economic expan-
sion or contraction, and fiscal crisis, would constitute determinants
of tax increase or decrease (Campbell, 1993, pp. 163e168). The
second issue is whether and how the state structure or political
institutions would impact tax policy. For example, whether political
representation would increase or decrease tax revenue in relation
to taxpayer compliance or whether a more centralized authority
would be able to extract more revenue (Campbell, 1993, pp.
171e172). The third issue is whether and how “ideology,” “culture,”
or “values” would affect tax policy. It is often unclear, in Campbell's
view, how these key concepts were defined, and whether “culture”
referred to that of political elites or citizens. He urged more precise
definitions of such concepts before their impact on taxation might
be determined (Campbell, 1993, pp. 172e173).
One of the studies in the new fiscal sociology relevant to this
paper is on tax revenue and state formation in developing countries
(Moore, 2004). Among its main findings are the following: The
fiscal contract theory (“tax for representation”) based on Western
European experiences did not play out in many developing coun-
tries, especially where state revenues did not primarily come from
domestic taxation on earned income, but from external exchanges
such as natural resource rents (oil or diamond) and strategic rents
(military bases or ports and facilities or foreign aid) (Moore, 2004,
pp. 308e310). Therefore, a governance dividende“a more negotiated
relationship between the state apparatus and society, involving an
exchange of (1) greater institutionalized societal influence over
revenue raising and expenditure for (2) higher levels of domestic
taxation, with substantial quasi-voluntary compliance”ewould
depend on many political, social, and even geographical variables in
different developing countries (Moore, 2004, pp. 310e314).
Moore's findings are consistent with a more recent study on a
similar set of issues (Kiser & Sacks, 2009).
In reviewing the field, Martin, et al. (2009) pointed to Levi's
(1988) work, along with Tilly's (1985), as pioneering the new fis-
cal sociology (Martin et al., 2009, p. 12). Synthesizing insights from
previous scholarship, Levi put forward a model for understanding
the relations between taxation and the statee“the theory of pred-
atory rule.” The word “rulers” applies to all forms of state in all ages,
from absolute monarchy to liberal democracy. “Rulers are preda-
tory in that they try to extract as much revenue as they can from the
population” under their rule (Levi, 1988, p. 3), but the absolute drive
to maximize revenues are inevitably constrained by three factors:
rulers' relative bargaining powers, transaction costs, and discount
rates. “Bargaining power” refers to the degree to which rulers
control coercive, economic, and political resources others depend
on, versus the degree to which others control resources rulers
depend on. “Transaction costs” refer to the costs of negotiating an
agreement on policy and of implementing policy, such as moni-
toring agents, learning administrative and technical practices,
measuring and enforcing tax compliance, punishing non-
compliance, and so on so forth. “Discount rate” refers to how
much rulers value their future in relation to their presentea lower
discount rate means that they place a higher value on their future,
so that they are less inclined to exhaust sources of revenues or more
concerned about promoting economic growth for the long run; and
vice versa. Levi's model has its critics who found that Levi sup-
ported her theory with “an unremitting, and unavoidably selective,
20 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
adducement of evidence” (Dryzek, 1990, p. 309) or that '[m]
easuring transaction costs is a big obstacle for testing this theory”
(Campbell, 1993, p. 172). Our quibbles lay elsewhere, however.
Levi's model is underpinned by rational choice theory (rulers
and their agents and constituents are all assumed to be rational and
self-interested) and, as a corollary, theory of principal-agent rela-
tionship (agents are supposed to, but do not always, work in the
interest of the principalethe state/ruler, and due to information
asymmetry, the principal's control over agents is always relative
and incurs costs). Rational choice theory is not necessarily incom-
patible with other perspectives and approaches (Campbell, 2009, p.
258), but an exclusive adherence to rational choice theory limits the
model's explaining power. Therefore, while using the concepts
from Levi's model, this paper differs from it in two important
aspects.
First, Levi only considers the state's resources that have a ma-
terial base and can be quantified, and thus excludes “legitimacy,
status, and authority” from political resources (Levi, 1988, p. 17).
While endorsing ideology as “an additional political resource” (Levi,
1988 p. 21e22) and a factor in quasi-voluntary tax compliance
(Levi, 1988, pp. 50e55, 67e69), due to her exclusive adherence to
the rational choice premise, Levi did not address how ideology
might have been more than a utilitarian tool for rulers to induce
taxpayer compliance and how ideology might enhance legitimacy,
status, and authority as political resources of the state.
The issue of ideology as power resource for the state is related,
in a general sense, to Mann's model of ideological, economic,
military, and political sources of power (Mann, 2005). By “ideol-
ogy” Mann refers to religions and secular meaning systems such
as liberalism, socialism, and nationalism. “Ideological power de-
rives from the human need to find ultimate meaning in life, to
share norms and values, and to participate in aesthetic and ritual
practices” (Mann, 1993, p. 7). “I prefer the term ‘ideology’ to
‘culture’ or ‘discourse’ not because I view ideology as false or a
cover for interests, as materialists tend to say. By ideology I mean
only a broad ranging system which ‘surpasses experience’” (Mann,
2005, p. 345) “The creation of an alternative order requires gen-
eral ideological visions going beyond direct self-interest and
presenting a plausible way of overcoming the existing crisis”
(Mann, 2005, p. 349). Such a conception of ideology is different
from Levi's utilitarian or materialist view of ideology. On the other
hand, Mann's model is also macro and schematic and requires
specificity in application to idiosyncratic historical settings. For
example, adopting Mann's model of four sources of power in an
accounting study, Jones (2010) found that the source of ideological
power involved in the rise of Exchequer in twelfth-century En-
gland came from the Church embodying Christian faith and, more
specifically, from the literary and numerical skills possessed by
church scribes (Jones, 2010). This kind of specificity answered
Campbell's (1993) call for precise definitions of “ideology,”
“values,” and “culture” in causal explanations. In a similar vein,
this paper uses “ideology” in a narrower sense than Mann's.
“Ideology” in this paper refers to the state's guiding principles for
taxation, even though they were related to the broader kind of
ideologies Mann discussed.
This paper treats state legitimacy as part of Chinese rulers' po-
litical resources, and state ideology on taxation as power resource
to enhance the ruler's legitimacy. State building was in essence to
build state legitimacy (being accepted by the ruled, even if reluc-
tantly) and state capacity (achieving state goals and delivering
public goods, to a certain degree at least)ethe two aspects influ-
enced and shaped one another. Ideology as the state's power
resource contributed to both. Such a formulation may better
explain the growth of state legitimacy and capacity than the theory
of predatory rule alone: Ideology helps state legitimacy by justi-
fying taxation, adding to its political resources; and taxation re-
quires, and in turn expands, state capacity including institutional
infrastructure, administrative expertise, coercive forces, and tech-
nologies required of state functions; and properly delivered state
functions at acceptable transaction costs, i.e., state capacity, in turn
reinforces state legitimacy. In a sense, by “ideology” this paper calls
attention to the rationales for taxation as the “political rationalities”
aspect of governance (Miller, 1990, p. 318), and explains the shift in
such ideologies by referring to changing political and economic
circumstances in late imperial and early Republican China that
precipitated an upsurge of wider ideological currents including a
discourse on the need for everything to become “modern” and
“scientific”.
Second, Levi posits the theory of predatory rule as a static
model, in that “policy choices are a consequence of a given set of
bargaining power, transaction costs, and discount rates” (Levi,
1988, p. 16), whereas this paper moves beyond a static under-
standing of the state behavior by exploring the dynamic and
continuous interactions between the state and taxpayers/social
actors over taxation. Such interactions intersected the relation-
ship between the state and its agents, serving as a monitoring
mechanism by the state over its agents and becoming a crucial
variable in the effects of the tax policy on state building. In the
Chinese case, such state-society interactions also worked as an
alternative to the political representation, by which citizens and
interest-groups would voice their demand on the state for
accountability, typical of Western Europe and the United States
but non-existent in China at the time. Ultimately, by unpacking
the “ensemble of practices and rationales” of the Nationalist
Government in China in adopting new taxes, this paper reveals a
new dimension to the general pattern of taxation and state
building that is primarily based on European-American historical
experiences but has also increasingly been informed by varied
experiences of developing nations in the non-Western world
(Moore, 2004; Bra €utigam, Fjeldstad, & Moore, 2008; Kiser & Sacks,
2009; Yun-Casalilla et al., 2012).
3. Finance & taxation in late imperial & early Republican
China
This section outlines state finance and taxation in imperial and
Republican China as a background to the changes under the
Nationalist Government and especially the shift in the ideology on
taxation.
During more than two millennia of imperial China (221BCE-
1911CE), dynasties drew revenues mainly from land tax, poll tax,
labor tax (labor and military services), and varying kinds of levies
on handicrafts and commerce. State finance and tax apparatus
were developed early in imperial China, normally under a
centralized system extending from the national capital down to
the county level (Huang, 1974; Wang, 1974; Bastid, 1985; Deng,
2012). Imperial dynasties used both bureaucrats and tax farmers
at different levels of administrative hierarchy, since it was more
cost-effective to use tax farmers in local society below countyethe
lowest level of state bureaucracy, comparable to the case of
ancient Rome (Levi, 1988, pp. 78e80). Explaining the mobile
capital that rulers relied on for revenue and the motivation for
rulers to adopt a more consensual way of dealing with owners of
such capital (merchants in European port cities) as taxpayers,
Moore noted that to rulers whose revenue source was agriculture,
more coercive strategy was more attractive, since peasants had
 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
few options: either armed resistance or flight from the land they
tilled (Moore, 2004, p. 301). In imperial China, land tax was indeed
the main source of revenue for the state. In the Confucian tradition
the imperial state was conceived as the patriarchal family writ
large, and therefore political representation was not even an issue.
The people would not resist taxes for having no say in the gov-
ernment or state finance; they would launch riots or flee from
land when taxes were actually too heavy for them to endure and
survive. Precisely for that reason, the Confucian tradition held the
emperor (and officials on his behalf) as “parents of the people”
and called for “low taxes” on the people as benevolent
governance.
As early as the Warring States period (475-221BCE), Mencius
(372-289BCE), who was the primary propagator of Confucius's
(551-479BCE) ideas, advised rulers to protect the people from
excessive taxes (Hansen, 2010, p. 86). After the Qin dynasty (221-
206BCE) was toppled by rebellions, much was said and written on
how excessive taxes and labor services imposed by the Qin state
drove desperate people into rebellions. In response, the Han dy-
nasty that succeeded the Qin made a deliberate policy of “low
taxes,” for the sake of political legitimacy, economic recovery, and
social stability. Under different emperors, the land tax rate was
targeted at one fifteenth (6.67%) or one thirtieth of produces from
land, compared to the normal rate at one tenth before the Qin and
at one half during the Qin (Chen, 1984, pp. 48e57; Hansen, 2010, p.
122; Wu, 1984). The ideal of “low taxes (qingfu boyao)” thus became
the orthodox in regard to state finance and taxation, part of the
Confucian discourse on “benevolent governance,” in imperial China
for two millennia.
In reality, however, poll tax and land tax often fell short of the
ideal of “low taxes.” Surcharges on taxesesupposedly a per-
centage of the tax to cover costs of collecting it (and sometimes
included costs of transporting tax in kind such as rice)ewere
often arbitrarily high. Extraordinary taxes would be collected
when serious crises arose, such as military confrontations on the
frontiers or nomadic invasions into North China (Wu, 1984). For
many dynasties in Chinese history, increasingly higher taxes
would accompany more frequent social unrest and rebellions,
deteriorating military situations on the frontiers, and weakening
functions and chronicle malaises of a dynasty until its final
collapse.
When the Qing dynasty (1644e1911) replaced the Ming dy-
nasty following the pattern noted above, it proclaimed itself to be
a legitimate inheritor of the Mandate of Heaven to rule China
(e.g., Hansen, 2010, p. 394). Both as a discourse and as a
commitment, Qing emperors emphasized “benevolent gover-
nance” that was manifested in reducing tax burdens on the
people. The first four Qing emperors exempted parts or the
whole of the country from taxes at different points of time in the
mid seventeenth to the late eighteenth century (Wang, 1971; Wu,
1984; Zelin, 1984). The Qing “low taxes” policy was both based on
the Confucian ideology and driven by a practical (or rational)
approach to revenue extraction, in the face of a damaged econ-
omy due to prolonged violence associated with the dynastic
change. The policy helped economic recovery and growth during
the eighteenth century.
From the mid nineteenth century onward, the Qing finance
deteriorated steadily, because of an increasing pressure of popu-
lation growth on resources (arable land in particular) and internal
and external wars and their consequences. The wars included the
Taiping Rebellion (1851e1864), the two Opium Wars (1839e1842,
1856e1860), the Sino-French War (1885), the Sino-Japanese War
(1894e1895), and the Boxer War (1900). The costs and destruction
caused by these wars very much outstripped any benefit the dy-
nasty might have gained by increasing taxes in wartime. The
21
Taiping Rebellion devastated half of the country. The commercial
tax (lijin) that was instituted during the rebellion as a stopgap
measure became a permanent tax, but it was hardly enough to
restore the state financial health.2 Then the repeated defeats in
the hands of foreign powers resulted in huge indemnities, along
with unequal treaties, imposed on China. The worsening finance
in the latter one century and a half of the Qing dynasty forced the
government, against the ideal of “low taxes,” to raise taxes in
different formsewith no less than seven official tax categories, not
to mention various local surcharges and levies (Dong, 2000, pp.
23e36; Wong, 2012; Wu, 1984, pp. 28e122; Zhou, 2000, pp.
120e441).3 The Qing state irreversibly sank into perpetual
indebtedness, as it was forced to make loans to pay indemnities
and make new loans to pay interest and principals of old loans
(Zhou, 2000).
This precarious financial situation was what the Republic of
China inherited. The central government under President Yuan
Shikai (1912e1916) tried to rationalize and reorganize taxation in
the country. In November 1912 the government unveiled a tax re-
form plan that would divide all taxes into national taxes and pro-
vincial taxes (to ensure the central government's revenue) and
institute new taxes in the near future (Wu, 1984, pp. 123e124;
Dong, 2000, pp. 91e94). The Yuan government even drafted the
regulations on income tax in January 1914 (Wu, 1984, pp. 220e221).
Yet, the central government's bargaining power was such that the
separation of national and provincial taxes remained on paper, so
did the plan for income tax. In June 1914 Beijing replaced the 1912
plan with a new scheme: all taxes would be collected by provinces,
and some of those taxes would be forwarded as national revenue to
the central government (Wu, 1984, pp. 125e128). Yet, provincial
governments (mostly controlled by warlords) continued to collect
whatever revenues they could, but were rarely compelled to for-
ward any to Beijing.
Studies in fiscal sociology tell us that obtaining revenue from
sources other than domestic taxation would tend to give the state
leeway to escape the responsibilities for delivering public goods or
managing regulatory, monetary, and other economic matters
(Campbell, 1993, p. 177; Moore, 2004, pp. 306e308). Indeed, to
meet the financial needs of the central government, President Yuan
presided over issuing domestic bonds and making new loans from
foreign banks in 1913e1915. Such measures were an easier way for
the Yuan government to raise revenue than collecting taxes or
instituting tax reforms, but they plunged China deeper into debts
than under the Qing dynasty. Foreign loans also caused China to
lose control over its financial resources. The Reorganization Loan of
1913 was secured by the Chinese Maritime Customs revenue sur-
plus and the salt monopoly tax. Under the terms of the loan, the Salt
Administration came under foreign management, as the Chinese
Maritime Customs had been since its founding in 1854, to insure
servicing foreign loans and indemnities (Dong, 2000, pp. 61e62;
Van de Ven, 1996, pp. 831e835). In short, the supposed benefit of
extracting revenue from sources other than domestic taxes did not
fully realizeethe maritime customs revenue and the salt monopoly
tax added little to the Chinese treasury for regular state functions,
2
The term “lijin” is often translated as “transit tax” in English language literature,
since it was designed to be collected on goods crossing provincial boundaries. In
reality, however, the tax was also imposed by local authorities on resident
wholesale and retail establishmentsehence our translation of it as “commercial
tax.”
3
Land tax was traditionally the most important tax revenue for dynasties, but in
the Qing dynasty, the fiscal importance of land tax decreased, constituting three
quarters of the total tax revenue in 1753 but only one third in 1908, because other
sources of revenues were developed, such as maritime custom duties, salt mo-
nopoly tax, and the commercial tax (Wang, 1971).
22 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
and the state was more debt-ridden than ever before.
After Yuan's death in 1916, the political division resulting from
rivalries among warlords further damaged national finance and
economy. “From 1916 on they [warlords] ceased to remit to Peking
the only substantial source of revenues, the land tax, which until
then had remained in sole control of the central government” (Van
de Ven, 1996, p. 830). Warlords typically had high discount rates
and engaged in the most short-term predatory behavior. While
surcharges on taxes would surpass or go several times over taxes
themselves, some warlords were notorious for collecting taxes
many years in advance to squeeze the last penny from the popu-
lation under their thumbs. In 1928 peasants in Chengdu, Sichuan
province, were paying land tax for 1985 (Dong, 2000, p. 83)!4
This was the situation the Nationalist Government confronted,
when it came to power in 1927e28. For one thing, China's debt
payments continued to be a huge burden. Yet, the largest share of
the outlay in the budget was military expenditure, due to incessant
warsethe civil war (1927e36), the Second Sino-Japanese War
(1937e45), and the civil war again (1946e49). Prior to 1937, about
40%e45% of the national budget was for military purposes, about
30% for debts, and the remainder for civil expenses; and during the
Sino-Japanese War, military expenses increased steadily, reaching
84.9% of the budget in 1945 (Young, 1965, p. 16).5 A larger context,
however, was that prior to 1937, the Nationalist Government's tax
revenues took a relatively small percentage of GDP. In 1933, for
instance, tax revenues were 2% of GDP, and in 1936 tax revenues
amounted to 2.8% of GDPethe total spending by all levels of gov-
ernment remained below 10% of GDP (Rawski, 1989, pp. 13e16,
22e2).6 These figures show that the state capacity in revenue
extraction was limited and there was an urgent need for the state to
expand sources of revenue and the ability to collect taxes.
The Nationalist Government responded to the financial situation
it faced with a tax reform, preceded by two other initiatives. The
first was to recover tariff autonomy through negotiations with
foreign powers in order to increase the maritime customs revenue
for the state, and it had been done by 1930 (Wu, 1990, pp. 198e202;
Sun, 2003, p. 380). The second was to stabilize the currency market
and to control the banking industry with a currency conversion
from silver tael to yuan (¥), and it had been accomplished by 1933
(Qian & Guo, 1986, pp. 225e226; ZMHSZ, 1991; Vol. 2, pp. 91e94).
Thus the stage was set for launching the tax reform.
4. A new ideology on taxation
To fully account for the Nationalist Government's tax reform, it
is necessary to examine its ideological underpinning, for two
points. First, as a discursive resource, ideology would justify new
taxes and help compel taxpayer consent and compliance. The less a
ruler possessed other resources, the more important to the ruler
was any ideological resource as moral persuasion to help revenue
extraction. Second, the use of a new ideology on taxation by the
Nationalist Government shows the transfer of ideas about taxes
from the West to China as a case study in a global history of debates
on taxation and of the rise of the tax states or fiscal states (Nehring
& Schui, 2007; Yun-Casalilla et al., 2012).
A related antecedent in China to the new ideology of “good
4
In 1928 the Nationalist Government was already established, but it did not
actually control Sichuan province where warlords were in charge until 1935, which
was indicative of the limited capacity of the central government.
5
In 1935, for example, the military expenditure claimed 34.8% of the national
budget (China Weekly Review, June 29, 1935, p. 165; May 15, 1935, p. 386; Sun.
2003, p. 411).
6
To compare, the total government expenditure in the UK took around 25% of
GDP in 1924e1937 (Daunton, 2001, p. 23).
taxes” was a discourse on social-economic equality. The discourse,
along with the ideology of “low taxes,” can be traced to the
Confucian traditionethe idea of equity in taxation was advocated
by some high officials no later than the Han dynasty in the 3rd
century (Hou, 2008, pp. 299e300), while the dream of economic
equality was a rallying cry in peasant rebellions throughout im-
perial China. By the early years of the Republic, “economic equality”
had become part of the Nationalist Party's official ideology advo-
cated by its founder Sun Yat-sen (1866e1925). In the meantime,
Chinese print media talked about income tax and estate tax that
were current in the West as “good taxes” (Lin, 2005, pp. 31e40). In
1928 the Ministry of Finance of the Nationalist Government
convened a national finance conference. The meeting resulted in
several agendas for overhauling taxation, including institution of
new categories of taxes. The new taxes were: 1) special consump-
tion tax that would exclude daily necessities such as grains and
home-made cloth that were important to common people's daily
life; 2) income tax, with a progressive rate so as “to augment the
obligations of the rich and lessen the burden on the poor; ” 3) estate
tax, again “as one of the policies to harmonize the rich and the
poor; ” and 4) business tax, to replace traditional levies on com-
modities (BSY, July 1928, pp. 9e10). The justifications for special
consumption tax, income tax, and estate tax expressed an egali-
tarian goal in social-economic terms.
As the tax reform was launched and implemented in the late
1930s and 1940s, a strong discourse on “good taxes,” as opposed to
“bad taxes,” emerged as an ideological justification.7 The “good
taxes” ideology incorporated but went beyond the notion of eco-
nomic equality. Bad taxes included the poll tax, which treated the
rich and the poor in the same way and therefore was fundamentally
unfair, and the commercial tax, which hampered domestic trade
and stymied economic growth and often became a device for
corruptive local officials to fleece business people. In contrast, good
taxes were based on the principles of equity and ability-to-pay,
which would help reduce the gap between the rich and the poor
and promote economic growth and social stability. Moreover, good
taxes were described as “scientific” and “modern,” two key words
in the public discourse in early twentieth-century China (Fung,
2010). As income tax and estate tax were introduced for the first
time in Chinese history, the justification for them as good taxes was
especially prominent. Ling Shumo, a professor of economics with a
Ph.D. from University of Illinois, explained why income tax and
estate tax as direct taxes were good:
Since such taxes cannot be passed on [to consumers], the end
point of the taxethat is, the actual tax burdenecan of course be
recognized more clearly, and the government can apply pro-
gressive rates and other exemptions according to taxpayers'
abilities, and can separate earned income and unearned income,
based on different kinds of sources of income, to determine
lower or higher tax grades in collection. Thus direct tax fits the
just principle of “one who has more money pays more tax, one
who has less money pays less tax, and one who has no money
pays no tax,” and that is why it can be called the best of modern
taxes (Ling, 1941, p. 1).
7
The tax plan was first proposed in 1928 but was not pursued due to a lack of
certain conditions, such as tariff autonomy and uniform currency, and other in-
adequacies in financial data collection and management identified by the Kem-
merer Commission. When income tax was finally instituted in 1936 (see below),
followed by estate tax, there was a greater and more urgent need to justify them.
The discourse on good taxes presented here were from the 1940s, because they are
the sources that we were able to find. There could have been same or similar
discourse in earlier sources, unavailable to this study. The available sources also
suggest that such discourses continued in the 1940s because resistance to, or
evasion of, new taxes continued to occur.
 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
Thus a critical ideological corner was finally turnedethe modern
concept of good taxes replaced the traditional notion of “low taxes”
as benevolent governance.8 Indeed, the ideal of low taxesethe
lower the betterebeing the badge of good governance became
untenable in early twentieth-century China for two historical rea-
sons. First, after the Qing fell into perpetual indebtedness in the
second half of the nineteenth century, state revenue was constantly
insufficient to cover expenditures. Second, independent of foreign
exploitation (especially after tariff autonomy was achieved in
1929), the Chinese state that was striving for modernization had to
continuously expand state functions, increase state expenditure,
and extract more and more tax revenues, even if in the absence of
wars. Ling explained why new taxes were necessary and feasi-
blee“under today's political organization [i.e., modern state], many
social projects cannot be undertaken by private entrepreneurs but
by the state, from building roads, promoting education, to devel-
oping health-care system. As the people benefited from such pro-
jects, they will gradually understand the message that ‘paying taxes
is citizens’ natural duty'” (Ling, 1941, p. 4). This was the vision of a
modern state and its relations with the public, modeled after
Western nations.
The same point was repeated by a tax official in explaining the
business income tax: In the past the state was responsible only for
peace and security, and therefore required expenditure was small;
“what the modern state needs to do is much more than before, from
birth to death all things that the people need must be taken care of
by the state in a collective manner....It is a totally erroneous idea to
seek minimizing expenditure. But there should be a fair and
reasonable way to raise the required revenue to suit the people's
abilities” (GZY, January 31, 1947, p. 2). The author noted that besides
the principles of equity and ability-to-pay, good taxes such as in-
come tax had other advantages: it was universal (thus creating
more sources of revenue); it was reliable; it was flexible; and it was
sustainable. He stressed that the business profit tax was good tax
because it was based on the ability-to-pay and a progressive rate,
and was universally applied; and it would reduce the opportunity
for the rich to accumulate huge fortunes and thus equalize social
wealth (GZY, January 31, 1947, p. 2). Thus the egalitarian goal
expressed in 1928 continued to be upheld as a moral high ground
and was incorporated into the good taxes ideology. Chinese tax
reformers (state officials and finance experts) embraced the idea
that the sensible approach to funding modernization was to make
tax burden on taxpayers equitable, and sources of tax revenue
sustainable. The point made by the Chinese tax official about the
modern state taking care of the people's needs “from birth to
death” was a promise by the state in the bargain for more taxes. The
promise was to motivate taxpayer compliance on the one hand, and
was predicated on the state's ability to compel and enforce
compliance on the other hand.
The good taxes ideology was learned from the West. In fact
Chinese reformers explicitly looked to Western experiences in
taxation as living lessons and justifications, since the larger
discursive context at the time was that Western nations were
modern and China was yet to become modern.9 Besides print mass
media, in government-sponsored journals of taxation published by
tax agencies, tax officials and finance experts repeatedly cited
8
This ideological turn was not smooth and unproblematic. While debates on this
ideological shift are not a focus for the present study, the issue is certainly worth
examining in the future.
9
There were contemporary criticisms in the West of the principles of equity and
ability-to-pay as the foundation of fair or just tax, of which Chinese tax reformers
made no mention, whether or not they were aware of such criticisms (for an
example of the criticism, e.g., Kendrick, 1939).
23
Western examples of income tax and estate tax to popularize the
idea of “good taxes.” At the height of the state implementing new
taxes in the early 1940s, the Direct Tax Monthly carried articles to
describe income tax in the United States, Canada, Great Britain,
France, Italy, Germany, and other countries (ZY, May 1941, p. 1e11;
July 1941, pp. 1e10; August 1941, pp. 33e44; October 1941, pp.
29e32). Recent research on the circulation of ideas about taxation
between and among states explored how “historical actors have
interpreted and conceptualized the challenges posed by economic,
political and social developments, and how they have framed and
transferred their ideas about taxation accordingly” (Nehring &
Schui, 2007, p. 2). The phrase “ideas about taxation” includes eco-
nomic thoughts and theories, ethical judgments about taxation,
and administrative knowledge of and experience in taxation.
Indeed, the Chinese state or tax reformers combined the technical
and ethical lessons learned from the West and the social and moral
imperatives rooted in the Chinese tradition to justify new taxes.
Significantly, Chinese tax reformers recognized that Western tax
systems could not be indiscriminately transplanted onto Chinese
soil. They noted that the political and economic conditions in China
were far too different from Western nations, who were somewhat
different from one another as well, to warrant wholesale trans-
plantation. For instance, one tax collection official wrote:
The birth of direct taxes started with income tax in Great Britain
and it was followed by [similar taxes in] the United States.
Thereafter other kinds of direct taxes in Europe and America
experienced the difficulties of building a system gradually up to
its completion. Indeed, merits and defects of a system lies in
certain principles. What is the principle of a good system? The
establishment of a system must suit the need of a nation's
conditions and must be in accordance with political and eco-
nomic laws (GZD, February 1, 1947, p. 3).
Another tax official spoke highly of the income tax and estate
tax in Britain as best examples of taxation based on equity and
ability-to-pay, but while pointing out the shortcomings in China's
income tax and estate tax regimes, he said that since China had only
recently started to implement such taxes, imperfection was inevi-
table and improvement would have to be gradual (Ye, 1946, pp.
15e17). As a matter of fact, the new taxes adopted by the Nation-
alist Government went through many changes in design and
implementation, and the changes were in response to the condi-
tions in Chinese economy and society and the state's capacity to
deal with them.
5. New taxes and revenue increase
This section examines what taxes were introduced by the
Nationalist Government, what conditions facilitated the adoption
of these taxes, and what was the result of the new taxes for state
revenue.
Income Tax (suode shui). Per the decisions made at the 1928
finance conference, in January 1929 the government issued the
“Regulations on Income Tax,” based on the similar regulations that
were issued by the previous governments in Beijing but never
implemented. The law again remained on paper, however, due to
oppositions from foreigners in China (see below) and other prac-
tical difficulties. Not until July 1936 did the government issue the
“Provisional Regulations on Income Tax,” and proceed to collect the
tax. Under the law, effective on October 1, 1936, incomes from 1)
business, 2) salaries/wages, and 3) interests on security investment
and savings were subject to tax; income from interests was taxed
by a proportionate rate of 5%, and income from business and sal-
aries/wages by a progressive rate of 3%e20% (Sun, 2003, p. 390).
24 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
After the Second Sino-Japanese War began in July 1937, the
government faced greater financial demands, especially due to the
loss of custom revenues to the Japanese who occupied China's port
cities (Young, 1965, p. 34). To help support military expenditures,
the government issued the “Law on Income from Property Rentals
and Sales” in January 1943, with a progressive rate of 10%e50% for
agricultural land and properties and 10%e80% on other properties.
A month later the “Income Tax Law” replaced the 1936 regulations
on income tax. After the war ended in September 1945, the “Income
Tax Law” was revised in April 1946. The new law expanded income
categories from three to five: 1) business, 2) salary or wages, 3)
interests on security investment and savings, 4) property rentals
and sales, and 5) one-time income. All incomes were taxed with a
progressive rate of varied grades (Sun, 2003, pp. 390e391). The
final incarnation of the Income Tax Law was enacted in April 1948.10
One of the challenges the Chinese state confronted in adopting
income tax was the opposition from foreigners and foreign busi-
nesses in China (Lin, 2005, pp. 55e57). After the “Provisional Reg-
ulations on Income Tax” was unveiled in July 1936 (it applied to
“persons residing in the Republic for more than one year,”
regardless of nationalities), the American, British, and Japanese
Embassies in China declared that their nationals in China would not
abide by the law. Their arguments were that their nationals enjoyed
extra-territorial rights (they were not bound by Chinese law-
sepractically they could not be prosecuted by Chinese courts any-
way), and that Chinese citizens in many provinces would not pay
income tax (that is, the Chinese state was unable to enforce the
law), so they should not pay either (New York Times, September 23,
1936, p. 9). This situation reflected the Chinese state's weak bar-
gaining powereits domestic political legitimacy was undermined
by foreign nationals' defiance at its tax law. For instance, a journal
published by the Shanghai Native Bankers Association commented
in 1936 that foreigners in China made countless profits each year
but avoided paying income taxes that would not have made a dent
to their profits. “If the government is unable to collect tax uniformly
[from both foreigners and Chinese], how can it face its citizens” (QY,
Sept. 15, 1936, pp. 17e18)? The issue remained unsettled until 1943
when the United States and Great Britain, after long negotiations
with the Nationalist Government, renounced the extra-territorial
rights for their nationals in China, as a good-will gesture to the
wartime-ally China (Wu, 1990, pp. 544e547; Fishel, 1952). This was
symbolically important for the legitimacy of the Nationalist Gov-
ernment, even though it was financially insignificant since most
foreign-owned businesses were in the treaty ports under the Jap-
anese occupation during 1937e1945.
Estate Tax (yichan shui). The government issued the “Provisional
Regulations on Estate Tax” in October 1938, and it was followed by
the “Implementing Regulations on Estate Tax” in 1939. The law
applied only to Chinese citizens who inherited properties and
valuables in China and abroad. Inheritance valued at ¥5000-
¥50,000 was taxed by a proportionate rate of 1%, and inheritance
valued at more than ¥50,000 by a progressive rate up to 50%. The
Regulations was replaced by the Estate Tax Law in 1946, by which
the threshold for the tax was raised to ¥1 million, and a progressive
rate up to 60% (Sun, 2003, p. 393). Tax officials promoted estate tax
as a modern and progressive tax to overcome the public perception
that the tax was state invasion into private transfer of properties
between generations within families that was held inviolable by
the Confucian tradition. One official argued, in addition to the ne-
cessity of the tax for war efforts, that “collection of estate tax has a
significant place in finances of all modern, important nations.
Therefore to start collecting estate tax is really a great act that suits
10
For the text of the Income Tax Law of 1948, see GZD, July 1948, pp. 8e18.
the historical trend”ehe named Great Britain, the United States,
France, Germany, and Italy as examples (ZY, September 1941, pp.
19e20). Again, to be modern or Western-like was an important
discursive trump card in promoting new taxes.
Business Tax (yingye shui). Historically, the commercial tax (lijin)
had been a major tax revenue for provincial governments since its
establishment in the 1850s. When the Nationalist Government
finally decided to abolish the commercial tax, alternative revenue
source had to be found to offset this revenue loss for provincial
treasuries. In 1928 the Guidelines of Provincial Collection of Busi-
ness Tax was issued. Under the law, business tax belonged to pro-
vincial tax revenues; it were collected by categories and grades of
goods and based on business income; and tax rate would not go
beyond 2%, except for luxury goods; and brokerage tax, pawn tax,
slaughtering tax were superseded. In June 1931 the Business Tax
Law was enacted, and the commercial tax finally ceased. The law
provided that all for-profit enterprises were subject to business tax
except for agriculture (which was covered by land tax), and that
provinces would decide tax rates according to local conditions
within a range of 2%e10% for tax assessed on sales or net profit, and
4%e20% for tax assessed on capital value. This led to widely
different tax rates and collection methods among provinces, and
abuses and corruption abounded. In 1942 the central government
took over the collection of business tax to make it standardized and
improved (Sun, 2003, p. 394e395).
The adoption of these new taxes by the Nationalist Government
shows a parallel to many historical cases in Western countries
where wartime was often an opportunity for rulers to expand tax
categories and/or raise tax rates (Braun, 1975; Brewer, 1990;
Douglas, 1999, pp. 146e147; Levi, 1988, p. 33). Referring to this
stream of research, Campbell pointed out that “most researchers
have not distinguished between different types of war” and that
revenue ratcheting tended to occur in states involved in global
wars, rather than more restricted interstate wars, “because global
wars are more expensive to finance” (Campbell, 1993, p. 166). In our
case, the civil wars the Nationalist Government was fighting against
the Communists during 1927e1937 and 1946e1949 claimed
around one third of its annual revenue, but did not help enhance its
political legitimacy. In contrast, the Second Sino-Japanese War in
1937e45 was devastating to China's economy, which included the
loss of much of maritime customs revenue to the Japanese occu-
pation (Boecking, 2011), but it was a fight for the nation's survival
and leading such a war enhanced the Nationalist Government's
political legitimacy. The war helped the state implement new taxes
and compel compliance for war efforts, besides invoking the ide-
ology of “good taxes.” A situation unique to the Chinese case was
the afore-mentioned relinquishing by the British and American
governments of their nationals' extra-territorial rights in China,
which removed the legal ground for foreigners to resist Chinese
income tax and helped boost the Nationalist Government's
legitimacy.
The new taxes began to be collected step by step. In October
1936 the government started collection of income tax under the
“Provisional Regulations on Income Tax,” initially limiting to sal-
aries of public servants and earned interest on the central gov-
ernment bonds only. In January 1937 the collection expanded to
cover all categories of taxable income (personal, business, and se-
curity investment incomes). With the outbreak of the war in July
1937, most sources of maritime tariff revenue, salt tax revenue, and
other taxes were lost to the Japanese. In October 1938 the gov-
ernment, now relocated to Chongqing, Sichuan province, issued the
Regulations on Excess Profit Tax during the Extraordinary Period to
offset the lost revenue. This tax was assessed on business profit
more than 15% of capital or real estate rental profit more than 12%
of property value; and the collection of the new tax started in
 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
January 1939 (and it would end in January 1947). In addition, estate
tax began to be collected in July 1939. Now that income tax, excess
profit tax, and estate tax were all collected by the central govern-
ment, the Income Tax Administration under the Ministry of Finance
was changed to the Direct Tax Administration in June 1940, and its
provincial and regional bureaus and offices changed their names
accordingly. The Direct Tax Administration also took over the
collection of stamp tax in 1940 and of business tax in 1942, even
though these were indirect taxes (Sun, 2003, pp. 390e396).
The tax reform yielded measurable results in revenue increase.
In 1941 the central government tax revenues totaled ¥871,604,000,
of which stamp tax, income tax, excess profit tax, and estate tax
added up to 15.4% or ¥135,000,000, second only to maritime cus-
toms revenue (59%) and ahead of business tax (13.3%) and salt tax
(11.7%) (Ling, 1941, p. 19). In Sichuan province alone, collected
business tax increased from ¥853,797 in 1936 to ¥2,840,195 in 1937,
and then to ¥3,953,663 in the first six months of 1938 (SYSY, June
1938, p. 78). According to another source, the Direct Tax Adminis-
tration posted a tenfold increase in receipts between 1936 and 1937
and 1940, and further ten nine-fold increase to ¥6478 million in
1944 (Strauss, 1998, p. 145). Importantly, the new taxes that were
established during the war would stay after the war ended.
What was the cost of collecting new taxes? In 1929 the
Nationalist Government had engaged a seventeen-member com-
mission, headed by Princeton University Economics Professor
Edwin W. Kemmerer, to advise the government on state finance
(New York Times, October 21, 1928, p. 39; December 14, 1929, p. 5;
March 30, 1930, p. 10; also Muhse, 1935). Kemmerer had advised at
the time that China was not ready to adopt income tax, because a
lack of standardized accounting records, systematic registration of
properties, and experience in reliable auditing would make the cost
of collection exceed the revenue (Ling, 1941, p. 5, 20; Young, 1965, p.
32). According to the economist Ling, however, contrary to Kem-
merer's assumption, the cost of collecting new taxes was relatively
low, despite the lack of systematic property registration and com-
plete financial data. The collection cost ranged from 4.09% to 7.17%
of new taxes collected during 1937e1941, averaging 5.75% a year
(Ling, 1941, pp. 19e20). Although it is unclear what was counted by
Ling as the cost of tax collection, the new tax regime was financially
viable. To explain why that was the case, two important issues are
analyzed in the following two sections.
6. Taxation as state building
The increase of tax revenue cited above was achieved by
revamping and expanding tax assessment and collection apparatus,
that is, by a growth of state legitimacy and capacity. Taxation is not
a condition of, but is part and parcel of, state building. This section
examines the expansion of state capacity in taxation, both “hard-
ware”ebuilding tax apparatus, and “software”etraining and
monitoring tax agents.
The Nationalist Government did not resort to tax farming in
collecting the newly-instituted taxes, but built and expanded state-
run apparatus. In 1941 within the territories under the Nationalist
Government (i.e., excluding Japanese-occupied territories), the
Direct Tax Administration oversaw 13 tax bureaus each responsible
for one or more provinces, 99 branch bureaus, and 118 tax offices.
These agencies only dealt with assessing taxes, and never handled
collection, which was designed to reduce corruption. Tax money
was remitted by taxpayers directly to the national treasury through
government and private banks and postal officesea cost-saving as
11
Ling said tax-paying sites numbered over three thousand, and Rao said they
numbered 2,835, each probably citing from different sources.
25
well as corruption-preventing mechanismethese sites totaled
around three thousand in 1941 (Ling, 1941, pp. 14e15; Rao, 1941, p.
2).11 These 230 multi-provincial, provincial, and sub-provincial tax
agencies, and more of them down the road, would cost resources to
build, maintain, and staff, even though no statistics of those costs is
available to the present study.
Economist Ling hoped the tax apparatus would be further
expanded. To illustrate the scale of the task, a few examples from a
long list Ling provided will suffice here. As shown in Table 1, the
Yunnan Direct Tax Bureau had under its jurisdiction 128 counties or
municipalities, but had only five branch bureausean average of one
branch bureau for twenty-five counties; the Gansu-Qinghai-
Xinjiang Bureau had 162 counties and ten branch bureauseone
for sixteen; the Henan Bureau had 112 counties and five branch
bureauseone for twenty-two; the Guangdong Bureau had ninety-
nine counties and five branch bureauseone for twenty, and so on
so forth. Ling held that to collect taxes fully and effectively, at a
minimum there should be one branch bureau for six counties and
one tax office in each county (Ling, 1941, pp. 23e25).
This was not the whole story, however. Regarding inherent
problems in tax collection independent of the war situation, Ling's
diagnosis in 1941 offered some clues. In his view, in spite of the
achievements cited earlier, much more remained to be done to
improve tax collection. Financial data, especially accounting books
in businesses, must be uniformly designed and systematically kept,
since the existing situation of wide varieties or incomplete nature
of accounting data caused difficulties for tax assessment and
auditing and lent opportunities to tax evasion. For the same pur-
pose, registration of businesses must be vigorously undertaken, and
property registration and residency registration be synchronized to
facilitate tax assessment. He emphasized that to make the good tax
actually good, i.e., for the principles of equity and ability-to-pay to
be realized, greater efforts must be made to prevent tax evasion
(Ling, 1941, pp. 22e23).
The government was aware of the issues Ling pointed out, but
was constrained by the involved costs. Not until 1946, after the
Sino-Japanese War ended, did the expansion of tax agencies move
into high gear. The provincial-level direct tax bureaus had reached
twenty-five across the countryetwenty were for provinces and five
for major port cities Shanghai, Tianjin, Chongqing, Qingdao, and
Hankou (GZD, April 15, 1947, p. 14). Although individual agencies
were often understaffed, the total number of tax agencies
increased. The Guangdong Direct Tax Bureau was provided with a
personnel quota of 91, but in early 1947 it had only 50 staff mem-
bers, while the need for at least 70 was acutely felt (GZD, April 15,
1947, p. 4). On the other hand, in 1946 the Guangdong Bureau was
overseeing fourteen branch bureaus, which in turn supervised
seventy tax offices (GZD, January 1, 1946, pp. 27e29). This was a
significant expansion from five branch bureaus in 1941, though part
of Guangdong was under Japanese occupation during 1938e1945.12
Some of the initiatives for effective tax collection required
building new institutions and facilities. In September 1940, for
instance, the “Regulations on Cargo Shipment Registration for
Direct Tax” was enacted to help collect business income tax and
excess profit tax. Under the regulations, a merchant residing in city
A who wanted to purchase goods from city B must get a license
from the tax bureau in city A; when goods were purchased in city B,
he must report their quantity and value to the tax bureau there and
12
In August 1940 the Chongqing Direct Tax Bureau issued a public notice that
taxpayers in the occupied territories should submit taxes to tax agencies in prov-
inces controlled by the Chinese government (see ZY, August 1941, p. 70). There is no
evidence that such a requirement was enforced, and one doubts that it could have
been enforced in any way.
26 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
Table 1
Number of tax bureaus as compared to number of counties in the country, the 1940s.
Provincial direct tax bureau Number of counties
Yunnan 128
Gansu-Qinghai-Xinjiang 162
Henan 112
Guangdong 99
Guizhou 85
Hunan 76
Jiangxi 84
receive certificates; the tax bureau in city B then send the dupli-
cates of the certificates to its counterpart in city A; and finally he
must return to the bureau in city A to have the goods verified to get
a seal of permission to sell the goods. This complicated procedure
was to ensure that the tax bureau would know how much sales and
profits the merchant would realize in a given tax year so that it
would be more difficult for the merchant to evade tax. The scheme
required establishing inspection stations along the key trans-
portation routes to check cargos passing through to verify the
certificates issued by tax bureaus. Thus, another set of state
agencies was built. In Guangdong province, such inspection sta-
tions grew from seven to thirty-one within one year (September
1941-Auguest 1942) (GZD, January 1, 1946, pp. 12e14).
The expansion of state capacity in the form of tax agencies
entailed training tax officers. In order to staff the entire tax appa-
ratus with trained personnel, the state administered exams to
select candidates, and put them through further training, to be tax
officers. For candidates, the state targeted college graduates
majoring in finance, economics, accounting, or statistics. The first
training class in 1936 graduated sixty-eight people. The second and
the third classes graduated eighty-nine in total. These people were
assigned to tax offices on probation for three months, and they took
another exam before being officially appointed. Again, the outbreak
of the war in 1937 disrupted the selection and training program.
Yet, it is in the middle of the wartime, in December 1940, that the
state issued the “Provisional Regulations on Special Examination
for Direct Tax Personnel” that established the criteria for candidates
for senior and junior tax officers (Tan & Zhang, 1995, pp. 163e164).
By June 1941 the Direct Tax Administration had a roster of 525
senior officers (college graduates) and 893 junior tax officers (high
school graduates), and 641 staff members, a total of 2,059, in the
country (not including occupied territories) (Ling, 1941, pp. 14e15).
By the end of the Sino-Japanese War, the Ministry of Finance had
devised a plan for increasing personnel in all tax agencies. Under
the Regulations on Staffing Standards for Direct Tax Bureaus of
1946, the Shanghai Bureau was to have a minimum staff of 400 to a
maximum of 426; the Tianjin Bureau, 300e343; the Hankou Bu-
reau, 150e343; and the Qingdao Bureau, 200e343. Other bureaus
across the country were classified into three grades based on
population sizes: at first grade, a bureau was to have a minimum
staff of 120 to a maximum of 163; at second grade, 100e129, and at
third grade, 70e95. Branch tax bureaus were classified into four
grades: at first grade, 100e180 staff members; at second grade,
50e100; at third grade, 30e60, and at fourth grade, 25e40 (GZD,
Feb. 1, 1946, pp. 8e11). In Guangdong Direct Tax Bureau, exams
were administered in early 1946 to select senior tax officers (college
graduates majoring in economics, finance, and business) and junior
tax officers (high school or specialized school graduates). Thirty-
three seniors officers and sixty-four junior officers were selected
(GZD, February 1, 1946, pp. 7e8).
Building state apparatus and staffing tax personnel created
principal-agent relationship, an inherent issue in state building. To
collect tax effectively and make envisioned “good taxes” actually
Number of branch bureau Average number of counties per branch bureau
5 25.6
10 16.2
5 22.4
5 19.8
5 17.0
6 12.7
7 12.0
good, the state had to improve tax agents' skills and fight shirk and
corruption among them. The taxation journals published by tax
agencies were designed to be educational tools for tax personnel as
well as taxpayers. Many issues of such journals contained articles
discussing how to improve tax collection, including calls for tax
personnel to be knowledgeable of tax laws and regulations, be
patient and tenacious in dealing with taxpayers, be careful and
thorough in conducting tax assessment and investigation, and most
importantly, be honest and incorruptible in doing their jobs (e.g.,
SYSY, July 1938, pp. 13e17; January 1939, pp. 1e2, 13e15; ZY, Sept. 1,
1941, pp. 44e52; Oct. 1, 1941, pp. 22e28; SY, 1944; No.3, pp. 17e19,
78e79; GZD, February 28, 1947, pp. 9e11; YZT, 1947; No. 22, pp.
5e7; No.38, pp. 5). The training of tax agents was not just “tech-
nical; ” it was ideological as well. In the emergence of Exchequer in
twelfth-century England, “literary and numerical skills became
new ideological norms that gradually defused through society.
They provided the technical infrastructure which underpinned the
new centralized state and facilitated the exercise of political power”
(Jones, 2010, p. 88). In the Chinese case, the training of tax agents in
skills of tax assessment and investigation, along with moral edu-
cation in professional ethics, played the same role in taxation and in
the expansion of state legitimacy and capacity in general.
Education and exhortation would not be sufficient to eradicate
abuses and corruption, and institutional mechanisms and law
enforcement would be necessary, even if their effectiveness could
only be measured in relative terms. In 1946 the Ministry of Finance
established a new policy: Each employee of the tax bureaus must
have a guarantor who would be held responsible for making
monetary restitution for abuse or corruption committed by the
employee. In one case, Mr. Zhu, an employee of the Wuxing Branch
Bureau of the Jiangsu Direct Tax Bureau, was found to be extorting
bribery from a tax-evading underground money shop, and he went
into hiding before being arrested. The authorities then went after
Zhu's guarantor, Mr. Guo. The latter responded that he did not
personally know Zhu (and his current where-about) and had
offered to be Zhu's guarantor only at the earnest request of a friend
who was Zhu's relative. The Jiangsu Direct Tax Bureau asked the
Shanghai Direct Tax Bureau for assistance in the case since Guo was
residing in Shanghai, but the Shanghai Bureau replied that the
Wuxing Branch Bureau had to take care of the matter on its own
(JPA, 1946). It appears that while the central government was in-
ventive enough to create a system of guarantor for tax agents, such
a system could still be gamed or defeated by state agents to varying
degrees; and that local tax agencies were aware of many difficulties
(and the resulting costs they had to bear) in enforcing the rules
established by the Ministry and therefore did not try very hard to
enforce it. Here lies the inherent limit of the state's bargaining
power vis-a -vis its agents.
As for judicial penalties for corruption by tax agents, there were
laws and regulations on the book. Although no systematic data is
available to this study, an incomplete browsing of archival catalogs
suggests that corruption cases involving tax personnel prosecuted
by courts were relatively few among all criminal cases during the
 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30 27

time period under study. households were full-time specialized producers, unlike peasants
doing a sideline, so that they should pay full business tax without
discount (SYSY, October 1939, p. 23). This suggests that peasants
7. Stateesociety interactions over taxation
who produced pulp as a sideline were not subject to business tax.
Indeed, according to an order from the Sichuan Provincial Gov-
The relationship between the state and its agents was inter-
ernment dated July 1938, peasants who bought and sold raw silk
sected by interactions between the state and its constituents, that
were exempted from business tax, while merchants pretending to
is, taxpayers. Such state-society interactions were a vital part of
be peasants to buy and sell raw silk would be punished with fines
taxation and/as state-building taking place in Nationalist China.
when discovered (SYSY, August 1938, pp. 31e32). In a similar
The expansion of tax categories and tax apparatus was constantly
fashion, the Sichuan Provincial Government exempted peasants
contested by social actors, and state legitimacy and capacity were
selling domestic animals they kept as a sideline from business tax
tested by the ways the state dealt with such responses from society.
(SYSY, August 1938, pp. 31e32).
No matter how the state would justify new taxes by invoking the
While protecting peasants from being overburdened by taxes,
ideology of “good taxes” or the necessity of a war for national
the tax agencies did not want to let merchants or the well-to-do get
survival, taxpayers could still perceive newly-created taxes as extra
away with tax evasion. The Ministry of Finance exempted from
burdens imposed by the state, and respond accordingly.13 In the
business tax handloom-spun cotton cloth produced and consumed
best-case scenario, the state would impose and collect new taxes as
locally (typically by peasants). When the Sichuan Business Tax
much as socially, economically, and technically feasible, without
Bureau found that local tax offices also exempted non-local textiles
causing tax riots or rebellions; and social actors/tax payers would
such as wool and silk, it demanded that merchants selling textiles
resist or evade new taxes as best as they could by taking advantage
woven with sixteen or more looms or with electricity-powered
of the existing mechanisms and/or inherent flaws in the state
weaving machines, or selling wool and silk even if handmade,
system, without causing the state to resort to coercive forces. With
must be taxed according to the law, “since both producers and
given legitimacy and capacity or bargaining power, the state would
consumers of such textiles were not the poor people” (SYSY,
negotiate with and accommodate taxpayers or social actors to
October 1939, p. 23).
reach a mutually acceptable deal, so as to reduce transaction costs
These instances demonstrate that The Nationalist Government's
for tax compliance. In the end, whatever transpired in the impo-
expressed new ideology of taxationeequity (consistent with its
sition, collection, resistance, and compliance of the new taxes un-
long professed egalitarian principle) and ability-to-pay (learned
der the Nationalist Government was the net result of such
from Western countries)ewas not lip service or propaganda only,
negotiations and compromises.
but was backed up by specific tax policies, which also reflected its
The responses of Chinese taxpayers to the new taxes may be
low discount rate and therefore its concern for long-term economic
considered in two categories: One is to negotiate with the state by
growth.
presenting economic difficulties and requesting reasonable ex-
Besides policy toward a category of taxpayers such as peasants
emptions, and the other is to find ways to evade taxes in illicit
or merchants, how the state dealt with individual business entities
manners. As cases sampled below will show, the tax agencies of the
is also illuminating. In 1938 (after the war broke out the year
Nationalist Government would try to work with taxpayers in the
before) a construction company in Liangshan county, Sichuan
first category by granting or denying exemptions on the merit of
province, contracted a project to build a runway for a government-
individual cases. As for tax evaders, the authorities would try to
owned airport. The company asked for tax exemption on the
police and catch them by building state agencies and penalize vi-
ground that it was engaging in a project for national defense. The
olators according to laws, rules, and regulations on the book, even
Sichuan Provincial Government responded that the project was
though penalties varied with local authorities. Both approaches
indeed for national defense, and to “encourage” such undertakings,
actualized and delimit the expanding state powerethey manifested
the company was to pay only half of business tax (SYSY, August
the real effects of state building.
1938, p. 31). The compromise shows that the moral high ground
Of the said interactions, the state responses to requests from
of fighting the war for national survival worked both waysefor the
taxpayers asking for tax exemptions are sampled first. The policy on
state and taxpayers.
consolidated tax and business tax provided that when a business
The state-society interactions over taxation pointed to a crucial
had a monthly sales income below ¥50, it was exempted from such
development in early twentieth-century Chinaethe rise of elite
tax (SYSY, March 1939, pp. 13e14). In 1936 the Academia Sinica
organizations. Historian Wong has noted that elites in imperial
made a request to the Ministry of Finance that textiles produced at
China were not organized in any corporate fashion. “Chinese elites,
the institution for research purpose but eventually sold to textile
like European elites, were related by friendship networks and
mills be exempted from the consolidated tax (before the tax was
sometimes by marriage, but the Chinese lacked any more formal
replaced by business tax). The Ministry rejected the request,
organizations that could easily serve as bases for negotiations with
arguing that the tax the Academia was to pay ought to be counted
the central government” (Wong, 2001, p. 75). This was changing in
as part of its operating and research expenses (SG, August 1936, pp.
the early twentieth century, however, if by “formal organizations”
30e31).
one refers to more than political institutions. Recent studies have
While standing firm to an academic institution, the state's was
documented the emergence and increasing assertiveness of pro-
more considerate towards the poorer segments of the population,
fessional and social organizations in urban settings that engaged
especially peasants. In 1939 the tax office in Dazhu county, Sichuan
the Chinese state to protect or advance the group interests that they
province, reported that it was collecting business taxes from
represented but often did so in the name of the public good (e.g.,
households that produced pulp for paper-making mills at a 40%
Bun, 2001; Sheehan, 2003; Xu, 2001; Xu & Xu, 2008, 2003).
discount. The Sichuan Business Tax Bureau instructed that such
The same phenomenon was seen in the area of tax negotiations
as well. In early 1947 Zang Boyong, a Western-trained physician in
13
Shanghai, received notice from the district tax office of the
For instance, before the implementation of the direct taxes in 1936, Chinese
businesses were already complaining about the newly-created consolidated tax
Shanghai Direct Tax Bureau that he should pay income tax and
hurting Chinese-owned industries, especially the cotton yarn and tobacco in- business profit tax on the pharmacy attached to his medical office.
dustries. See Wright (1991), pp. 657e658. Zang turned to the Medical Practitioners Association of Shanghai
28 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
for help. The association presented Zang's request to the tax bureau
against the tax assessed on his pharmacy. Zang's argument was that
the small pharmacy was not for profit but for patients' convenience,
as it ordered medications from commercial pharmacies and stored
them nearby. The bureau responded that it would ask for in-
structions from the Direct Tax Administration of the Ministry of
Finance (SMA, 1947). Similarly, a Chinese native bank (called money
shop) found itself being assessed business income tax higher than it
should be, and it turned to the Shanghai Native Bankers Associa-
tion. The latter intervened on its behalf, and the Shanghai Direct
Tax Bureau promised to make further investigations (SMA, 1947).
On another occasion, when a medicinal material store was notified,
after it had paid income tax, that it was selected for auditing by the
Shanghai Direct Tax Bureau, the store turned to the Association of
Medicinal Material Trade Association, and the latter turned to the
Shanghai General Chamber of Commerce. The Chamber wrote to
the tax bureau arguing that according to the government rules, the
tax agencies should consult with trade associations to decide which
businesses were to be selected for auditing, and the bureau failed to
follow the rules in this case. The bureau responded positively (SMA,
1947). In fact, the tax agencies routinely worked with business
associations and trade guilds to determine income tax and profit
tax rates for related businesses, because such organizations were
much better informed of the capital investment values and profit
margins of the businesses involved. The tax agencies also cooperate
with such entities to standardize accounting methods and books
for various businesses in order to facilitate auditing and tax
assessment, part of the effort to modernize financial data collection.
For instance, Chongqing Leather Industry Association drafted a
standardized format of accounting books for the trade in 1939,
which was published in an official journal, the Sichuan Provincial
Business Tax Monthly (SYSY, February 1939, pp. 21e26).
These interactions and negotiations between the state and social
actors reflected the state's legitimacy and capacity and its calcula-
tion of costs in extracting revenue. The state's taxation would
appear more legitimate or acceptable, when the state appeared
reasonable in responding to or accommodating the requests of
taxpayers/social actors. The negotiations and compromises would
also reduce costs for tax compliance.
To grasp the actualizing effect of the state-society interactions,
such interactions should be further analyzed in the Chinese
context. On the one hand, the idea of “no taxation without repre-
sentation” and formal institutions of political representation were
absent, and on the other hand, trade guilds and business associa-
tions played an important role in representing various social groups
in their negotiations with the state over taxation (and other issues).
Those groups were able to act in that way because of a long-
standing and evolving cultural repertoireethe remonstrative and
representative functions of social organizations or elite groups in
dealing with the state on behalf of the “people” or the “public.”
Such interactions served to validate legitimacy for both sides. The
state's power to impose new taxes was being accepted by social
actors, while the tax agents' mistakes or arbitrariness were being
checked by social actors whose public standing to do so was being
accepted by the state. Such interactions intersected the state-
agents relationship and helped reduce transaction costs and in-
crease tax legitimacy and tax compliance for the state. Thus, the
Chinese case was an alternative to the negotiating mechanism of a
representative body (parliament and such), typical in Western na-
tions, and it enriches our understanding of taxation and state
building.
Finally, a brief look is in order at the enforcement by the state of
tax laws and regulations, another aspect of state legitimacy and
capacity and of state-society interactions. One of the enforcement
efforts was to fight tax evasion. The incidence of tax evasion in
Nationalist China may be glimpsed in one report. During November
1937-December 1938, the Sichuan Business Tax Bureau audited
13,567 businesses in the city of Chongqing, Sichuan province, of
which 384 businesses (or 2.4%) were found to be evading taxes.
Most of these were in hardware or oil businesses, and tax evasions
took place most frequently in July, August, and September (SYSY,
December 1938, pp. 39e41). This was only a snap shot, but it pro-
vided a sense of the scale of the problemeit was not surprising. The
auditing itself, of course, was part of enforcement efforts.
The state launched several initiatives for tax compliance. For one
thing, it began to undertake the task of collecting economic-
financial data to facilitate tax assessment. In preparation for in-
come tax and business tax, the government began to register
businesses more systematically. In August 1936, for example, the
Tax Administration (later Income/Direct Tax Administration) of the
Ministry of Finance registered product brands, trademarks, retail
prices, and tax rates of cigarette companies and textile mills. The
registration of cigarette makers and textile mills was a monthly
exercise, with updates of new businesses and deletions of busi-
nesses gone under. The tax agencies in Jinan, the capital of Shan-
dong province, registered individuals who produced hand-rolled
cigarettes at home, while the government had ordered to ban
hand-rolled cigarettes by April 1937, precisely because such pro-
ducers were too numerous and too scattered to regulate and tax
effectively (SG, August 1936, pp. 21e22, 48e74).
The state also issued regulations on penalty for tax evasion.
When the tariff autonomy was achieved in 1929, the regulations on
punishing smuggling and evading custom duties was issued. Other
regulations covered evasions of income tax, stamp tax, and busi-
ness tax. Tax non-compliance cases reveal that tax agencies
imposed fines on hand-rolled cigarette makers who sold cigarettes
falsely using the brands of established cigarette companies to evade
taxes (SG, August 1936, pp. 80e93).14 As the amount of fines varied
from a few yuan to dozens of yuan in most of these cases, the cost of
enforcing the tax law was more than the taxes thus recovered and
the fines imposed. The enforcement was more symbolic of state
power than for direct gain in monetary value.
8. Conclusion
In the final analysis, the increased revenue from the tax reform
(which was no small achievement by itself) was supposed to be
translated into economic resources and political power for the
state, and to a certain degree it was, but the gain was still insuffi-
cient in the face of the mounting and continuous military expen-
diture that the Nationalist Government incurred in the civil war of
1946e1949, a war that was unpopular and undermining its legiti-
macy. More generally, the tax reform as revenue extraction and
state-building was a work in progress in the 1940s, and it remained
an unfinished project when the Republican era came to an end in
1949.
Nonetheless, this case study of the tax reform under the
Nationalist Government in China yields some important insights
for tax research as accounting history. First of all, the Nationalist
Government intended to rule China for a long run (a low discount
rate) and, for the most part, tried not to “dry the pond to catch fish.”
Hence its accommodations to taxpayers or social actors in imple-
menting new taxes. Second, from the beginning it had limited
14
In 1929 makers of cigarettes (including hand-rollers) were obligated to pay a
cigarette tax, so that hand-rollers would have incentive to pretend they were not
makers by falsely using brand names, besides being able to sell their products more
easily. Falsely using a brand name or trade mark was also illegal, but apparently tax
agencies were not pursuing that matter.
 Y. Xu, X. Xu / Accounting, Organizations and Society 48 (2016) 17e30
political and economic resources as bargaining power: It had to
honor national debts it inherited from the previous governments
and abide by the unequal treaties with foreign powers in order to
be recognized as the legitimate Chinese state. Yet, the continuing
foreign debts and unequal treaties did not help its domestic legit-
imacy, nor did the continuous civil war with the Communists. It is
during the Sino-Japanese War of 1937e1945 that its political
legitimacy was enhanced by leading a war for national survival,
even though its economic and financial well-being was severely
damaged. The war made it necessary and possible for the state to
institute new taxes and compel tax compliance. Importantly, when
the war was over, the new taxes that taxpayers complied with
during the war would stay.
Within that historical context, this paper analyzes several crucial
developments in the transformation of both taxation and the Chi-
nese state into modern forms, unpacking an “ensemble of practices
and rationales” of the Nationalist Government. First, as state finance
had become unsustainable with huge debts, high-level military
expenditures, and limited tax revenues, the Confucian ideology of
“low taxes” was jettisoned and replaced by the Western-derived
ideology of “good taxes,” which helped justify new taxes. Second,
after the state embarked upon the tax reform, taxation in turn
required building tax agencies and training and monitoring tax
agents who staffed the apparatus, an expansion that was con-
strained by transaction costs. Third, compliance with new taxes was
pursued by the state through negotiations and compromises with
social actors or tax payers, as well as enforcement of tax laws and
regulations, which both actualized and delimited state legitimacy
and capacity in taxation (and other matters by extension). In the
end, the new ideology justifying new taxes, the building of tax
apparatus and the training of tax personnel, the negotiations with
social actors/taxpayers, and the enforcement of tax laws and reg-
ulations, all led to a growth of state legitimacy and capacity. In sum,
this paper contributes to the accounting history literature by
emphasizing taxation as state building (a growth of state legitimacy
and capacity) and by illustrating two history/culture-specific vari-
ations to the familiar historical pattern of taxation and state
building based on the Western experiences: First, the shift from the
Confucian ideology of “low taxes” to the Western-derived ideology
of “good taxes,” and second, the state-society negotiations over
taxation in the absence of formal representative political
institutions.
As a preliminary study on the subject, this paper has obvious
limitations. Future studies may investigate other related issues,
such as whether additional state capacities were developed,
whether the fiscal budgeting was improved, whether the collected
new taxes were used in an accountable way (other than military
spending), whether the tax reform made the state and economy
more or less fragile, and how taxation as state building affected
economic growth as tax sources.
Acknowledgments
We are grateful to the editor, David Cooper, and two anonymous
reviewers for their constructive comments and suggestions on
earlier versions of the paper. This study is partially funded by a
sabbatical leave from Old Dominion University and a faculty
development grant ($2,000) from Christopher Newport University.
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