The Crisis of Distribution and the Regulation of Economic Law 9780367676469, 9781003132226

Table of contents :
Cover
Volume 01
Cover
Half Title
Title Page
Copyright Page
Table of Contents
List of figures
List of tables
Preface
Chapter 1: Introduction: Distribution crises and the rule of law
Chapter 2: Distribution pressure and distribution differences
Chapter 3: Relationship and structure of co-integrating distribution
Chapter 4: Legal optimization of distribution structures
Chapter 5: Distribution-oriented rule of economic law
Chapter 6: Beyond the distribution crisis: Theoretical extension
Chapter 7: Conclusion
Bibliography
Index
Volume 02
Cover
Half Title
Title Page
Copyright Page
Table of Contents
List of tables
Preface
Chapter 1: Introduction
Chapter 2: The consistency of key distribution systems
Chapter 3: Unification and difference of distribution systems
Chapter 4: The legal protection of distribution rights and interests
Chapter 5: Legal response to distribution crises
Chapter 6: Conclusion
Bibliography
Index

Citation preview

The Crisis of Distribution

The crisis of distribution is one of the longest standing and most complicated issues facing human society. Imbued with social, political, historic, and cultural elements, it varies significantly across different countries as a result of all these factors. As an emerging economy which transferred from a planned to a market economy, China has experienced large distribution gaps since it implemented the Reform and Opening-up Policy in the early 1980s, requiring stronger economic law to mitigate and regulate the crisis of distribution. In this two-volume set, the author analyzes distribution crises from a theo­ retical perspective and proposes law and policy solutions. In this first volume, he discusses the four main concepts and focus points of the crisis of distribu­ tion – distribution itself, the crises it faces, the rule of law, and development. Concentrating on the major distribution problems China faces in particular, the author proposes regulatory methods which can be used to overcome the distri­ bution dilemma, such as tools from policy and economic law, and reiterates the significance of theory building in resolving the issues. The book should be of keen interest to researchers and students of law, eco­ nomics, and political science. Shouwen Zhang is a professor at Peking University Law School. His research interests include economic law, social law, information law, and more.

China Perspectives

The China Perspectives series focuses on translating and publishing works by lead­ ing Chinese scholars, writing about both global topics and China-related themes. It covers Humanities and Social Sciences, Education, Media and Psychology, as well as many interdisciplinary themes. This is the first time any of these books have been published in English for international readers. The series aims to put forward a Chinese perspective, give insights into cutting-edge academic thinking in China, and inspire researchers globally. To submit proposals, please contact the Taylor & Francis Publisher for China Publishing Programme, Lian Sun ([email protected]). Titles in law currently include: Legal Protection of Private Equity Investors in China Practice, Challenges and Reform Chi Zhang Private Lending in China Practice, Law, and Regulation of Shadow Banking and Alternative Finance Lerong Lu Building the Rule of Law in China Procedure, Discourse and Hermeneutic Community Weidong Ji Deciphering Intellectual Property Law and Its Conflict/Reconciliation with Competition Law Kongzhong Liu The Crisis of Distribution (Set: The Crisis of Distribution and the Regulation of Economic Law) Theoretical Analysis from Economic Law Shouwen Zhang Distributive Institutions (Set: The Crisis of Distribution and the Regulation of Economic Law) The View of Economic Law Shouwen Zhang For more information, please visit https://www.routledge.com/China-Perspect ives/book-series/CPH

The Crisis of Distribution

Theoretical Analysis from Economic Law

Shouwen Zhang

This book is published with financial support from the Chinese Fund for the Humanities and Social Sciences. First published in English 2021 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2021 Shouwen Zhang Translated by Xu Yan and Zhang Dong The right of Shouwen Zhang to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. English version by permission of Peking University Press. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record has been requested for this book ISBN: 978-0-367-67646-9 (hbk) ISBN: 978-1-003-13222-6 (ebk) Typeset in Times New Roman by Deanta Global Publishing Services, Chennai, India

Contents

List of figures List of tables Preface 1 Introduction: Distribution crises and the rule of law

vi

vii

viii

1

2 Distribution pressure and distribution differences

14

3 Relationship and structure of co-integrating distribution

54

4 Legal optimization of distribution structures

83

5 Distribution-oriented rule of economic law

105

6 Beyond the distribution crisis: Theoretical extension

131

7 Conclusion

167

Bibliography Index

173

186

Figures

2.1 Gini Coefficient of China (2003–2011) 5.1 GDP, fiscal revenue and fiscal revenue/GDP of China (1978–2018)

39 113

Tables

2.1 Gini Coefficient of China’s national income in the past decade 5.1 China’s GDP and fiscal revenues from 1978 to 2018 (100 mm RMB)

39 112

Preface

Problems concerning distribution are global. Unbalanced distribution caused by large distribution gaps and unequal distribution has existed in varying degrees throughout different historical periods around the world. These problems have been highly intertwined with elements of society, economy, politics, law, history, and culture. They have close links to issues like economic crises such as the Great Depression in the 1930s and the global financial crisis in 2008, as well as social crises such as the Ebola outbreak and the COVID-19 pandemic. Distribution problems induce distribution risks which, when accumulated and concentrated, will trigger distribution crises. In essence, every economic crisis is a distribution crisis. Unbalanced distribution causes an unbalanced economy over­ all, disturbing the proper functioning of the economic and social system. Thus, distribution problems must be addressed on an ongoing basis, and distribution risks must be mitigated in a timely manner to prevent severe distribution crises. Distribution problems are not limited to economic and social problems, and they affect those of politics and law as well. Legal measures are required to effi­ ciently solve these problems. Within the framework of the rule of law, many kinds of values should be balanced: efficiency, fairness, freedom, and order. Related rights and obligations should be reasonably distributed across multiple legal sys­ tems. The efficient enforcement of laws protects the interests of relevant entities and achieves distributive justice. Although differences exist among legal systems in different countries, these systems share common ground in their basic values, which form the common denominator for international and domestic governance in solving distribution problems. Comprehensive adjustments to numerous legal systems, especially those regarding economic law, are needed to solve distribution problems and guard against distribution risks. Economic law is mainly a concept in countries with civil law. Even so, in the common law system, economic law exists in other forms, such as fiscal law, tax law, financial law, and antitrust law. Although the names of these legal systems vary, in practice they all address distribution problems. Thus, solving distribution problems and defusing distribution crises should be regarded through the theoretical and systematic lens of economic law. Distribution crises should be effectively controlled and addressed by strengthening the regulation of economic law.

Preface ix China, the largest developing country in the world, is a transitioning country (or an “emerging economy”) that shifted from a planned economy to a market econ­ omy. Thus, China has a special distribution system: its planned economy period stressed “equalitarianism”. Its early period of reform and opening up emphasized “prioritizing efficiency with due consideration to fairness”. Afterwards, concepts such as “harmonious society” and “scientific development” were proposed, which show an evolution of the understanding of distribution. Needless to say, during its rapid economic development, China, like many other countries, had relatively large differences in the distribution ratios of factors such as labour, capital, and technology, as well as problems such as large distribution gaps and unfair distri­ bution, which are caused by many factors. For this, a policy system and a legal framework had to be established to solve these distribution problems. Of par­ ticular necessity was a synergy among legal systems ranging from constitutional law to economic law. In fact, the theme of solving distribution problems has run through the whole process of China’s reform and opening-up. Thus, studying dis­ tribution can help shed light on the course of China’s reform and opening up and the development of the rule of law. It can also help us gain a comprehensive understanding of the problems facing China’s economy, society, rule of law, and development. The successful solution of its distribution problems will determine whether China achieves its modernization goals, which are vital for China’s future. Therefore, it is essential that we study distribution problems to figure out how to guard against and mitigate distribution risks and crises through strengthening reg­ ulations over economic law. To do this, we need to analyze distribution problems and crises from the perspective of theories on economic law, and we must address the improvement of distribution systems through the lens of economic law. These problems inspired me to write Distribution Crisis and Economic Law Regulation, which was published by Peking University Press in 2014. In 2017, the book was included in the “Translating Chinese Books Project” supported by the National Social Science Fund of China. At the same time, the book was translated into English and published at the invitation of Routledge. During the translation process, I added new ideas to the book, based on new theories and practices, and the book is presented in two volumes: The Crisis of Distribution: Theoretical Analysis from Economic Law and Distributive Institutions: The View of Economic Law. I believe readers from different backgrounds will now find it easier to grasp the ideas in these books from both theoretical and systematic perspectives. I would like to take the opportunity to extend my most sincere gratitude to the following individuals and institutions (in chronological order): First, I would like to thank the National Social Science Fund of China for including the book in the “Excellent Works in the Social Science Series” and for supporting the publishing efforts of Peking University Press. Second, I would like to thank Mrs Wang Jing, the editor at Peking University Press, for her detailed and efficient work in pub­ lishing the Chinese edition and in translating it into English. Third, I would like to thank the National Social Science Fund of China for including the book in the “Translating Chinese Books Project” and for supporting its translation. Fourth,

x

Preface

I would like to thank Routledge and its staff members for their invitation and all their hard work and commitment. Last but not least, I would like to especially thank Dr Xu Yan and Dr Zhang Dong, the translators of the book, both gradu­ ates of economic law from the Peking University Law School, now teaching at China University of Political Science and Law. They devoted considerable energy to the translation of the book and demonstrated a high level of professionalism and English proficiency, which guaranteed the quality of this translation. Finally, many thanks to all the diligent “unsung heroes” whose names are not listed here! Distribution is an extremely complicated topic. Since economic and law sys­ tems vary greatly from country to country, each country has its specific prob­ lems, which further causes variation in terms of solutions and public opinion. Nevertheless, distribution problems, which have long been a focal point in his­ tory, are still significant today, and this calls for investigation by and discussion among colleagues in relevant fields across the world. I am humbly open to criti­ cism and opinions about this book. Shouwen Zhang Peking University Law School

1

Introduction Distribution crises and the rule of law

1.1 Background and basic propositions Since the concept of “risk society”1 was proposed by German sociologist Ulrich Beck (2004), modern society has been acknowledged as a typical risk society. Many prominent scholars have paid close attention to crises arising from various risks in history (Denney 2009).2 The global financial crisis of 2008 provides a recent example of a financial disaster. Shortly after its outbreak, it evolved into a fiscal crisis, a debt crisis, and even a recession in both the EU and the US. Not only did the devastating crisis exert significant pressure on national budgets put­ ting countries on the verge of bankruptcy,3 but it also led to weak profitability among enterprises, the general declination of personal income, and a soaring bur­ den on people’s livelihood. In response to these crises, governments have resorted to a bundle of economic policies acting on the fiscal, tax, financial, and industrial sectors, and corresponding legal means to reverse the dangerous economic down­ turn, to promote economic recovery and to restore public confidence.4 At the same time, researchers have continued to reflect on the causes of these crises and to discuss potential ex-ante and ex-post solutions. The basic consensus is that economic crises are the manifestation of economic imbalance resulting from the unequal distribution of resources, wealth, and benefits. In a word, dis­ tribution is the cause of each type of crisis. Therefore, precautionary measures including policy and legal regulations should be applied effectively to solve the issues of distribution. These measures can ensure economic security and social stability, enhance national governance capacities, and promote sound and coordi­ nated economic and social development. The issue of distribution and associated crises are major problems that attract global attention. China is not an exception. The long-lasting high Gini coeffi­ cient, as well as the strong sense of unequal income distribution from the public, may lead to a devastating distribution crisis. As a result, we felt it necessary to apply a theoretical perspective in analyzing the causes and response mechanisms to the issue of distribution in this book – thus refining related theories, especially the theories on the adjustment of distribution structure and legal regulations. At the same time, practical purposes call for more concrete measures to overcome the

2

Introduction

distribution crises, particularly the specific ways to improve the relevant distribu­ tion system from the perspective of economic law and regulations. Despite the abundant literature, from economics, sociology, political science, and other fields related to the distribution issue and attendant crises,5 there remains the inadequacy of a systematical analysis from the perspective of economic law. Based on the background and fundamental questions above, this book focuses on the four correlated key concepts of (1) distribution, (2) crisis, (3) the rule of law, and (4) development. Taken from the existing consensus, these intertwined concepts constitute the basis of the book and form a thread which runs through all stages of the distribution crisis, including the cause, nature, potential solutions, and goals of policymakers. Furthermore, the concepts contribute to the follow­ ing propositions: (1) distribution issues may lead to distribution risks which may further lead to distribution crises; (2) all types of crises contribute to or can be defined as distribution crises which require legal regulations, and finally; (3) legal regulations shall be in line with the spirit of rule of law thus facilitating economic stability and development. Based on the theoretical analysis of economic law, the book proposes that legal regulations, especially by means of economic law, shall be strengthened to resolve the distribution issues and prevent potential crises. The capacity of the rule of law in the economy should also be continuously enhanced in this pro­ cess. As a result, various crises led by distribution problems could be prevented and resolved. Therefore, sound operations and coordinated development can be executed in the economy and society. According to the practice in various countries, the solution of distribution crises relies on comprehensive legal regulations. Economic law is the most important of all legal regulations. For this reason, in addition to emphasizing the aforementioned basic propositions, this book focuses on analyzing the problems, risks, and crises of distribution within theories of economic law. At the same time, the analysis further contributes to the development of economic law by revisiting related theories and seeking to adapt them from a distribution standpoint.

1.2 Subjects and definitions In general, this book analyzes the distribution crises and reassesses the solutions presented by economic law. Specifically, it is necessary to study the process of distribution with relevant risks and crises and to explore potential solutions fea­ turing the predominant use of economic law. Thus, the book proposes that the perfection of economic law might contribute to the realization of the rule of law in the economic sector and subsequently lead to the coordinated development of economy and society. Because the objective of this book is to analyze distribution crises at the level of economic law and to discuss potential solutions to distribution issues by strengthening the regulations of economic law, the basic definition of economic law is indispensable, particularly prior to the presentation of a coherent argument. It is generally claimed that the economic law system is traceable to the end of the

Introduction 3 19th century, represented by market regulation such as the US Sherman Antitrust Law, Interstate Trade Law, and the German Anti-unfair Competition Law. It is also claimed that it was proposed, formally, by German scholars in the 1920s for the flourish of economic legislation, then promptly spread widely to many other countries. During the Great Depression of the 1930s, state intervention was pushed to the top of stimulus and bailout programmes, which led to the increasing enhancement of legislation on macro-control in the areas of fiscal policy, tax, and finance. Whether the above-outlined institutions are included in economic law depends on various countries. While in civil law countries, economic law is com­ monly acknowledged as an independent branch law or an independent discipline in the country’s system of legal science.6 Despite the relatively scant research under the framework of “economic law” among common law countries,7 there exist abundant legislations virtually falling into the defined scope of economic law (given by civil law jurists), thus making it possible for an international com­ parative study. The economic law system, generally known in Chinese academic circles, is one of seven major department laws in the national legal system – a general term referring to regulations imposed on social relations generated from mac­ roeconomic control and marketing regulations and mainly consisting of macrocontrol law and market regulation law. The former basically includes the law of fiscal regulation, involving budget, national debt, and tax regulation etc.; finan­ cial regulation, involving the regulation in monetary market and capital market, etc. and planning regulation, involving planning, industry, investment, and price regulation, etc. The latter can be separated mainly into general law, including antitrust law, anti-unfair competition law, consumer protection law, and product quality law, etc., as well as special laws, such as banking regulation and securi­ ties regulation, etc. Research on the economic law system has basically centred on the above-mentioned institutions, have made considerable progress after “the opening of China” and the country’s reform, and have greatly promoted the level of China’s economic rule of law. Meanwhile, research on distribution problems and distribution crises have become cutting-edge issues in economic law theory, which, in turn, renders distribution theory the new pattern in the economic law system. In light of the above definition of research objects and economic law, this book focuses on the following issues. 1.2.1 Issues of distribution and distribution crises The issues of distribution which are of great concern to all countries, gener­ ally include inequality, unfair practices, disorders, and imbalance. All these problems have a profound and direct influence on society, in terms of politics, economy, and law. Distribution efficiency and equality are crucial to a coun­ try’s political stability, economic growth, social development, and the rule of law. Therefore, the issues of distribution should be solved in an effective way for the purpose of resolving issues related to national development and people’s

4

Introduction

livelihood, achieving long-lasting governance and stability, and avoiding “disor­ derly circulation”.8 This book builds on the concept of distribution in its broadest sense to include the distribution of income, wealth, power, and resource. Likewise, the notion of distributor is presumed to vary from countries, enterprises, and individuals to all other social parts (Kerbo 2012).9 Meanwhile, resources allocated cover public finance, corporate assets ,and personal income. All these distribution types, which are impacted by multiple economic and legal factors undertaken by inhomogene­ ous distribution, could lead to disparities or discrepancies (Jinjun Xue 2013).10 The coexistence of inequality and unfairness may induce distribution risks, trig­ gering distribution crises. The “distribution crisis” is an extreme manifestation of the distribution prob­ lems exacerbated by the clear failure to address them. On the one hand, a dis­ tribution imbalance broken by unequal distribution directly impacts sustainable economic development, leading to economic crises/distribution crises. On the other hand, unfair distribution – the absence of regulation or the distortion of dis­ tribution damages allocation – impacts distribution rights and leads to legal and social inequalities, unfairness, and injustice, thereby disturbing the legitimacy and sustainability of distribution and possibly triggering distribution crises at the legal or social level (Habermas 2000).11 The general public is relatively perceptive when it comes to the distribution crisis. Signs of both the Great Depression, caused by overproduction in the 1930s (Liping Sun 2009)12 and the financial crisis in 2008 were initially observable through economic indicators. Furthermore, they were attributed to distribution imbalances and, by their very nature, are an element of the distribution crisis. To prevent or resolve all kinds of distribution crises, the choice we have is to inten­ sify legislation, of economic law in particular, and adjust distributive activities. 1.2.2 Distribution crises and legal regulations In order to eliminate the distribution risks and the distribution crises, governments have placed an emphasis on both policy and legal measures. Policy regulations and the law could effectively allocate the distribution rights or power, affect the distribution factors and weight, thus optimizing the distribution structure and solv­ ing the distribution imbalance. At the same time, distribution imbalance, anoma­ lies, and maldistribution could be solved by strengthening legal regulations. The aforementioned policy and legal measures play an important role in preventing distribution risks and dealing with distribution crises, and are two paths to solving distribution issues. In practice, concrete methods could be taken to prevent risks and confront the crises. Adjusting the industrial structure can facilitate the balanced development of regions and respecting and protecting the economic development right of each country can facilitate coordinated development among different countries. At the same time, narrowing the income distribution gap can prevent the unfair income allocation, and lowering the burden for enterprises can promote the development

Introduction 5 of small and medium-sized enterprises, Additionally, reducing the living cost while increasing the income of residents all constitute regulating measures too. All of this could help to facilitate the sound operation and coordinated develop­ ment of the economy and society, which is directly related to the application of the two previously mentioned measures. Distribution crises are not the only concern of economists. They are also impli­ cated with other distribution issues, especially with those relating to rights, capaci­ ties, norms, and justice, etc. Therefore, it is of great importance to prevent or resolve distribution crises through legal regulations. In practice, it has been universally rec­ ognized by most countries that legal regulation should be strengthened, especially by means of economic law. At the same time, there has been a consensus that emphasis on increasing the capacity of economic rule of law should be enhanced.13 In fact, if there exist serious inequalities, injustices, or imbalances in the dis­ tribution of public finance, personal income, wealth, and resources, economic fluctuation may break out at a macro level, thus leading to a certain type of dis­ tribution crisis, such as fiscal crisis, financial crisis, and debt crisis. Production overcapacity in the real economy and the imbalance between the real and virtual economy caused by excessive financial innovation, are both consequences of the unbalanced distribution of resources among different subjects in different fields. As a result, overall coordination is required by strengthening the legal regulation to solve the above-noted distribution issues, thus alleviating economic fluctuation. Early in 1755, the well-known historical ideologist Étienne-Gabriel Morelly (1996) proposed the argument that “economic law is a law of distribution”,14 indicating the important value of economic law in resolving distribution issues. In accordance with the oversea practice, the “New Deal” policy by Franklin D. Roosevelt was successfully implemented in the era of the Great Depression, as well as the macro-regulation measures by other countries in the 1930s. The law of macroeconomic control became law before the crisis. It is playing an important role in dealing with economic crises and counter-cyclical economies. Therefore, the role of economic law regulation should be strengthened to solve distribution issues, prevent distribution risks, and deal with distribution crises. In China, distribution pressures and the resulting crises not only opened the door of reform and opening-up, but also pushed forward the birth and develop­ ment of economic law. Concerns about distribution issues have dominated the entire process of China’s reform and opening-up, connecting the evolution of the economic law system. At the same time, the development of economic law helps to solve distribution issues. It is therefore clear that we need to continuously push forward the reform and opening-up as well as strengthen the rule of economic law, in order to solve distribution problems. This is not only based on history but also standing on a foundation of reality. 1.2.3 Crisis, development, and the rule of law Development is a global theme in modern times. Crises that frequently broke out during economic development should be solved by development.15 Normal

6

Introduction

development and risk prevention have to rely on the rule of law in the economy. At the same time, the level of rule of law will also be improved by promoting the effective development of the economy and dealing with economic crises. The strong correlations among crises, development, and the rule of law are especially illuminating in understanding and studying the role of economic law and regula­ tion in the field of distribution. The arguments can be summarized as follows: Firstly, a crisis is endogenous with economic development. On the one hand, a crisis is a consequence of development, which means that crises originate from development and worsens if they are not well dealt with. On the other hand, development is born with crises. Although a crisis should be solved by means of development, it could also facilitate development and bring about new leapfrog development. Usually, people are more concerned with the “born-with-development crisis”, as mentioned above. In spite of different understandings of financial crises and fiscal crises in academic studies, all of them fall under the umbrella of economic crises. At the same time, they are also distribution crises. A financial crisis will be related to the interest distribution among stakeholders, however strong its influ­ ence on the real economy is. In terms of the fiscal crisis, it does have significant effects on the market economy given that a fiscal crisis is also called the crisis of public economy itself. Each type of crisis noted above resulted from economic development and thus became a serious issue endangering the development. Every country has likely experienced several crises in its individual journey of economic development. For each country, only coordinated and balanced eco­ nomic development could be called effective development – one that thus avoids the occurrence of a crisis. Instead, if the real economy is not coordinated with the virtual economy, the national economy cannot be balanced with the world econ­ omy, therefore, the entire equilibrium of distribution structure will be affected, which may lead to economic crises or distribution crises, or even the ineffective economic development at last. Therefore, balanced, stable and effective develop­ ment is of utmost importance to a country (Boin et al. 2010).16 In addition, both crises and development are adhesive to the level of the rule of law. Effective legal regulations can facilitate the protection and mitigation of crises, promoting effective economic development. Macro-control law was estab­ lished under the backdrop of the Great Depression in the 1930s. The economic law system was thus born as a whole and became an important systematic founda­ tion for the promotion of effective economic development. As a result, economic law is not only called the “Law of Crisis Response Measure”, but also the “Law of Development Promotion”.17 From the perspective of distribution, fiscal and financial crises are directly related to the imbalanced distribution of funds/capital, income, and wealth. Often, a financial crisis may evolve into a fiscal crisis, which can, in turn, aggravate the financial crisis. Although there are inherently profound economic reasons for all kinds of distribution crises, it is undeniable that the lack of legal regulations is a key cause. Therefore, it is indispensable to strengthen the legal regulations of the

Introduction 7 economy as a way of preventing potential risks. In preventing distribution risks or dealing with distribution crises, the perfection of relevant legislation can also help to increase the general level of the rule of law. As a matter of fact, the emergence, development, and regulation of economic law is a case in point. Although the regulation of economic law should be strengthened to prevent and deal with economic crises, and promote the effective economic develop­ ment, the regulation should be in line with the basic principle of the rule of law, and reflect its basic spirit. To this end, the principles of legality, fairness, and efficiency in the domain of economic law must be given particular emphasis and be reflected in the whole regulation of economic law (Shouwen Zhang 2013).18 At the same time, the development of an economic law system should also deal with its internal uniformity and difference, independence and coordination with other legal systems, and relations between economic policies and economic law, to name but a few. This will all be discussed in the relevant chapters of this book.

1.3 Basic clues and main content 1.3.1 Basic clues This book begins by looking at the distribution problems that China needs to solve and then reflects on the causes and harmful impact of these problems, as well as the exact potential solutions. Afterwards, the book makes an analysis of the exist­ ing problems in the institutional construction and practice of dealing with the dis­ tribution crises. Measures and directions on the improvement of related systems are proposed as outlined below. Finally, the distribution theory and the theories on legal regulation are summarized. To be more specific, the above-mentioned clues could be listed down as follows: 1 Problem-orientation: this book proposes two types of distribution pressures, namely, financial pressure at the national level or livelihood pressure at an individual level. The alleviation of these pressures requires the strengthened regulation of economic law. Therefore, the necessity of strengthening the regulation of economic law in the distribution field can be illustrated. Based on that, the book exemplifies the fiscal crises and distribution gap to reveal the internal relations between the two types of distribution problems and eco­ nomic law regulation. 2 State coordination: no type of distribution problem can be solved without state coordination, which heavily depends on policies and law, and in particu­ lar, economic policies and economic law. In fact, economic policies and eco­ nomic law are indispensable in adjusting the distribution structure that needs to be rendered effective, especially the “promoting legal norms” in economic law. When it comes to the optimization of the distribution structure, lawmak­ ers today are no longer aligned with the same values they used to be. These discussions intend to clarify the necessity and benefits of economic law as a solution to distribution problems.

8 Introduction 3 Economic policies: applying economic policies and economic laws as the solutions of distribution issues (Piketty 2014)19 has been a basic measure in China since reform and opening-up. At the same time, the rule of economic law has focused on distribution, reflecting the orientation towards distribu­ tion. In fact, the resolution of the distribution problem has always been an important objective of the rule of economic law. Strengthening economic law regulation is of great importance in practice by solving the distribution problems, and preventing distribution crises. 4 Theoretical input: discussion on the issues of distribution, crises, and the rel­ evant laws and regulations is helpful in strengthening theoretical research. On one hand, attention should be paid to the application of economic law theories in order to analyze the causes, expansion, and resolution of distribu­ tion problems and crises. On the other hand, emphasis should also be placed on combing the prevention of distribution risks and the resolution of distribu­ tion crises. Theoretical researches on economic law should be continuously strengthened and expanded and related legal theories should also be devel­ oped in the study of distribution problems and crises so that we can better promote economic and social development, as well as the rule of law itself. By examining different factors, this book provides a specialized analysis of distri­ bution problems and crises, and of the reinforcement of the rule of economic law. At the same time, the author aims to integrate the above-mentioned four aspects – distribution, crisis, rule of law, and development. 1.3.2 Basic content As noted in the introduction above, this book will explore the major issues as follows. Both countries and nations are facing distribution-related pressures – fiscal pressure at the national level and at individual livelihood level could obviously reflect distribution problems. Only effective release and mitigation could prevent higher risks and avoid distribution crises. In terms of the fiscal risks and crises brought on by fiscal pressure, especially related to unequal distribution or distri­ bution differences, unfair distribution, and imbalanced distribution, legal regula­ tion should be adjusted effectively. To effectively solve the distribution issues, “dual adjustments” to the distri­ bution structure should be made through policies and law at the national level. During the optimization of distribution structure, we should not only perceive the important role of traditional laws in solving the problems in the first distribution but also in finding out the important value of modern laws, especially economic laws, in solving the redistribution problems.20 In addition, full focus should be given to the role of “promoting norms” of economic law in the process. China’s “opening” and reform have revolved around solving the distribution problems in history. It is the same as the construction of the rule of economic law. Fiscal distribution at the national level and interest distribution at the individual

Introduction 9 level are both the direct motivation of the reform and China’s “opening”, as well as an important theme in analyzing the evolution of economic policy and law sys­ tem. Through the focus on distribution, the past, the present, and the future of the whole rule of economic law can be connected, thus establishing a comprehensive understanding of the system of economic law, and the regulation of economic law. The post-crisis era calls for an in-depth study on public economic crises, national competition, and risk theories, as well as the principle of change of cir­ cumstances. As we probe into the area, the adoption of a legal-based perspec­ tive may reinforce the establishment of the theory of “Development Law”.21 All our efforts to handle distribution-related issues, allocate risk, and prevent crisis serve the common purpose of maximizing economic and social development. Therefore, the law of social development should give sufficient weight to the issue of distribution, promote economic and social development, as well as the rule of law via further research in the area of economic law and other fields.

1.4 Structure and methodology of the book 1.4.1 Outline The book is divided into five chapters, in addition to an introduction and conclu­ sion. They are each closely connected and focus on the following issues. The first chapter raises several questions. This book does not seek to address the multiple distribution issues that exist. Rather, it focuses on perceptible dis­ tribution pressures and differences that concern society as a whole, notably the fiscal distribution problems of the country and individual income distribution, especially distribution gaps and unfair distribution. The problems, which can be ultimately attributed to distribution imbalance, require regulation by economic law. This insight lays the foundation for the rest of the book. The second, third, and fourth chapters – which are based on the tools pro­ vided by economic law – analyze regulatory methods which can be used to over­ come the distribution dilemma. First, it strengthens the necessity of national regulation in the polybasic and complicated distribution relations. The author proposes that policies and laws are two important tools of national regulation. Then the necessity and feasibility of “dual adjustment” in distribution structure is discussed, as well as its justification. At the same time, these chapters are dedicated to the legal optimization of the distribution structure, and they high­ light the differences between traditional law and modern law – especially in their categorization and orientation. Contemplating the history of institutional changes, the book further reveals the impact of distribution on the formation and development of theories and institutions of Chinese economic law, while emphasizing the important functions of economic policies and laws in resolving distribution issues. Based on the regulatory tools mentioned above, the fifth chapter will explore the theory of distribution crisis in the field of economic law, revealing the impor­ tant value of risk theory in the prevention and control of distribution crisis as well

10

Introduction

as the development of economic law theory. At the same time, it will emphasize the necessity of carving out a space for the theory of distribution within the legal science framework. The book is structured as follows: (1) distribution problems are proposed as the research target of the book; (2) in terms of various distribution problems, regula­ tory tools should be applied at the national level to solve the problems. Overall, policy and law are two main tools in distribution, especially economic law, which are playing a more important role in the regulation; and (3) how to apply the regulatory tools and systems to solve the distribution crisis is then discussed. The existing problems are discovered and the relevant theories are summarized. 1.4.2 Research methodology The categories of research methods have been employed in this book. Some meth­ ods, like comparative research, economic analysis, empirical research, and his­ torical analysis, are commonly applied in social science research, while others, including “structural analysis” or “systematic analysis” and policy analysis are specific for analyzing distribution problems. The first category is a common one known by all; the second needs some explanation. “Structural analysis” and “systematic analysis” are imperative for the study of distribution issues. Given that there is a direct connection between distribution issues and the imbalance of the distribution structure, it is necessary to analyze the distribution structure and the distribution system in order to dis­ cover their existing problems and find corresponding solutions from the specific structure or the overall system. The analysis is particularly helpful for optimizing the distribution structure, improving the relevant structure of the distribution sys­ tem and addressing the distribution problems in a very specific manner. In addition, the complexity of the distribution system determines its vulner­ ability and susceptibility of risks and crises. Some distribution problems may trig­ ger the “butterfly effect”, thereby endangering the systematic risks. This means that the method of systematic analysis needs to be emphasized when studying distribution issues.22 Policy analysis is irreplaceable in the study of distribution. As a matter of fact, social and economic policies which initiate legislation have a direct impact on allocation and may become the solution for the problems. An analysis of the inter­ action between policy and legislation must be incorporated into any study like this one (Shouwen Zhang 2003).23 This book uses generalization and deduction methods to explore topics that reappear in economic law theory and practice. Distribution, a recurrent issue that runs through the historical evolution and the future development of economic law, will guide us through multiple issues that contribute to the basic understanding of economic law as well as a conviction of the effects of economic law on dis­ tribution. These are propositions, tools and methods which inspire our analysis. The book focuses on the questions raised above and demonstrates the process of

Introduction 11 reasoning. Toward the end of each part, a brief summary is provided to facilitate the understanding of fundamental propositions and projected conclusions.

Notes 1 Beck emphasized that in developed modern societies, the social production of wealth is systematically accompanied by risks. Accordingly, problems and conflicts in the scarce societies are mainly overlapped with those of production, definition, and dis­ tribution of risks arising from the development of science and technology. Beck, U. (2004). Risk Society: towards a New Modernity. Translated from German by Fuwen He. Shanghai: Yilin Press, p. 14. In fact, distribution problems have always been important causes of social risks. Therefore, distribution-related risks and crises must be taken seriously. 2 For example, Marx devoted attention to the economic crisis brought about by the capi­ talistic mode of production. Durkheim focused on the moral crises and the risks of social disintegration brought about by the over-emphasis on economic development. Denney, D. (2009). Risk and Society. Translated from English by Ying Ma. Beijing: Beijing Press, p. 7. 3 After the 2008 financial crisis, the most remarkable crisis had seen Iceland on the brink of bankruptcy. That was followed by the debt crises in Greece and other European countries, which have continued to cause widespread concern in the world. 4 In response to the financial crisis of 2008, China implemented numerous measures including a four-trillion-yuan investment to boost domestic demand as well as “struc­ tural tax cuts”. The United States also invested 700 billion US dollars in the form of emergency financial assistance to save the market. Several countries likewise under­ took many countermeasures. 5 The importance of distribution has been emphasized by David Ricardo, John Stuart Mill, and John Bates Clark in their representative works. It is held by some that the dis­ tribution of income, wealth and rights matters than other economic issues such as scar­ city and efficiency. Bronfenbrenner, M. (2009). Income Distribution Theory. Translated from English by Ming Fang. Beijing: Huaxia Press, pp. 1–2. 6 See Feikenje, W. (2010). Economic Law. Translated from German by Shiming Zhang. Beijing: China Democracy and Legal Press; Jacques, A. and Schrams, G. (1997) Economic Law. Translated from German by Yuquan. Commercial Press. 1997; Kimsawa Ryu. (2005). An Introduction to Economic Law. Translated from Japanese by Man Daren. Beijing: China Legal Publishing House, p. 27; Tansou Akinobu. Atutanizyou Zin. ed. (1985). Introduction to Modern Economic Law. Translated from Japanese by Cichang Xie. Beijing: Mass Press; Tansou Akinobu and Hiroshi Iyori. (2010). Economic Law, translated by Yoshida Keiko. Beijing: China Legal Press. etc. 7 However, there are still relevant economic law studies in Anglo-American law coun­ tries. See Schmitov. (1993). The Concept of British Economic Law. Translated from English by Zhao Xiuwen. Beijing: China Encyclopedia Press; Kindleberger, C. (1989). Economic Laws and Economic History. Cambridge: Cambridge University Press; Garvey G. and Gerald G. (1990). Economic Law and Economic Growth: Antitrust, Regulation, and the American Growth System. Westport: Greenwood Press. 8 Historical changes and the flourishing of dynasties have a direct bearing on crises in the distribution field. To resolve “the chaos cycle” issue is tantamount to resolving distribu­ tion issues. 9 Inequalities in the distribution of income and wealth are the two most important types of inequality. Some scholars believe that income usually refers to income from work or returns of investments. These include wages, investment incomes and assets such as real estate, stocks, and deposits. See Kerbo, H. (2012). Social Stratification

12 10 11

12

13

14

15

16

17

18

19

20

Introduction and Inequality. 7th ed. Translated from English by Jiang Chao. Shanghai: Shanghai People’s Publishing House, p. 24. There is an ongoing debate about whether the income gap acts as inducement or obstruction of economic growth. Jinjun Xue. (2013). Growth with Inequality. Beijing: China Social Sciences Publishing House, pp. 15–16. Habermas believes that in late capitalism, there was an inflationary crisis, a fiscal defi­ cit crisis, and a social and economic crisis of the economy. See Habermas, J. (2000) Crisis of Legitimacy. Translated from German by Weidong Cao. Shanghai: Shanghai People’s Publishing House, pp. 63–68. There is a considerable volume of literature on major economic crises associated with distribution imbalances believed to be caused by overproduction. Liping Sun. (2009). The Logic of the Financial Crisis and Its Social Consequences. Chinese Journal of Sociology, 29(2), pp. 1–15. Can the prescriptive function or the security function of law directly contribute to solv­ ing distribution problems? It is through the regulation of distribution behaviour of rel­ evant parties and the security of the distribution of their benefits that sound and orderly distribution can be achieved. Morelly called the law of “allocating natural products or artificial products” the “dis­ tribution law” or the “economic law”. Morelly, E.G. (1996) Code of Nature. Translated from French by Jianhua Huang and Yazhou Jiang. Shanghai: Commercial Press, pp. 107–110. Some scholars have argued that the word “crisis” originated in the Greek language and was used to describe a disease that has reached a turning point. The word “crisis” was translated into English in the 14th–15th century. In China, the word “crisis” appears as a whole in the verses of Chengtian He, the astronomer of the Southern Song Dynasty, referring to troubles and risks. By the Tang Dynasty, “crisis” had gradually become a word in the common vocabulary. Pengcheng Gao. (2009) Risisology. Beijing: China Social Sciences Publishing House, p. 5. Arjen Boin argues that long-term economic growth and development is often inter­ spersed with crises. Boin A., Hart, P., Stern E. and Sundelius, B. (2010). The Politics of Crisis Management: Public Leadership under Pressure. Translated from English by Fengping Zhao. Zhengzhou: Henan People’s Publishing House, p. 3. Economic law is a law that promotes development in which a large number of “pro­ moting” legal norms make promoting economic and social development a reality. Therefore, economic law research needs to be strengthened by both the fields of devel­ opmental economics and development law. The principles of legality, moderation, and performance that are emphasized in the field of economic law are all very important for ensuring the rationality and legitimacy of economic laws and regulations, and for solving problems such as ineffective and unfair distribution. In certain fields, the aforementioned principles of moderation and perfor­ mance are also called the principles of fairness and efficiency. Shouwen Zhang. (2013). General Theory of Economic Law. Beijing: Peking University Press, pp. 68–72. In his study of distribution problems, Thomas Piketty emphasized that the most appro­ priate system and policies needed for a fair social order should be established so as to achieve complete fairness and justice under the legal framework. Piketty, T. (2014). Capital in the Twenty-First Century. Translated from France by Shusong Ba. Beijing: CITIC Press, p. 32. After the Great Depression of the 1930s, the country’s economic and social functions expanded causing economic laws and social laws to become prominent in solving economic and social imbalance of modern society. Consequently, economic laws and social laws have transformed into modern laws which aim at solving problems in mod­ ern society. That notwithstanding, different views exist as to the spirit of modern laws.

Introduction 13 Wenxian Zhang. (1994). View of the Spirits of Market Economy and Contemporary Law. China Legal Science, 11(6), pp. 5–12. 21 It should be noted that as the subject of research, development has been studied in a variety of branches including development economics, development politics, and development sociology. Accordingly, there can also be a branch of development law. Shouwen Zhang. (2005). The Development Law Science and Development of Law Science. Law Science Magazine, (3), pp. 3–7. Xigen Wang and Kangmin Wang. (2009). On Regional Development Rights & the Concept of Law Update. Political Science and Law, (11), pp. 2–9. 22 Some scholars believe that the vulnerability of the system refers to its character of being easily damaged and is closely related to concepts such as instability, susceptibility, and vulnerability, and acts as a necessary condition for risks turning into crises. Ming Li. (2011). The Financial Crisis and Local Management. Beijing: Peking University Press, pp. 34–35, 42–44. 23 Shouwen Zhang. (2003). Policy Analysis on Economic Law. Studies in Law and Business, (5), pp. 94–102.

2

Distribution pressure and distribution differences

Distribution pressure and distribution differences obviously have an impact on the distribution issue and are closely related to distribution risks and distribu­ tion crises. Therefore, both of them should be solved in the legal system of distribution. Among all kinds of distribution pressure, there are mainly two types that are especially noteworthy: one is the country’s financial pressure and the other is the people’s living pressure. These two kinds of typical pressure have existed in dif­ ferent historical periods in various countries and, therefore, need to be resolved by effectively adjusting the distribution system. At the same time, these two types of distribution pressure derive from differences in distribution – either distribution differences between government and the people or distribution differences among individuals. Such differences affect the formation of distribution pressure, lead to greater distribution risks, influence distribution orders, and even lead to distribu­ tion crises. Allocating more distribution power to the state will reinforce the differences between governments and people, widen the distribution gap among individuals, increase distribution pressure, and vice versa. Thus, it is necessary to strengthen the legal regulations in the area of distribution, to pay particular attention to the issue of distribution pressure and distribution differences, to constantly relieve and release the distribution pressure, thus narrowing the distribution differences. With this in mind, this chapter will first discuss the legal methods adopted to reduce the above-mentioned distribution pressure and then, from a legal stand­ point, it explores the regulation of financial crises from the perspective of national financial pressure and the prevention of the risk of distribution differences from the citizen’s perspective. It should be noted that this book focuses on distribution pressure and relevant financial pressures, financial risks, as well as distribution differences, unfair distribution, and related issues.

2.1. Legal relief of two kinds of distribution pressure The national economy and people’s livelihood are both of great importance to national governance. A well-performing national economy and the health of people’s livelihood is a symbol of good governance. Therefore, a country that is

Distribution pressure and differences 15 capable of ensuring the development of the national economy and people’s liveli­ hood can avoid the “governance dilemma” and become prosperous and safe. However, throughout the history of China and foreign countries, the devel­ opment of the national economy and the people’s livelihood cannot always be satisfying. The weakness of state, the huge deficit or famine, and the suffering of people exert huge pressure on the national government. It is only by effec­ tively solving distribution problems and continuously releasing the pressure on the national economy and people’s livelihood, can governments avoid economic imbalance, social imbalance, and political upheaval. As a matter of fact, history reveals that countries have taken various measures to relieve and alleviate the tremendous pressure on national economies and peo­ ple’s livelihood by, for instance, launching wars, reforming laws and developing the economy, with the hope for long-term prosperity and security. In modern rule­ of-law countries, legal regulation has been an important measure in adjusting and releasing the pressure. Strengthening the rule of economic law has been widely recognized and studied because of its important role in rebalancing the public and private economies, alleviating the pressure on the national economy and people’s livelihood. As mentioned above, governments all over the world face “dual pressure”1 – the pressure placed on both the national economy and people’s livelihood led by distribution problems. The effective release and alleviation should be two major issues in practice that the countries should focus on. Efforts to alleviate “dual pressure” need to address the economic and social levels. Furthermore, the rule of economic law could be more helpful to increase the capacity of relevant stake­ holders and to ensure the legitimate rights and interests as the path of legal regu­ lation. For this reason, states should effectively apply and continuously improve economic legal systems as a way to comprehensively promote both the rule of law and good governance. Current academic research has a lot to do in terms of exploring the rule of economic law as the path to alleviate the “dual pressure”.2 In accordance with the practice among different countries, the regulation of economic law is of great importance in alleviating and releasing the two types of distribution pressure. If deeper research is conducted in this area, it will likely help to clarify the function, mission, and institutional structure of economic law, answer the foundation and motivation of economic law, as well as answer the frequent problems of “dual pressure”. Therefore, we feel it necessary to analyze the internal connection between “dual pressure” and economic law – based on the practical existence of “dual pressures” – to see its effect on the formation and development of economic law, as well as the important role of economic law in alleviating “dual pressure”. Therefore, our analysis focuses on the connection between “dual pressure” and the rights, power, and related obligations of economic law subjects. We do this by emphasizing the allocation of the rights and obligations of economic law subjects and their importance in the potential alleviation of “dual pressure”. Furthermore, the specific paths to alleviate dual pressure through economic law are discussed

16

Distribution pressure and differences

in detail, strengthening the necessity of comprehensive regulation via economic law and other department laws. Finally, the importance of the overall rule of eco­ nomic law could be concluded in solving distribution pressure, distribution risks and distribution crises. 2.1.1 “Dual pressure” in China We begin with a discussion about whether such a phenomenon as “dual pressure” exists in China. In terms of people’s livelihood, problems such as high inflation, high unemployment, and high taxes increase the cost of living. As a result, peo­ ple’s distribution capacity is insufficient with relatively low income levels and high living pressure. At present, China’s economy has stepped into the “new nor­ mal” and “high cost” era. People’s livelihood has become an obvious issue while achieving ways for people’s rights to existence and development are blocked. This situation has further increased the people’s living pressure, directly affect­ ing quality of life and welfare, as well as the fulfilment of basic human rights.3 In addition, the negative influence caused by the recent global economic crisis is ongoing. The insufficient motivation resulting from economic growth and social development has also made the living pressure continuously high. In fact, not only the existing living pressure at the individual level, it is the same with countries and governments, which could be called as the public pres­ sure of national economy or fiscal pressure – the pressure at the economic level.4 Different from people’s livelihood, the two types of pressure are respectively related to the public economy and private economy while there exists an interac­ tion between the two. On the one hand, “living pressure” is basic (fundamentally basic; essential) and has an important influence (resounding impact) on the reso­ lution of “public economic problems”. On the other hand, the solution to public economic problems could also strongly promote the resolution of issues related to people’s livelihood. China does have obvious living pressures, which has long been understood by all. However, when it comes to fiscal pressure, there still remain many arguments. Many people might hold the view that since the growth rate of fiscal revenue in previous years has significantly surpassed the GDP growth rate,5 and the country’s overall fiscal revenue has increased year on year, that China’s tax-sharing system is apparently asymmetric. The distribution structure of fiscal revenue remains inappropriate and is mainly controlled by the central government.6 The financial capacity of local governments, in spite of the abundant duties, is relatively not enough to support. To some extent, the lower the level of government, the heavier fiscal burdens it has. Notably, the overall fiscal pressure of the local government will not be changed because of the fiscal surplus, for the reason that the fiscal revenue in many areas is mainly from “land finance”, which is not a sustainable income model. When a local government is continuously expanding its power, financial pressure will be felt at the same time. Therefore, many local govern­ ments have to issued bonds at large scale. Sometimes the bond scale will surpass the total volume of the national fiscal revenue.7 Factors such as the government

Distribution pressure and differences 17 debts, the slow-down economic growth, the increasing input of people’s liveli­ hood, and each kind of “structural tax reduction”,8 mean China is currently facing severe fiscal pressure. Therefore, we see that whether for the country or its people, national economy or family economy, existence or development, high pressure exists everywhere. Dual pressure not only refers to the fiscal pressure and living pressure but also the pressure in the public economy and in the private economy. Such a phenomenon should be given special attention in today’s economic and social development. Subjects under this pressure have to continuously alleviate it for existence and development. Additionally, the whole economic and social system has to continu­ ously release the pressure to ensure general security. Therefore, the “sustained release” of “dual pressure” is a major and pressing issue that all governments have to solve. The above-mentioned “dual pressure” also exists in other countries. For exam­ ple, Greece and Spain used to suffer sovereign debt crises, and Italy, Portugal and other European countries used to face severe fiscal pressure (Hui Wang 2010; Liansheng Zheng 2010).9 In order to cut down their fiscal deficit, these countries adopted measures such as austerity and reduced their national welfare. These measures not only directly affected the supply of public goods but also increased the living pressure of the people. Similarly, such fiscal pressure and people’s living pressure has increased in many prominent countries, which sub­ sequently begins affecting each other and eventually forms the ubiquitous “dual pressure”. In reality, “dual pressure” is the symbol of an unbalanced economy and unbal­ anced development, which is intrinsically linked to the imbalance between public economy and private economies, thus directly affecting steady economic growth and social stability. Given that “dual pressure” exacerbates economic imbalances and vice versa, it is necessary to explore the legal path through which “dual pres­ sures” can be relieved based on laws that can regulate economic imbalance and “dual pressure”. Therefore, further studies should focus on the internal relations between “dual pressure” and the adjustment by economic law, in order to reveal the internal mechanism of how to alleviate the “dual pressure” through the rule of economic law. 2.1.2 The internal connections between distribution pressure and economic law How can economic law become an important solution to relieve “dual pressure”? What is its internal mechanism? To answer these questions, we need to reveal the inherent relationship between “dual pressure” and economic law. In general, on the one hand, the release of “dual pressure” requires the regulation of economic law. Such demand, in reality, promotes the birth and development of economic law. On the other hand, advancements in economic law promote the release of “dual pressure” and the effective solution to the relevant economic and social problems.

18

Distribution pressure and differences

As a matter of fact, financial pressure and people’s livelihood pressure, in real­ ity, urgently need countries to take corresponding measures and create policies in the economic and social fields and make further legal responses. Therefore, the two pressures play an important role in pushing forward the economic reform and institutional evolution. Therefore, it is in the process of solving the problems brought about by the dual pressures that economic laws, as well as other funda­ mental branches of law, could be formulated and developed. When considering fiscal pressure, research conducted by famous economists such as Joseph Alois Schumpeter, John R. Hicks and Douglass C. North can be summarized as an important proposition in the sentence: “fiscal pressure is the direct impetus of reform” (Fan He 1998).10 It can be inferred that financial pres­ sure is also a direct motivation for legal development, as reforms always occur alongside legislation. In addition, it can be seen that people’s living pressure is also an important and fundamental impetus for reform. The pressure on people’s livelihood is an enduring motivation and inexhaustible source for the develop­ ment of various laws, including economic law. For instance, before the reform and “Opening of China”, it suffered severe financial pressure and living pressure. It was because of the living pressure that China begun the reform of the family contract responsibility system in rural areas to solve the issue of the allocation of peasants’ income. Under the fiscal pressure and living pressure, China initiated a city reform focusing on corpo­ ration reform, to solve the distribution issue of allocating income among the government, the enterprises, and the employees.11 Overall, the reform measures related to finance, tax, and planning, such as the substitution of tax payment for profit delivery and the allocation of funds replaced by loan grants. Additionally, other relevant economic law systems were playing a significant role in solv­ ing interest distribution issues, enhancing economic efficiency, and easing “dual pressure”, which directly promoted the establishment and development of the economic law system and other legal systems that are compatible with the com­ modity economy. At the beginning of reform and the “Opening of China”, institutional reform was centred around “decentralization and interest concession”. Numerous eco­ nomic laws were stipulated, thus promoting the development of commodity econ­ omy and solving individual livelihood problems. After fifteen years of reform and opening-up, China clearly implemented the market economy system. At that time, China was facing huge financial pressure, which was reflected in the decrease of the proportion of fiscal revenue in GDP and the proportion of central fiscal revenue in the whole fiscal revenue. Reduction of the two ratios strongly influ­ enced the realization of China’s state capacity (Shaoguang Wang & Anguang Hu 1993).12 Therefore, to ease the excessive fiscal pressure, China conducted largescale reforms on the fiscal and taxation legal systems in 1994. Within the follow­ ing 20years, the fiscal and taxation legal system in China played an important role in increasing the total amount of national fiscal revenue and the “two rations” to a large extent. As a result, fiscal pressure at the state level was efficiently allevi­ ated. Such practice indicates that fiscal pressure could promote the establishment

Distribution pressure and differences 19 and development of fiscal law systems, while the effective evolution of fiscal and taxation law systems can remarkably alter the fiscal pressure. The changes noted in the fiscal and taxation system are only microcosms (an example) of changes in the economic law system. In fact, various economic laws, including financial law, industrial law, competition law, and foreign trade law, are generated and developed in the process of addressing the “dual pressure”. Together with the traditional civil and commercial law systems, these economic laws provide an important institutional platform for alleviating the “dual pres­ sure”. It was in this process that economic law has developed in a comprehensive way. In recent years, with the development of market economy and the distribution leaning to the government, the financial pressure of the state has been relieved, but the pressure of people’s livelihood is continuously increasing. Many impor­ tant problems in the field of people’s livelihood need to be solved by expanding financial expenditure, leading to new fiscal pressure, especially at the level of local governments. As a result, the dual pressure continues. From the development path above, it is not hard to see that China was faced with “dual pressure” at the beginning of reform and “opening”. Additionally, the reform and “opening”, as well as the development of the commodity econ­ omy, contributed to the promotion of people’s livelihood and the easing of financial pressure. After the market economy was implemented, China’s fiscal revenue kept increasing year-on-year with the economic development and the fulfilment of the legal system. However, the problems of people’s livelihood have become increasingly prominent, forming a very prominent pressure on people’s livelihood and a relatively hidden financial pressure. The dual pressure still essentially exists and tends to be spiral upward. The practice need to solve the dual pressure issue above strongly pushed forward the establishment and development of economic law in China. At the same time, the effective rule of economic laws was also playing an important role in the solution of dual pres­ sure issue thus increasing the importance of economic law in alleviating the “dual pressure”. Thus, there exist intrinsic connections between “dual pressure” and economic law. On one hand, the “dual pressure” can stimulate economic and social evolu­ tions and promotes the rule of law development and institutional evolution. In order to solve “dual pressure”, a country needs to promote the development of economy and rule of law, thus promoting the establishment and development of economic law. On the other hand, once the economic law was stipulated, its mis­ sion, value, and function were based on the important need to alleviate the dual pressure. Economic law, as the law of development and promotion, is especially helpful in ensuring the stable development of economy and society, stimulating the potential of economic development, and enhancing the development impetus – which prevents weakness in development. Economic law, as the law of crisis solution, is especially helpful in preventing and solving each kind of distribution risk, so as to best prevent economic crises and social crises (Shouwen Zhang 2011).13

20

Distribution pressure and differences

In addition, the obvious problem of people’s livelihood will directly affect the sustainability of finance, thus increasing fiscal pressure. The growing fiscal pressure may force the government to increase fiscal absorp­ tion from the people, which will further increase the pressure on people’s liveli­ hood. Therefore, people’s living pressure is intrinsically related to fiscal pressure. As a result, dual pressure unavoidably happens in modern society. Alleviating “dual pressure” also requires effective development of economic law. At the same time, the risks brought on by distribution pressure also need to be prevented and regulated through the effective regulation of economic law. Therefore, we should not only focus on the proactive promotion of “dual pres­ sure” to the establishment and development of economic law but also see the important role of economic law in relieving the dual pressure. Furthermore, we should reveal the internal connection between dual pressure and the distribution of rights and obligations of economic law subjects, as well as the rights and inter­ ests. As a result, economic law could be applied to solve “dual pressure” issues by distributing the rights, powers, obligations, and duties of the relevant subjects. 2.1.3 Distribution pressure and the distribution of rights and responsibilities among economic law subjects Based on the above inherent relationship between “dual pressure” and economic law, “dual pressure” is directly related to the unreasonable distribution of rights and obligations of economic law subjects, as well as the unfair distribution of rights and interests. In addition, the solution to relieving such “dual pressure” in economic law is to adjust the distribution of rights and obligations to the eco­ nomic law subjects, thus influencing the right and interest structure of economic law subjects. Economic law was regulated differently in history in relation to the distribu­ tion of the right and obligation of the subjects, which was based on the different pressure placed on people’s livelihood and finance. For example, at the beginning of the reform and “opening”, China was still in an era defined by low income and low cost in general. The demands on the amount and quality of distribution were not high. It would have been relatively easy to address dual pressure at this stage. Accordingly, the “dual pressure” could be eased by simply ensuring basic demand and eliminating poverty. However, the dual pressure now faced by China has been formed in the era of high cost, since it has stepped into the group of middleincome countries. High cost in every aspect has not only pushed the GDP upward but also brought about the change in distribution structure. As a result, the distri­ bution structure is characterized by state high tax revenue and high fiscal revenue leading to problems such as distribution gap and unfair distribution. Under the backdrop above, we see that people’s living pressure nowadays is different to what it previously was, for the reason that both of the surviving pressure, develop­ ment pressure shouldered by citizens, and pressure on the government to improve people’s livelihood have changed. At the same time, the solution for people’s liv­ ing pressure is closely related to financial support from the government. Although

Distribution pressure and differences 21 the total amount of fiscal revenue at different government levels is increasing, the huge input needed in solving people’s living problems will still exert high pres­ sure on government finance. As a result, the scale of local debt is also increasing. Economic law and other relevant laws should be comprehensively applied to solve the problem of “dual pressure”. In particular, there is a need to adjust the rights and interests in economic law to effectively allocate powers, rights, obliga­ tions, and duties in order to release the “dual pressure” and to treat all economic participants in a fair way. On one hand, from the perspective of rights, “dual pressure” is related to sub­ jects’ rights to subsistence and to development including many specific rights and powers of economic subjects (Shouwen Zhang 2012).14 For example, to release fiscal pressure, we need to focus on the distribution and exercise of fiscal power, distribute the right of fiscal revenue and of fiscal expenditure in a reasonable way, and build a more efficient fiscal and tax system under the current tax sharing sys­ tem,15 in order to better maintain the survival and development of individuals. For example, to ease the pressure of people’s livelihood, the government should pay attention to the distribution and exercise of national rights such as employment rights, competition rights, management rights, and income distribution rights, given that such rights affect the realization of basic rights such as the right of subsistence and the right of development. On the other hand, from the perspective of obligations, fiscal pressure is directly related to the obligation of fiscal expenditure (or expenditure duty).16 Generally, the higher the obligation of fiscal expenditure is, the higher the fiscal expendi­ ture amount is, and the heavier the fiscal pressure the government will shoulder. In accordance with the Balance Principle, government financial expenditure is largely restricted by its fiscal revenue. If the revenue scale is restricted but the expenditure continues to be high, the government will be faced with high fiscal pressure. In general, the more “rigid expenditure” is, the higher the resulting pres­ sure on expenditure.17 People’s living pressure is directly related to their expenditure obligations. If the expenditure obligations are overburdened, people’s living pressure will esca­ late. In fact, the “three highs” – high tax, high price, and high fee – are making people’s obligations heavier than before, thus leading to higher pressure on peo­ ple’s livelihood. In addition, even if the price is comparatively high, people’s pres­ sure will still be reduced under full employment and higher income. Therefore, people’s insufficient income has been the main reason for their living pressure. In China, the high living pressure is largely due to the relatively slow growth of their incomes and the relatively declining affordability. In conclusion, there are direct connections between dual pressure and the dis­ tribution of rights and obligations in the laws, especially in economic law. To ease or release the pressure above, we must effectively allocate the rights and powers concerning fiscal revenue and fiscal expenditure, and rationally allocate the rights and powers concerning taxation and pricing – thus fully protecting taxpayers, workers, consumers, and other subjects. Besides, we must effectively apply each right of macro-regulation and market regulation, making the right and obligation

22

Distribution pressure and differences

structure of each economic law subject more reasonable, effectively lowering the social cost and reducing the burden on each citizen. To do this, it is necessary to clarify the direction of economic law with a view to easing “dual pressure”. 2.1.4 The best direction for releasing distribution pressure Distribution pressure is of great importance in economic and social development and its resolution requires comprehensive adjustments on various laws. Economic law works well in alleviating distribution pressure, protecting basic human rights, and safeguarding national interests, public interests and private interests. Therefore, it is necessary to explore the specific path that eases “dual pressure” from the perspective of economic law. The separation of two rights – the national financial right and the right to pri­ vate property – is the framework of economic constitution. A country must care about its national economy and people’s livelihood, to legitimately protect the national financial right and the right to private property and to safeguard equilib­ rium, thus alleviating the dual pressure in a better way. If the two rights above are restricted, the fiscal or living pressure will increase. Therefore, economic law aims to facilitate the balanced protection of the two rights. More specifically,economic law has different arrangements in the structure of rights and duties based on the conditions of dual pressure, which directly or indirectly influence the rights and interests of various subjects, and thus ease or eradicate all kinds of distribution pressure. In terms of fiscal pressure, an important problem must be considered in making specific regulations through economic law. That is, how to obtain fiscal income, balance revenue and expenditure, prevent the sovereign debt crisis, address the fiscal risks, and solve the financial crisis. Fiscal revenue relies on economic devel­ opment. Economic development requires economic law to promote and safe­ guard. Therefore, all branches of economic law are directly or indirectly affecting the public economy of a country, and the national fiscal revenue, which is helpful in the alleviation of fiscal pressure. For example, adjustments of fiscal and taxation structures have a direct effect on alleviating financial pressure, especially on the distribution of fiscal revenue. In China, the establishment and practice of tax-sharing reform have continued to increase government revenue since 1994. The favourable allocation of the right to tax income, as well as territorial arrangements on non-tax revenue such as the right to derive benefits from the land, were applied in this process.18 However, fiscal pressure was further aggravated with the slowdown of economic growth in recent years, the sharp drop in land revenue, the increase in people’s livelihood pressure, and the expansion in tax-reduction fields. In order to solve the pres­ sure, we not only need to properly modify fiscal and taxation structure, rationalize income distribution, estimate local financial revenue capacity to adjust transfer­ ring payments in practice, but also coordinate financial law, industrial law, price law, competition law, and other economic law in theory. Moreover, based on constitutional law and administrative law, governments should further transform

Distribution pressure and differences 23 their roles, reduce their fiscal expenditure in an all-round way and, as Guan Zhong argued,19 thereby achieving the goal of “making the fiscal expenditure necessary”. One the other hand, various sectorial laws of economic law, including the fiscal and tax laws, are especially helpful in protecting citizens’ property rights, com­ petition rights, income rights, and rights of subsistence and development that are beneficial to alleviating the living pressure of individuals. For example, financial law can help to maintain the monetary value and price at a stable level, as well as the financial order and financial security, which will protect national income dis­ tribution rights or national property rights. Additionally, competition law ensures the fairness and legitimacy of competition, as well as safeguarding the order, effi­ ciency, fairness, and security of the market. Different types of enterprises, such as small- and micro-sized enterprises, and private enterprises could thus enter into the market under fair competition. At the same time, it plays an important role in influencing people’s employment, income, and distribution, as well as their whole livelihood. In short, all kinds of specific economic law can directly create or ease people’s living pressure. In addition to above-mentioned specific paths, coordination at macro-level should be strengthened to achieve the win-win result, considering the internal tie between two kinds of dual pressure. In fact, the alleviation of people’s living pressure can help to solve the fiscal issues in a better way. As Laffer Curve has revealed,20 if we only focus on fiscal revenue and ignore the burden of the people, then dual pressure will greatly rise. Therefore, we should consider economic law as the constitution of the economy and truly implement its provisions as well as promote the comprehensive regulation of each type of economic regulation, and alleviate the dual pressure in an all-around way, to promote the good performance and the coordinated development of the economy and society. Comprehensive regulation of economic law requires a balanced implementa­ tion in light of the specific features of different branches in the economic law system. For example, both fiscal and tax law are of great importance to allevi­ ate fiscal pressure and people’s living pressure. Therefore, the two laws should be implemented in parallel. Financial law is related to the stability of monetary value, and the exact interest rate and exchange rate, which directly affect people’s property rights. For this reason, financial law tends to alleviate the pressure on people’s livelihood. Similarly, competition law helps to regulate the monopoly and unfair competition acts, protect the rights and interests of consumers, which could effectively alleviate people’s living pressure. Comprehensive regulations among the laws above could not only be helpful to release the “dual pressure”, but also facilitate the development of economic law itself. 2.1.5 Conclusion This chapter proposes that the concept of “dual pressure” as the expression of the major important distribution issues in reality. It claims that dual pressure not only exists objectively but is also internally related to the regulation of economic law. The causes of “dual pressure” have been analyzed in terms of rights and

24

Distribution pressure and differences

obligations, and the paths of economic law proposed to alleviate the pressure have been discussed. The chapter highlighted the great importance of economic law to the alleviation of dual pressure. Based on that, it is necessary to further refine and extend the focus to the following aspects. Firstly, systematic research should be conducted into dual pressure and the legal paths for its alleviation. In fact, the public economic system and the private economic system are both important parts of the national economic system as both of them are faced with fiscal pressure and people’s living pressure. The legal system, as the important framework that influences the existence and external environment of the two economic systems, is extremely helpful in solving the pressure and issues of the economic system. Above all, the system of economic law can play a more direct and important role in alleviating the dual pressure of the economic system. Secondly, dual pressure directly affects economic growth, social develop­ ment, and political stability. For modern rule-of-law countries, legal measures should be applied to alleviate dual pressure. Dual pressure, and its internal rela­ tionship with economic law regulation, not only promotes the establishment and development of economic law but also becomes the major issue under the frame­ work of economic law regulation. The structure of the right and obligation in economic law helps to analyze the causes of “dual pressure”. At the same time, economic law can effectively allocate the rights, powers, and related obligations of the legal subjects. This is precisely the mechanism through which economic law alleviates the “dual pressures”. In addition, comprehensive regulation at a macro-level should be applied to discover the internal relationships among the specific paths, which is helpful in building the whole function of economic law system. Thirdly, the thought on dual pressure is related to the research on the value, establishment, foundation, motivation of economic law. We see that “dual pres­ sure” has been an important impetus of the establishment and in the development of economic law, just like the transformation from pressure to motivation. The motivation of the economic law system could thus be explained. At the same time, the system construction of economic law should give a proactive reply to the major practical issue on how to alleviate the dual pressure, which is an important reflection of the responsiveness of economic law (Pusheng Liu 1999).21 Fourthly, under the prevalence of dual pressure, we must pay special atten­ tion to the tensions and interactions between these two kinds of dual pressure – especially the “two types of distribution”, namely the state financial distribution and the individual interests distribution22 – under the framework of “separation of powers and rights”, so as to improve state revenue and individual income and provide sustained economic supports to relieve dual pressure. At the same time, we should enhance the legalization of economic law so as to provide a long-term regulatory framework for the sustainable development of the country and its peo­ ple, to truly establish sound interaction of “giving and taking” between the nation and its people, and to ensure the full and permanent alleviation of dual pressure.

Distribution pressure and differences 25 In conclusion, dual pressure, as one of the most vital and realistic problems prevailing in China and other countries, are important causes of distribution risks and distribution crises. Thus, this book explores the solutions to financial risks and crises resulting from financial pressure and, in the later chapters, distribution gaps and risks resulting from people’s living pressure.

2.2 Laws and regulations on financial crises As mentioned above, fiscal pressure leads to distribution risks and distribution crises. Because finance is crucial to a country’s economy, governments spare no efforts to explore how to guarantee a prosperous source of increasing revenue, prevent fiscal crises and “cyclical disorder”,23 thus achieving lasting peace and stability. However, limited by traditional research paths and a host of other reasons, law experts fail to pay sufficient attention to many legal issues related to the crises of financial distribution.24 In addition, research on such issues is relatively rare. Considering that the legal regulations are related to the emergence and settlement of fiscal distribution crises, the following chapters will focus on legal regulations of the fiscal distribution crisis. First, the chapter summarizes the consensus on the issues of financial risks and financial crises, then discusses the main legal reasons that cause financial risks and financial crises, and finally provides correspondingly legal solutions. 2.2.1   Financial risks and financial crises in reality Since the global financial crisis broke out in 2008, some countries have been faced with huge fiscal deficits and debt crises. Debt risks or financial crises caused by fiscal deficits have received much attention in recent years. Debt crises or financial crises have broken out in Iceland, Greece, Italy, Portugal, Spain, and Cyprus, and the bond ceiling in the United States or the “fiscal cliff” have led to public panic. Given the huge impact on the national economy brought by the problems above on – social development and political stability, for example – many countries have not only taken a great number of measures in the economic field, but also strengthened relevant economic legislations, or stipulated special treaties so as to solve the deficit problems, prevent financial crises and ensure the robust develop­ ment of economy and society. For example, in order to solve their long-lasting deficit problems, the United States passed the “Gram-Rutman-Hollins Act” in 1985 for the purpose of eliminating the federal budget deficit by 1991.25 Similarly, in order to resolve their fiscal deficits, members of the European Union signed the “Stability and Growth Pact”, requiring all deficits to be maintained within 3% of GDP so as to avoid high deficits which can endanger steady economic growth.26 As countries have become increasingly clear about the limited positive and huge negative effects of “deficit finance”, they have applied both economic measures and legal measures to avoid the financial crisis.

26

Distribution pressure and differences

In China’s case, since the reform and “opening” policy, the discussions on such issues as fiscal pressure, fiscal risks, and financial crises have continued. Some people think that the implementation of the reform and opening is due to a demand to ease fiscal pressure, and the implementation of a market economy, as well as the massive reform in fiscal and taxation systems, is, in fact, targeted at easing the tremendous financial pressure. Especially in recent years, in order to ease the financial crises and solve problems such as deflation and insufficient domestic demand, the government has adopted “proactive” or “expansionary” fiscal policies which have led to a sharp increase in fiscal expenditure, fiscal def­ icit, and treasury bonds. People will examine the scale and structure of treasury bonds to judge whether a fiscal crisis will be triggered. Usually, the indicators of debt dependence, debt-service ratio, the national debt burden ratio, and the share of fiscal deficits in GDP are used to evaluate a country’s financial conditions. Changes and trends of these indicators can clearly reflect the national fiscal per­ formance. However, different studies formed different views such as pessimism, optimism, and neutrality, which could not come to a collective consensus.27 The fiscal risks depend largely on the volume of government debts and its capacity to pay off. If government debt is too high, the possibility of a finan­ cial crisis will be higher. For example, in the early years of the 21st century, China’s fiscal deficit remained at a high level, with hundreds of billions each year. After the global financial crisis in 2008, China’s deficit volume has been further increased28 and that is just the amount of state debts shouldered by the govern­ ment. Some scholars use this data as a basis for calculating indicators such as debt dependency and the national debt burden rate. In addition to using the volume of treasury bonds to measure government debts, scholars have applied some other measures. For example, government debts are divided into four categories: explicit debts, implicit debts, direct debts, and con­ tingent debts.29 Therefore, the treasury bond noted above is only a kind of explicit debt or direct debt. From a different perspective, the debt burden will be even heavier. For example, the debts caused by state-owned enterprises, social secu­ rity, non-performing assets of banks, large amounts of arrear wage, and expendi­ tures on public health (e.g. “SARS prevention and control” in 2003 and “bird flu prevention and control” in 2013) were mainly shouldered by the government. The “real debts” of a government are important factors that lead to financial crises. In this way, fiscal crises deserve more attention than financial crises, as financial crises are likely to be transferred into fiscal crisis, whose bill will eventually be “paid” by the government. At this point, no matter how to determine the indicators that affect fiscal risks or financial crises, or how to calculate the government’s debts, it is clear that China’s debt burden is quite heavy, which is a reflection of a potential financial crisis. This also leads to a series of legal issues that need to be studied, such as whether it is reasonable and legitimate for governments to continuously increase the fiscal deficit and issue additional treasury bonds, whether it complies with the rule of law and the spirit of constitutional government, and whether there will be

Distribution pressure and differences 27 a “fiscal illusion”and an impact on “inter-generational equity”30 etc. To answer these questions, we need to explore the legal reasons for the fiscal crisis. 2.2.2   The legal causes of fiscal risks or fiscal crises Owing to the remarkable contribution by Musgrave, master of finance and tax studies, public finance has been regarded as the “public economy”. And “public economy”, literally as an economy, also requires its management. Without precise management, losses or even bankruptcy will occur. Any carelessness in this regard has the poten­ tial to cause fiscal crises to break out. For these fiscal crises, we tend to be more concerned about the economic causes. Sometimes we even explore the causes from political and historical traditions, social and cultural roots, instead of law. Traditional legal scholars cannot easily focus on fiscal issues, as they are typi­ cally restricted by their major. However, public finance itself could reflect the modern spirit of rule-of-law. In history, without fiscal crises, fiscal decentraliza­ tion, and specific institutional arrangements, there wouldn’t be a modern constitu­ tion, a real separation between parliament and government, or constitutionalism characterized by effective power separation.31 Thus, a fiscal crisis, as an extreme state of fiscal operation, and as a critical situation that a government must face, is closely linked with constitutional law and constitutionalism.32 In fact, fiscal issues are also constitutional issues because there is a direct con­ nection between fiscal issues and the exercise of public power as well as the pro­ tection of the fundamental rights of the people. The essence of the constitution is power sharing, namely, the separation of powers between the state and the people and among state bodies. Financial power, namely the right or power to occupy or distribute social wealth, has long been the core of power sharing. Under the whole system of financial power, based on the demand to provide the public with goods, the government holds the financial power, including the right to fiscal revenue and the right to fiscal expenditure, while citizens have a basic property right. In order to effectively protect the government’s financial power and the citizens’ property rights, it is imperative to follow the principle of legality, which means that the right and power should be expressly stipulated in the constitution, as the foundation of constitutionalism. At the same time, specific provisions on the pro­ tection of fiscal and property rights should also be stipulated in relevant laws so as to effectively balance the conflict between the state fiscal power and individual property rights. All of them should be followed in the specific legislation of the relevant fiscal, tax, and civil laws. The above-mentioned legal spirit is actually a reflection of “the rule of law principle” as well as on the spirit of constitutionalism, which balances the inter­ ests of all kinds of subjects and achieves their sound interactions through effective and legitimate power sharing. Failure to carry out this agenda effectively not only damages national property rights but also jeopardizes fiscal power – even leading to financial crises. In reality, the specific legal causes of fiscal risks or fiscal crises may be divided into the following aspects.

28

Distribution pressure and differences

2.2.2.1 The ineffectiveness of budget law The Constitution of the People’s Republic of China was formed and developed with a very nuanced background, and weakness in the economy. Therefore, stipu­ lations about the budget are limited.33 Such limitation should be made up by the budget law. However, China’s budget law system is similarly vague and in poor operability. As a result, the management of most fiscal revenue activities is out­ side of the control of the budget law, thus seriously affecting the authority of the budget law. In short, the budget law has failed to work for a long time and it requires reconstruction or restructuring.34 Originally, as the constitutions of many countries stipulate,35 a country’s fiscal revenue and expenditure should be counted in the budget according to jurispru­ dence, and this should be reflected in specific budget laws. However, in China, this principle has never materialized. As a result, there are the so-called “extra­ budgetary funds”, in addition to the “budget funds”, and even illegal “funds outside the system” in addition to the “extra-budgetary funds”. This causes dis­ tribution disorder and illegality and also leads to an ever-expanding deficit, and fiscal and financial risks and crises. In addition, the financial balance of payments is the basic principle of budget laws in all countries,36 as stipulated within many constitutions around the world. In theory, if such balance could be achieved, there would be neither a large num­ ber of deficits nor fiscal crises. However, in practice, there are circumstances that a country’s budget law lacks enforceability and is even ignored in reality. As a result, the principle of “balance of payment” is difficult to implement, which has been a key reason for fiscal crises. On the issue of balance of payments, the opinions of economists are as change­ able as the economic life, which clashes with the stability of the law. During the period of Keynesianism, many economists promoted “deficit economies” by sup­ porting the deficit fiscal policy.37 Even when advocating fiscal balance, they often emphasized “cyclical balance”, rather than annual balance.38 If these claims were adopted and then applied into specific budgetary activities, large deficits would occur that would trigger the financial crises. Divergence from the principle of budgetary balance will lead to high deficits and potential financial crises. This is also an important reason why many countries at present are in the situation of “deficit expansion”. As a result, many countries have abandoned the mere “deficit fiscal policy” and begun to adopt the principle of balance of payments. Meanwhile, reducing the deficit and preventing fiscal risks and fiscal crises, have become the new tar­ gets. In addition, deficit scale is influenced by economic and social changes, legal adjustments,39 and changes in a cyclical pattern which, first, increases and then decreases like an inverted U curve. As this phenomenon still needs to be tested in the future, this book has named the trend as the “Inverted U Hypothesis”.40 Similar to the “Inverted-U Hypothesis” proposed by the famous economist Kuznets on income distribution (Piketty 2015),41 our Inverted U Hypothesis shows that when deficit reaches a certain scale, it drops because of the pressure to solve

Distribution pressure and differences 29 financial crises or the pressure of legitimacy, even for the collapse of the economy, change of government, etc. This means the increasing deficit scale also has its limit. The “inverted U” curve, similar to the sinusoidal or wavy line (either broken or not), remains generally balanced. This means that, in reality, it is a case of the balance of payments. It is only by achieving this balance that the financial crisis can be resolved. Of course, managing the public economy of a country is very complicated. In practice, the balanced budget is hardly achieved. The budget law also stipulates the circumstances in which the deficit is allowed with strict restrictions. However, the implementation of budget law is not strict enough. The expansion of deficits occurs when additional expenditures are permitted. So, the questions are: why is the additional expenditure permitted? Why does the expenditure generally exceed the revenue? Why does the government always fail to make ends meet? Why does it take one year to evaluate the “one-year budget”? Do all kinds of govern­ ment investment and spending (especially on economic construction) benefit the taxpayers and provide public goods for the community? If not, is the additional expenditure and the fiscal deficit lawful? All these issues are worth studying. In fact, if the government cannot implement the budget law seriously and just focuses on the short-term policy regulation, instead of long-term consideration for the sake of stable expectation, financial risk or financial crisis is unavoidable. It is by fully implementing the budget law, and truly following the principle of “statu­ tory budget”, that excessive expenditures, fiscal deficits, and crises can be avoided and the balance of payments can become reality. As for China, in the past, the above-mentioned “extra-budgetary funds” and “funds outside the system” have generally shown their divergence of the budget law, thus increasing the possibility of fiscal risks and crises. Besides, there are other problems that violate the principle of fiscal balance including the non-legalization of the tax-sharing system,42 the loose exercise of treasury receipt and payment regula­ tions,43 the loss caused by the arbitrary collection of budget revenues,44 and the out­ of-control or even illegal expenses manipulated by the chief executives. All of these factors lead to the budget law failing to work and leading to fiscal crises. Previous research focused more on how the distribution of powers and rights would ultimately influence the interests and benefits in economy. However, from the point of public law, we should also consider how to limit the power of dis­ tribution in fiscal budget, fiscal revenue and expenditures. In the era when we are strengthening the “market economy”, “the tax state”, and “the budget state” (Shaoguang Wang 2007),45 it can be helpful for the government to change their role and supply public goods through tax revenue. Therefore, adjustments of power distribution, as well as other institutional arrangements, are of great sig­ nificance in solving deficit issues and financial crises, to name but a few. 2.2.2.2 Vacancy of treasury bond law The financial crises, directly shown as a large number of explicit or implicit deficits, are usually compensated by issuing treasury bonds, issuing additional

30

Distribution pressure and differences

currency, increasing tax revenue, etc. Among these, the least harmful and the most common one is to issue treasury bonds, which is guaranteed by the national credit. Moreover, they are, in nature, “public”, which means they should be regu­ lated by public law. Thus, their amount, structure, interest rate, and repayment must strictly comply with the law, or namely, the issuance of treasury bonds must be ruled by the law. However, the current legislation regarding treasury bonds in China is still rather insufficient. Even though it has been included in the legislative planning several times, all endeavours have ended up with failures. Thus, there is still no specific “Treasury Bond Law” that can provide a systematicstipulation for rel­ evant basic issues. At present, except for some limited and simple administra­ tive regulations46 on administrative treasury bills, abundant regulations related to treasury bonds are issued through the documents separately or jointly, by the Ministry of Finance, the State Taxation Administration, the People’s Bank Of China, the National Development and Reform Commission, the Securities Regulatory Commission, and other agencies. The overall treasury bond law is still in the blank condition. In spite of the sporadic provisions on treasury bonds in the budget law and other laws,47 the unsystematic and uncoordinated provisions increase the possibility of fiscal risks and crises. Furthermore, only some basic regulations are reflected in the budget law. For example, with regard to the legal basis of issuing government bonds, the budget law before 2015 enhanced the central government’s public budget, and local budgets at all levels should be prepared in accordance with the principle of balance of payments. At the same time, the deficit was not listed in the public budget of the central government and local governments. This means, in theory at least, that there are no deficits and thus no need to compensate for the deficit by issuing treasury bonds. Accordingly, issues such as deficit, treasury bonds, and fiscal crises shouldn’t happen. Otherwise, it is easy to know that the rules of the budget law weren’t implemented as planned. In fact, deficits exist not only in central government but in many local govern­ ments too, and on a huge scale. For example, according to the statistics of the National Audit Office, although local governments at all levels had no power to issue government bonds before 2015 based on the budget law, the debts of local government had come to more than RMB10 trillion.48 Making up for these fiscal deficits has been the priority of governments at all levels, and is also the key to easing the fiscal crises of different levels of governments. According to the budget law before 2015, domestic and foreign debts can only be permitted for funding the gap caused by the construction necessary for the central government. It is only when the central government lacks the money for necessary construction can debts at home and abroad be permitted. Even more so, the amount and the structure of debts need to be reasonable.49 Regulations on the exact reasonable scale and structure are nonexistent, which leads to different views by scholars on issues like debt dependence, etc. To solve these important issues – which may otherwise lead to financial crises – we should not only focus on the debates around theory among scholars but also enact and implement the

Distribution pressure and differences 31 “treasury bond law” which will combine the experiences of other countries with China’s reality in relation to economic law. In theory, the amount and structure of treasury bonds should be regulated by the treasury bond law. Without a specialized treasury bond law at present, the congresses of the people at all levels and their standing committees should, in accordance with the budget law, strengthen budget supervision to prevent govern­ ment departments from increasing their borrowing through non-standard “budget adjustments”, exercise the power of change or withdrawal, and hold those who violate the law accountable.50 However, without a specialized law for treasury bonds to fully and clearly stipulate their amount and structure, supervision by the power organs lacks direct legal basis. This also encourages the over the issuance of treasury bonds, which, to a certain extent, will inevitably increase the possibility of fiscal risks or fiscal crises. 2.2.2.3 The insufficient enforceability of the tax law Generally speaking, among the various financial crises related to laws, the num­ ber of tax laws and regulations is the largest. On the one hand, the principle of statutory taxation has led to “one tax, one law” which means all types of taxes, in practice, have a legal basis. On the other hand, the principle of legal reservation and parliamentary reservation that follow the principle of statutory taxation, are not fully implemented, so a large amount of tax legislation belongs to regulations, instead of the “law”, and the level of tax legislation is relatively low. As a result, non-compliance in law enforcement is prominent, and the implementation of tax doesn’t strictly follow the existing laws and regulations. Therefore, the tax law’s enforceability is obviously insufficient. The insufficient enforceability of tax law is mainly shown as “over-levying” (such as various “over-tax”) and “inadequate-levying” including waiving by the government, the levying power out of private relationships (such as the so-called “Renqing tax”), or failing to levy in practice. The “underground economy” and the prevalence of tax evasion inevitably lead to the massive loss of state revenue, thereby reducing a country’s fiscal expenditure capacity and increasing the pos­ sibility of a financial crisis. The weak enforceability of China’s tax law is mainly derived from the exces­ sive provisions of tax preference.51 A large number of preferential tax treatments and a larger number of tax concessions in practice that exceed the requirements of the tax law have made huge “expenditures of tax” on a large scale, thereby reduc­ ing the fiscal revenue, increasing the fiscal deficit, and leading to the possibility of financial crises. On top of this, the weak enforcement of China’s tax law is also connected with the illegal changes of the statutory tax elements made by some state organs. For example, statutory tax rates, tax breaks, and even taxpayers may face adjust­ ments without legislative procedures, which would negatively affect the stable fiscal revenue.

32

Distribution pressure and differences

In a word, some of the most important reasons that account for the weak enforceability of China’s tax law include the low tax legislative level, the viola­ tions of “legislation law”, and the principle of statutory tax, as well as the illegal exercise of relevant provisions. Therefore, it is of great importance to follow the principle of “statutory tax revenue”, raise the overall legislative level, and exer­ cise relevant powers legally, so as to prevent fiscal risks. The legal reasons for potential fiscal crises are actually manifold, but the above-mentioned discussion focuses on the budget, treasury bonds, and taxa­ tion that are closely related to the financial crises. It is not difficult to find that issues pertaining to legislation and enforcement in these fields can directly affect the state’s fiscal conditions. If these problems cannot be resolved properly, there would be financial crises even with a booming economy. In general, economic development is only a basis for resolving financial crises, but it can’t necessarily and automatically eliminate the financial crisis. In fact, in recent years, even with a roaring economic growth, China has also faced serious deficits and an increas­ ing amount and scale of government bonds. Therefore, to solve financial crises, we should conduct research not only from the perspective of economics but also from the perspective of legal studies. To reach this goal, we will further explore its causes on a constitutional level in addition to the above-mentioned specific legal reasons for the financial crises. 2.2.3 Further exploration of legal causes: the absence of relevant constitutional provisions The absence of relevant constitutional provisions has been implicitly involved in the exploration of legal and fiscal causes. After all, fiscal power and prop­ erty rights are vital to both the country itself and its people. For the country, “no finance, no policy”; for the people, “no property, no heart”. Therefore, fiscal power and property rights, as the basic power of the state and the basic rights of the people, should be clearly defined and protected in the constitution. Only in this way can the state effectively provide public goods for society and guarantee people’s rights of substance and development. This is also an important institu­ tional arrangement for safeguarding the country’s prosperity and progress (North 1999).52 Budget law, treasury bond law, and tax law above all aim to safeguard the country’s fiscal power based on its constitution. The constitution includes not only the division of fiscal power and property rights between the nation and its citizens but also the division of fiscal powers among the relevant state organs. In fact, there are multiple and detailed provisions concerning the budget, taxation, government bonds, and so forth, in the constitutions of many countries. These are constitutional arrangements of fiscal power. Such provisions not only provide important constitutional bases for enacting the relevant laws or regulations in the future, but they are also, to some extent, enforceable. However, the relevant provisions in the Constitution of PRC are relatively vague. The direct provisions with regard to the “budget” are insufficient. The

Distribution pressure and differences 33 provisions mainly clarify the budget approval power of the legislatures at all lev­ els, as well as the budget-drafting power owned by the state administrative organs. With respect to taxation, only article 56 directly stipulates “tax revenue”. That is, “Citizens of the People’s Republic of China have the obligation to pay taxes in accordance with the law”. For government bonds, there is even no stipulation at all. It is obvious that there is a deficiency of provisions on the financial budget, taxation, and treasury bonds in the constitution, which not only limits relevant legislation but also creates a dangerous legal vacuum. In conclusion, the causes of fiscal crises include the deficiency of specific pro­ visions including budget law, tax law, and bond law, and the absence of relevant provisions in the constitution. As a matter of fact, the lack of specific laws is partly rooted in the absence of relevant provisions in the constitution. The essence of the constitution lies in the “decentralization” and “limitation” of powers including fiscal power so as to settle disputes – this is the same case as fiscal power. If the fiscal power cannot be effectively distributed, financial order will be disordered, leading to fiscal crises. Despite the stipulation on power shar­ ing in China’s constitution, the possibility of financial crises still exists because they are neither comprehensive nor concrete. Thus, we should figure out solutions according to different situations. Deficiencies in the constitution need to be compensated by legislation. For those stipulated in the constitution, they should be effectively implemented in order to avoid and dissolve the fiscal risks and fiscal crises. Accordingly, the existing problems and their solution will be briefly discussed as follows. 2.2.3.1 The deficiency of the relevant constitutional provisions and potential solutions The Constitution of PRC has its weaknesses. First, the provisions are still insuf­ ficient in the constitution, which has been restricted by many historic factors. In recent years, China has approved several constitutional amendments to make improvements. Despite this, in terms of the distribution of fiscal power, further amendments are needed. Constitutional revisions should reflect the character of an era, particularly the common sense of decentralization on an international level, which is a reflection of the basic institutional civilization. In the era of globalization, constitutions tend to be more economic, and China’s constitution still has far to go in this aspect.53 The provisions about public economy stipulated in the constitution are directly related to basic civil rights, thus in connection with other constitutional provi­ sions. For instance, the protection of public powers and private rights has been an important issue. In fact, a constitution is also built on the dual structure of public rights and private rights (Shouwen Zhang 2001),54 which is also the foundation for cultivating the spirit of the rule of law or constitutionalism. Under the framework of “dual structure”, fiscal power, as an important part of state sovereignty, is typically a public power whose establishment and exercise must obey a series of statutory principles, including the statutory budget, statutory

34

Distribution pressure and differences

government bonds, and statutory taxes. Accordingly, these principles should be reflected in the process of constitutional revision. They are not only the key prin­ ciples for protecting the state fiscal power but also a shield for citizens’ property rights. Therefore, the principle of “parliamentary reservation” and the principle of “legal reservation” must be effectively set up and implemented so as to effec­ tively meet the requirements of the Law on Legislation of the People’s Republic of China (Shouwen Zhang 2003).55 The effective allocation of fiscal power requires specialized sectors of law enforcement and legislature. For instance, each type of budget power – such as the approval power, supervision power, and drafting power, the enforcement power – should be effectively distributed between the parliament and the government. In terms of taxation, the legislative power, imposing power, and access privi­ lege should be clearly distributed between the legislative organs and law enforce­ ment organs. Therefore, only by stipulating abundant provisions related to public finance, clarifying the power distribution among budget, taxation, and treasury bonds, can we make our constitution comprehensive. 2.2.3.2 The weak enforcement of the relevant constitutional provisions and the corresponding adjustments The weakness of the constitution not only refers to the absence but also the weak enforcement of the current stipulations. Weak enforcement has led to issues such as deficits, debts, or fiscal crises. For example, the constitution stipulates that peo­ ple’s congresses at all levels have the power to supervise all kinds of state organs and that people’s congresses, at all levels, should be accountable to the people and supervised by the people so as to embody the basic spirit of “all power belongs to the people”.56 Of course, people’s congresses at all levels have made great efforts to exercise the supervision power in accordance with the constitution. However, in practice, the supervision of public finance is still inadequate. For example, there is already a special financial commission and budget committee in the NPC, but the supervision of budget expenditures and other expenses cannot be conducted effectively. As a result, the supervision power cannot be effectively exercised, budget expenditure lacks effective supervision and restriction, and the deficit scale continues to increase. Whether the supervision power belongs to the National People’s Congress or the people, it is empowered by the constitution. One of the important reasons why such power cannot be sufficiently enforced is that the Constitution of PRC does not have its stipulation and protection to safeguard the citizen’s “right to know”. In fact, the complete citizen’s right to know is the precondition needed to exercise supervision power. The right to know is an important information right. If people or their representatives lack the necessary understanding of the exact revenue and expenditure of finance, effective supervision will be difficult to implement. Therefore, we must thoroughly implement the related power or right. To fulfil the supervision power of People’s Congress, reforms should be made to the budget drafting and approval system. The supervision of fiscal expenditure,

Distribution pressure and differences 35 such as government procurement and transfer payment, should be strengthened. High waste led by “jerry-built projects” and “three public consumptions” should be prevented. Only by the continuous supervision, effective protection of taxpayers’ rights, and solving the continuously high expenditure, deficit, and debt scale, can the government strengthen its capacity over rule-of-law, thus prevent­ ing a fiscal crisis. To fulfil the supervision power of the people, the citizen’s right to know should be truly given to the people. The citizen’s right to know itself is an important right of the taxpayers. It is also a citizen’s right in accordance with the constitu­ tion. Therefore, taxpayers should have the right to know the basis of taxation and where the money goes, and whether the government has provided the correspond­ ing goods. Taxpayers have the right to know about the debts of their government, whether there is the potential for a fiscal crisis, etc. Based on that, evaluation of the budget, taxation, and debts of the government could be conducted so that the supervision power in the constitution could be fulfilled. If the people cannot fully exercise their right to know and understand the usage of taxes, they may have a reasonable doubt on the legality of the taxation, expenditure, and debts of the government. Such acts will further deteriorate the fiscal conditions, even form a vicious cycle and, finally, trigger fiscal crises. The issues regarding budget law and the law of treasury bond that lead to fiscal risk or fiscal crises can also be attributed to weaknesses in the constitution, which is the institutional reason for these problems. Therefore, we should expand on the short sections in the constitution and make the current provisions fully clear, so as to better solve fiscal crises with the framework of the rule-of-law. 2.2.4 Fiscal decentralization should be implemented through the specific legislations Effective decentralization should be made in specific fiscal legislation to restrict power, thus solving fiscal risks and fiscal crises. As a result, Nash equilibrium could be achieved among different subjects and disputes could thus be alleviated. Fiscal decentralization is of great importance for all countries. Fiscal decen­ tralization is required to clarify the scope and function of the government. Specifically, a clear line should be drawn between country and people, and gov­ ernment and market, in order to give basic rights back to the citizens. Issues that citizens can deal with should be solved by citizens, not by governments. In fact, the core function of a government is still the supply of public goods. If the gov­ ernment could truly transfer its function –from an “omnipotent government” to a “limited government” to shoulder the limited responsibility – then the fiscal expenditure will significantly drop.57 Many deficits or debt issues may not happen if this were the case. Therefore, in order to truly avoid the negative impact illus­ trated by Wagner’s Law58 and Parkinson’s Law, it is necessary to separate powers through the constitution. Apart from decentralization under the above-mentioned “dual structure”, hori­ zontal and vertical fiscal decentralization within the government is also required.

36

Distribution pressure and differences

Horizontal decentralization mainly involves the division of fiscal power among state organs at the same level, especially the legislative power over finance and taxation, the power of budget examination and approval, and the rights of bond issuance. Vertical decentralization mainly involves the division of fiscal power among different levels of state departments, especially power over tax revenue. In fact, one of the key points concerning the relationship between the central government and the local government is the vertical division of fiscal power. It is only by adequately defining this division in the fiscal and taxation system, in accordance with the law, and limiting the exercise of powers, can the issues con­ cerning financial revenue and expenditure be better resolved. For example, it is necessary to allocate certain tax powers to local governments based on their needs and interests, especially proper legislative power and tax revenue power. In this way, local governments can be fully motivated to address their fiscal deficits and achieve better development. 2.2.5 Conclusion Fiscal deficits, public debts, and the resulting fiscal risks and crises have always been a focus of all countries. It is necessary for China to analyze its advantages and disadvantages from all angles and to take precautions. At present, although there are still controversies surrounding the specific numbers of deficit and debt (which can lead to fiscal crises), it is clear that expanding deficits and debts will undoubtedly increase the possibility of financial crisis. Based on this, it is essen­ tial to further explore the economic, social, legal, and other reasons that may trigger financial crises and put forward countermeasures. From a legal standpoint, the reasons that may trigger fiscal crises include not only the specific causes in the fiscal and taxation systems, such as the abstract budget law, the absence of a treasury bond law, and the weak enforceability of the tax law but also the deeprooted causes in the constitution – including its deficiencies and the weak exercise of provisions. An effective solution to avoid fiscal risk and crisis is the restriction of power after decentralization. Comprehensive considerations should be made on the inter­ ests of different parties so that each party can fully exercise their power or right.59 Binding institutions could be designed to alleviate the disagreements. Here, we not only see the power sharing but also the power restriction – not only freedom but also binding systems – which fully reflect the spirit of democracy and the rule of law, as well as the pursuit for legitimacy and legality. In addition, legislation and enforcement should be comprehensively created and implemented to facili­ tate a virtuous relation between giving and receiving. Under such virtuous interac­ tion, issues such as fiscal deficits, debt risks, and fiscal crises could be solved in essence, thus achieving peace and prosperity. Fiscal crises also exist in other countries with comprehensive legal systems. The fiscal crises that broke out in some EU counties and in the US are cases in point. Debt issues and deficit issues that broke out among those countries are also related to the legal causes mentioned above. Continuously reflecting

Distribution pressure and differences 37 and summarizing, as well as sustainably strengthening the rule of law construc­ tion – especially the rule of economic law – may help to break the cycle of the inevitable. With a rule of law background, efficient management of finance, taxation, and debt based on law could be conducted, thus formulating a wellperforming public economic order and the stable development of the country and the society.

2.3 Legal preventions from the risks of distribution difference In addition to fiscal risk and financial crises, people’s living pressure has become increasingly obvious, which is directly related to people’s income distribution. The related legal issue is also worth further research. In terms of people’s living pressure, the distribution gap is an issue. The high Gini Coefficient, wide distri­ bution gap, and weak capacity to allocate abundant national income combined lead to the risk of distribution difference, which also leads to distribution crises. Therefore, distribution differences should be taken seriously to decrease the dis­ tribution brought on by distribution risks. To achieve the objectives above, legal preventions must be strengthened, as well as the rule of economic law, in order to enhance the distribution capacity of national income, and alleviate people’s living pressure. 2.3.1   Introduction of distribution difference “It was the best of times, it was the worst of times”.60 There are various indica­ tors which can be used to evaluate the era, such as its political, economic, social, and legal performances. Usually, economic efficiency and social equality rely on the rapid growth of the economy and the coordinated development of society. The distribution of social income is an important tie connecting the economy and society. Income distribution is also an important criterion for evaluating the era. Income distribution is of great importance across different eras. The circulation of governance and turbulence in history, as well as social evolution, are related to income distribution. For example, the idea of “eliminating the gap between the rich and the poor”61 and the culture of “worrying about the unequal” stem from the distribution of wealth, the focus on people’s livelihood and national development, as well as fairness and equality. However, the unavoidable difference, in reality, will directly lead to the distribution difference. Unequal distribution will become the norm. The treatment of distribution difference will affect the development of economy and society.62 In the case of China’s modern development path, the whole process of the reform and “opening” revolves around distribution and adjustment (Shouwen Zhang 2009).63 In recent years, issues such as imbalanced distribution and une­ qual distribution have gathered increasing attention from society. Governments have been conscious that fairness and efficiency are both important, but without giving them any priority. Therefore, distribution difference should be taken seri­ ously under the reasonable range of control through different systems.

38

Distribution pressure and differences

Due to several factors, distribution difference is universal. The positive role of distribution difference shall be analyzed in an objective way while the nega­ tive impact, especially the potential risks and the ways to prevent them in law, require further studies. This chapter focuses on the rule of economic law over distribution difference. Based on analyzing the influential factors of distribution difference, the structural risk that is brought about by distribution risks will be proposed to reveal the internal connections between distribution difference and the rule of economic law. The necessity of the rule of economic law will also be strengthened. The possibility and related solution of the rule of economic law will be discussed, combining the unfairness led by distribution difference. During the discussion, the chapter tries to illustrate that in the long-term eco­ nomic restructuring, effective adjustments should be made to the distribution structure, in order to decrease the distribution difference and its negative impact. The positive impact of distribution difference should be applied in an appropriate way, so as to achieve distributed justice,64 and thus facilitate equal distribution and social stability. 2.3.2  The    key factors affecting distribution difference Distribution difference is ubiquitous. To solve the problems caused by distribu­ tion difference, there is a need to analyze the key factors leading to distribution difference. In general, there are mainly three factors: subjects, space, and time. Correspondingly, there are also three important dimensions for studying the dis­ tributional difference, namely, the subject dimension, the space dimension, and the time dimension. First, from the subject dimension, each type of subject – government, enter­ prises, individuals as well as others – differs a lot in terms of the capacity, right, power, and information of the distribution. For instance, countries differ a lot in their capacity to manage public finance systems. The percentage of fiscal revenue differs a lot too. Among enterprises, each entity has different profitability and capacities of distribution. Among individuals, the capacity to earn income and participate in social distribution differs a lot. The differences above formulate the landscape of income distribution. Therefore, it is necessary to analyze each type of difference and understand it. Nowadays, the most obvious distribution issue in China is individual income. The wide distribution gap is a case in point with an excessively high Gini Coefficient. According to official conservative statistics, the Gini Coefficient is over 0.47 (Yongjun Liu et al. 2009)65 from 2003 to 2013. This suggests that the distribution gap is fairly obvious and severe (Table 2.1, Figure 2.1). By further refining the above distribution gap, it is easy to notice that wealthy people, who make up a very limited proportion of the total population, possess most of the wealth in China (Piketty 2014).66 Additionally, there are huge distri­ bution disparities between urban and rural areas, among industries, and among various enterprises.

Distribution pressure and differences 39 Table 2.1 Gini Coefficient of China’s national income in the past decade Year

Gini Coefficient

2003 2004 2005 2006 2007 2008 2009 2010 2011

0.479 0.473 0.485 0.487 0.484 0.491 0.490 0.481 0.477

Source: The National Bureau of Statistics, January 20, 2014

0.492 0.49 0.488 0.486 0.484 0.482 0.48 0.478 0.476 0.474 0.472 2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Figure 2.1 Gini Coefficient of China (2003–2011)

Although the Gini Coefficient is important in evaluating the distribution gap, especially for intuitively depicting fairness among individual income distribu­ tion, it is necessary to introduce other “coefficients” including the proportion of government revenue, and corporate income in the entire social income. This is because these two coefficients can directly affect personal income and, therefore, should be considered when improving the system of personal income distribution. Second, from the dimension of space, distribution difference can be shown as geographical difference which is equally worthy of attention. For example, distri­ bution difference around the globe is the main difference between the North and the South. And in China, the distribution difference is the main difference between the East and the West. After all, the income distribution on average relies on economic

40

Distribution pressure and differences

development. Developed countries and areas have a higher income in general.

Such geographical difference requires special attention. In fact, W.A. Lewis, a US economist, has placed a special focus on the dual structure between urban and rural areas. In China, the difference between urban and rural areas exists whether in the eastern area, mid, or western areas. Generally speaking, urban residents have a higher income than rural residents. Despite different living costs and other costs, the PPP difference should be considered among different areas, to place it in line with the real income. As a matter of fact, the space dimension is exactly the exten­ sion and limitation of the subject dimension. The research on distribution differ­ ences from aspatial or geographic dimension provides readers with further clarity. Thirdly, in addition to the dimensions of subjects and of space, the dimension of time is also crucial. The difference in distribution time has a direct effect on relevant subjects. At different times, the real incomes of relevant entities may vary due to factors such as inflation or time value of currency. The same amount of money, allocated at different times, may have different effects on citizens. Thus, for fields like social security or capital return on markets over a long period, special attention should be paid to the time limits needed to make adjustments through the related designs on the system. From a macro perspective, the time difference of distribution also includes different regions at different times, during which different developing levels also underscore differences in distribution.67 Distribution, as well as people’s income in more developed regions, is generally higher than in less developed regions. For differences in development at this time and at this stage, China has already made adjustments and compensation through institutional arrangements including transferring payments and implementing export tax rebates.68 The subject differences, space differences, and time differences above directly lead to the distribution differences. Meanwhile, these three dimensions are closely connected with one another. For example, the distribution and income of subjects are influenced by the regions as well as the regions’ overall economic situations. Thus, the subjects’ differences in distribution can be significantly much clearer and comprehendible when space and time differences are taken into considera­ tion. For instance, there are significant distribution differences between public servants in the eastern and western regions. Similarly, for public servants, there are also clear distribution differences between the present and the future. These space and time differences are so universal that it is imperative to take them into account during the design of distribution systems.    difference and structural risks 2.3.3  Distribution The distribution differences above, in turn, lead to differentiated distributions, namely a distribution system characterized by distribution variations among differ­ ent subjects with regard to time, space, abilities, and so forth, which show as dif­ ferences in the distribution of opportunities with different results among subjects. Notably, differentiated distribution is different from “equal distribution” or “no differences in distribution”. Equal distribution is based on the assumption that all

Distribution pressure and differences 41 subjects are undifferentiated so that they can be distributed evenly and equally. This kind of distribution not only can’t guarantee fairness, but it additionally has the potential to sacrifice efficiency despite its fair appearance. On the contrary, the differentiated distribution cares more about efficiency and is more likely to realize substantive fairness. In a nutshell, efficiency and fairness are always at the core when it comes to distribution. Thus, it is necessary to strike a balance between efficiency and fairness and to pay more attention to fairness given its importance as well as the gravity of the existing situation. Similarly, compared to efficiency, fairness generally gains much more atten­ tion in the legal field. This is because moderate differences in distribution are tolerable, while large ones are deemed unreasonable and are likely to trigger ques­ tions from the public due to their dissatisfaction, thereby creating a “distribution risk” and even a “distribution crisis” likely to affect social stability, impede eco­ nomic development, and endanger the regime. In history, there have been many uprisings and revolutions resulting from distribution risks or crises. Moreover, history has shown that individual income distribution is vital for the stability of the entire distribution system. Only when the personal income gap is limited to a reasonable range can social security and long-term prosperity be ensured, and can turmoil and chaos be avoided. The key to fair distribution is the reduction of unreasonable distribution differences and the reduction of unreason­ able disparities in distribution that has a direct impact on basic human rights and dignity (Shouwen Zhang 2012)69 including the right of subsistence and develop­ ment, as well as the government’s legitimacy, control, and coercion. In addition, disparities in allocation can cause unfairness and create a variety of “structural risks” which need to be prevented and resolved based on specific conditions. In the overall distribution system, the proportions that various subjects and governments have accounted for can cause structural issues that not only have important economic and social significance but additionally have important politi­ cal and legal significance. As ancient Chinese philosophers noted in the classi­ cal work, Daxue (The Great Learning): keeping wealth in governments splits the people while keeping wealth in the people unites them. The high revenue of gov­ ernments and the low income of individuals can cause “structural risks” in distri­ bution which will ruin the foundation of the market economy and affect people’s livelihood and development. To boost people’s livelihood and development and increase public support of the government, it is necessary to cut down the share of fiscal revenue in GDP, or in overall social wealth, and to reduce the tax revenue70 as well as various non-tax burdens. All of them require the full implementation of robust economic law and regulations. In addition, with regard to the distribution system on individual income, the proportion of wealth held by different subjects can also lead to “structural risk”. With most of the wealth held by a few people,71 the majority have a limited share of the total wealth. This situation results in a high Gini Coefficient and it not only affects people’s living conditions but also their overall economic and social devel­ opment. To prevent the “structural risk” in a distribution system, it is fundamental to switch the structure of individual income distribution from “pyramid pattern”

42

Distribution pressure and differences

to “olive pattern” by means of “raising the low income, expanding the proportion of people with middle income, and lowering high income” based on the specific situations of different subjects. Moreover, with regard to the distribution system, distribution based on work or other factors can also cause “structural risk”. Generally, distribution based on work should always be the main route to realizing social fairness. In other words, if the majority of workers cannot obtain corresponding income according to their work, distribution risks will certainly become increasingly prominent because honest and hard work are not encouraged, while forfeiture, trading of money and power, unjust enrichment, and corruption are not restricted or regulated – eventu­ ally ruining the people’s faith in honest work. Thus, in order to reduce distribution risks and to realize fairness, it is necessary to ensure a distribution system based on the work by means of legislation that encourages people to work hard, work honestly, and promote harmony. For example, a well-known economist has once said: the principle of the tax law of a country should enhance morality and encour­ age people to be diligent. Therefore, laws and regulations are needed to ensure the equitable distribution of social wealth created by labour, so as to encourage hon­ est work and to stimulate genuine creativity. Notably, among the structural risks, distribution risks caused by the unreasonable proportions among various subjects and governments require particular attention. This kind of risk is harmful both to people’s living conditions and to social stability and harmony. In conclusion, the differences in income proportion among relevant subjects (also called “structural differences”) result in differentiated distribution, and differentiated distribution is likely to cause “structural risks” that, if allowed to accumulate, may likely lead to distribution crises. So, it is necessary to take meas­ ures to promptly prevent and resolve distribution risks.72 The present distribu­ tion structure in China is established on the basis of the reform and “opening” as well as later adjustments; but unbalanced distribution has affected the steady economic growth and, to a certain extent, the coordinated development of the society. Therefore, it is necessary to reiterate the value of fair distribution in order to remove “structural risk” in the distribution system in a comprehensive and sys­ tematic manner through the effective regulations of relevant laws – especially the regulation of economic law. 2.3.4   The necessity of legal regulation of distribution differences Specific legal measures are vital for the adjustment and control of distribution differences. In general, it is necessary to use laws and regulations, in particular, economic law, to solve distribution differences as well as other distribution issues in China. 2.3.4.1 The need to regulate distribution differences with economic law Laws and regulations are needed to solve distribution differences, covering a wide range of areas. For example, distribution differences among different regions can

Distribution pressure and differences 43 lead to fiscal imbalances which can affect the supply of basic public goods, and, therefore, require a transfer payment system. Likewise, distribution differences among enterprises may affect the basic living standards of workers thereby mak­ ing the implementation of a minimum wage system necessary. Distribution dif­ ferences among individuals, especially those who lack or even lose the personal ability to work, can affect their basic livelihood. This makes a social security system imperative. In addition, many arrangements in tax law – including nontaxation, tax exemption, tax deduction, and so forth – are also aimed at solving the issue of distribution differences. Among a variety of laws and regulations needed to resolve the issue of distri­ bution differences, more attention should be paid to economic law for its impor­ tance in adjusting distribution differences and controlling distribution risks. The following chapters further analyze this situation taking finance and tax law as examples. In general, the original and basic functions of fiscal and tax law lie in the distribution of income. That means the regulation of distribution can be viewed through the principles and theories of finance and tax laws. Many specific fiscal and tax laws, such as personal income tax law and property tax law, aim at fair and reasonable distribution. In one word, fiscal and tax laws can also be seen as distribution laws because every design in fiscal and tax laws, including the various types of elements, is related to distribution as well as the regulation of distribution. For example, there are elements concerning subjects (who can enjoy the benefits of distribution), objects (which is what the favoured subjects can get), and methods (how the favoured subjects can access the benefits of distribution). The elements above can be summarized as physical elements and procedural elements. The key elements include the subjects, objects, and methods (such as the method of calculation and the specific distribution method under special circumstances). Procedural ele­ ments include, among other things, the time and the place of distribution. In addi­ tion, there are many powers and rights in fiscal and tax laws such as powers and rights of preemption, immunity, debit, withdrawal, jurisdiction, warehousing, and supervision. In the process of distribution, all these elements can be much clearer when they are studied from the perspective of “distribution rights” – compared to when they are analyzed in their own rights. As a matter of fact, the “distribution right” is a basic category of distribution law and should be outlined clearly in distribution law but it is currently not clear or well enacted in China. Instead of being prescribed in distribution law or in departmental law, distribution rights are stipulated separately in many departmen­ tal laws. Fiscal laws address many issues related to distribution, such as financial delegation and taxation. Specific rights such as priority, deduction, and warehous­ ing are examples of the distribution right which calls for fiscal and taxing arrange­ ments. All of them require specific design in fiscal laws. In addition, given the tight connection between distribution and consumptionor, more specifically, people’s wealth, it is necessary to eliminate taxes in the addedvalue tax system in order to guarantee the livelihood of the people and to promote

44

Distribution pressure and differences

consumption.73 Besides, there should be arrangements to regulate luxury consump­ tion and over-consumption in the consumption tax system.74 Likewise, tax-free arrangements are required in the social welfare area including education, healthcare, culture, childcare, and other aspects. Similar regulations are everywhere across the tax law system, especially in income tax law and property tax law. 2.3.4.2 Particular demand for fiscal and tax law to regulate China’s distribution differences As mentioned above, fiscal and tax law, as part of distribution law, should include arrangements on the wealth distribution among governmental departments, between governments and people, between governments and enterprise, between people and other subjects, as well as market participants. However, the current iteration of distribution differences requires more work in China. For example, national fiscal revenue remains at a relatively high level, which is an issue in fiscal law. In terms of tax law, repetitive taxing remains an issue under the compound tax system. Specifically, how to lower the heavy tax burden,75 and how to coordinate different types of tax and each taxation law, have been important issues in the tax law system’s construction. In addition, various non-tax income directly related to the national fiscal income has continued to increase over the past few years, which is also directly related to the weaknesses of the whole fiscal law system. As another example, the dearth of regulations in the primary distribution phase contributes to the large distribution gap among individuals and the high Gini Coefficient. Especially in the areas where capital and other funds gather rapidly, tax law plays a weak role in distribution, thus widening the distribution gap. Actually, it is necessary to strengthen the effective regulation of tax laws either in primary dis­ tribution, secondary distribution, or so-called tertiary distribution. But it is the insuf­ ficient regulation of fiscal and tax laws that have led to serious problems in China. In addition, we aim to maintain the distribution difference within the reason­ able range when we strengthen the application of tax law to control the distribu­ tion difference. For instance, the preferential tax system reflects the differentiated treatment, which is an exception of the equal tax imposition. The system is designed to achieve substantive justice. Therefore, the system has to be designed in a reasonable way to narrow the gap. In fact, the preferential tax applied in former revolutionary base areas, areas inhabited by minority nationalities, rural, and poor, as well as on disadvantaged groups, aims at narrowing the distribution gap. With regard to the transfer payment system in fiscal law, the fiscal balance is achieved by narrowing the distribution gap, so as to facilitate the equalization of the supply of the public goods and ensure the equality of distribution. 2.3.5   Unfair distribution and the effective rule of economic law Unfair distribution is an issue directly related to distribution differences (Thompson 1997).76 In general, income distribution refers to the division and allocation of

Distribution pressure and differences 45 income. At present, the unfairness of income distribution mainly has two causes: (1) the unfair primary distribution, and (2) the unfair secondary distribution. For the primary distribution, unfairness may occur when it comes to the exact share of the state government, enterprises, organizations, and individuals. Therefore, the effective rule of the taxation law, competition law, financial law, and price law in the fields of economic law, helps to facilitate the fair division of income, thus alleviating disputes. As for the secondary distribution, we need to make reasonable arrangements on the state income, for instance, the exact proportion allocated to people’s liveli­ hood and the protection of basic human rights. If the fiscal expenditure on housing and consumption takes a large portion of income, while the expenditure on fields such as education, medical care, and social security only accounts for a small portion, people would believe that the income distribution has not been equally distributed. Indeed, many unfair distributions are not reflected in the primary dis­ tribution, but in the secondary distribution. To resolve various issues of unfair distribution, each of the economic laws should play a role. For instance, competition law can ensure fair distribution by prohibiting a monopoly. At the same time, fair competition should ensure to pro­ vide market entities with equal access to profits. In the case of financial law, mon­ etary value should be regulated at a stable level and financial supervision should be strengthened to prevent distribution unfairness in the financial field. In addi­ tion, the taxation system, especially the consumption tax, the income tax, as well as the real property tax should play an important role in regulation. Of course, at the stage of forming and distributing income, related taxation law, as well as other fiscal law systems, should also play a role. In addition to economic law, the coordination between economic law and other laws should be strengthened to effectively solve the distribution difference and prevent potential unfairness.77 Thus, the issues should be solved as follows: Firstly, it is necessary to clarify the income distribution right between govern­ ment and citizens. For the citizens’ right to income distribution, the joint pro­ tection should be strengthened among the constitution, economic law, civil law, and commercial law, with the focus on the lawful distributions. As a result, the government will not account for an overly high proportion of the whole social income. Therefore, for fields related to government revenue such as taxation law, government power should be stipulated in law, and government should lawfully impose the tax. Secondly, it is necessary to clearly allocate the distribution rights among enter­ prises, individuals, and other subjects to ensure both horizontal and vertical fair­ ness. In particular, individual income distribution should be favoured through various channels in the primary, secondary, and tertiary distributions so as to con­ stantly promote balanced distributions. Thirdly, it is necessary to protect individual distribution rights by means of various laws including labour law, social security law, and civil and commercial law. Additionally, transfer payments in fiscal law, along with consumption tax, value-added tax, personal income tax, property tax, travel tax, deed tax, and so

46

Distribution pressure and differences

on, directly or indirectly play important roles in protecting individual distribution rights. In addition, there are many noteworthy arrangements in charge laws which can affect personal income. 2.3.6 Conclusion Distribution difference commonly exists under the influence of many factors. Differentiated distribution is thus formulated as an important type of distribu­ tion. Unlike the equal distribution, it is born under unfairness and adds to this. Therefore, both the positive role and negative role should be taken seriously, keeping the distribution difference within the appropriate range so as to prevent and resolve potential distribution risks and distribution crises.78 The regulation of distribution differences by means of economic law also reflects the so-called differential principle in economic law.79 As a matter of fact, distribution difference together with other signs of market failure like unfair dis­ tribution, economic imbalance, and social imbalance make economic law regula­ tion necessary. Through the rule of economic law, positive remark will be made on the reason­ able distribution gaps in reality. However, when the gap comes to an unreasonable level, negative remarks shall be made by economic law through the institutional rearrangement. Therefore, the regulation of economic law combines both positive encouragement and promotion, as well as negative restriction and prohibition. In addition, it is necessary to enhance the coordination and cooperation between the economic law system and other legal systems so as to jointly solve the issues of distribution differences.

Notes 1 Most countries generally pay more attention to “inflationary pressures” and “stag­ nant economic pressures”, that is, the pressures of stagnation and inflation, otherwise known, in economics, as the typical “dual pressures”. However, dual pressures related to finance and people’s livelihood are actually more fundamental and long-term and they have a great impact on fields like politics, economy, society, and law. 2 There are still few special research results on the “double pressure” of the national economy and the people’s livelihood. With the increasing pressure on people’s liveli­ hood and the emergence of the “double pressure” problem, the research results in the field of law will continue to increase. 3 See Zhang Shouwen. (2012). The Right to Economic Development: From the Perspective of Economic Law. Modern Law Science, Issue 2, pp. 4–10. 4 Before the word “public finance” was introduced from the western world, expressions such as “Guoji” (the management of the country), “Guoyong” (national spending), “Duzhi” (annual spending) and “Suiji” (annual planning) were used to convey approxi­ mately the same concept in ancient China. 5 The growth rate of China’s fiscal revenue has been much higher than the growth rate of its GDP for many years, which has triggered a lot of doubts and discussions. Even con­ sidering the statistical calibre, it cannot be denied that the growth rate of fiscal revenue has been high year after year. This situation has changed in recent years. 6 The asymmetry of China’s financial system is partly shown given that local govern­ ments with lower revenues have huge expenditures, a situation that puts significant financial pressure on them. Shanguang Sun. (2007). Research on the Asymmetry of

Distribution pressure and differences 47

7

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9

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12 13 14 15

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Local Government’s Financial Power and the Change of Constraint and Incentive Mechanism After The Tax Sharing System. Comparative Economic & Social Systems, (1), pp. 36–42.Shouwen Zhang. (2014). A Discussion on Sharing Type of Tax Distribution Institution and Related Law Improvement. Taxation Research, (1), pp. 60–65. For example, the local loans provided by the Audit Commission to the NPC Standing Committee for auditing the implementation of the 2010 central budget and other fiscal revenues and expenditures was RMB 10.7 trillion, surpassing the national fiscal rev­ enue of RMB 10.37 trillion in 2011. Since China has ended its period of rapid economic growth, the slowdown in the eco­ nomic growth has become the “new normal”. As a result, the fiscal revenue growth rate has declined, and various types of distribution pressures have been surfaced thus making the task of adjusting the economic structure more arduous. The related analysis could be seen from Hui Wang. (2010). Root, Influence and Reflection on the European Sovereign Debt Crisis. Public Finance Research, (5), pp. 75–77; Liansheng Zheng. (2010). Evolution, Influence, Reason and Reflection of EU Debt Issue. International Economic Review, (3), pp.108–121. SeeFan He. (1998). Constitution of Market Economy: Fiscal Problems in China. Beijing: Today’s China Publishing House, pp. 39–45. According to the analysis of historical data, scholars believe that the main reason for the reform of state-owned enterprises and the reform of profits and taxes is to increase government revenue and alleviate financial pressure. Zhihui Gu and Fang Cai. (2005). The Financial Pressure upon China and the Economic Transition therein from 1978 to 2002: the Theory and a Case Study. Management World, (7), pp. 5–15. Shaoguang Wang and Anguang Hu. (1993). A Study of China’s Capacity. Shenyang: Liaoning People’s Publishing House, pp. 6–10. For a detailed analysis of the “risk theory” of economic laws, see Shouwen Zhang. (2011). Excavation & Expansion of Theories on Economic Law in Post-crisis Era. Journal of Chongqing University (Social Science Edition), (3), pp. 96–101. For a detailed analysis, see Shouwen Zhang. (2012). The Right to Economic Development: From the Perspective of Economic Law. Modern Law Science, 17(03), pp. 4–10. The government has fully recognized the problems of the tax-sharing system. In the Decisions on Some Important Issues concerning the Overall Deepening of Reform (referred to as “the reform decisions”) made by the CPC Central Committee in 2013, the direction for the future improvement of the tax-sharing system was clarified. The division of liabilities and property power is always the core of improving the tax system. Since 2013, the state has attached significant importance to the liabilities asso­ ciated with the property, and has emphasized that liabilities and property power should be matched as refined and strengthened in “the overall reform of the fiscal and taxation system program “in 2014. China’s fiscal expenditure on education accounted for 4% of GDP for the first time in 2012 making it one of the common rigid spending in the likes of social security spend­ ing and so forth. This tilt configuration, as an important feature of the tax-sharing system of China does bring about many problems. For a detailed analysis, see Shouwen Zhang. (2014). A Discussion on Sharing Type of Tax Distribution Institution and Related Law Improvement. Taxation Research, (1), pp. 60–65. Guan Zhong once said that “balanced finance contributes to the national stability while unbalanced finance undermines the national security. Arthur Laffer, the American economist and one of the representatives of the supplyschool, has put forward the famous “Laffer Curve”, which says that state taxation should be modest，mainly considering the affordability of the market participants and

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Distribution pressure and differences never entering the tax-forbidden zone because a modest low tax rate can improve the income distribution of both the state and the people at the same time. See Pusheng Liu. (1999). Responsiveness of Economic Law. Studies in Law and Business, (2), pp. 23–28. China has begun to attach importance to “two types of distribution” since the reform and “opening” of China. For a more detailed analysis, see Shouwen Zhang. (2009). The Meridian of the Development of China’s Economic Law – From [the] Distribution Perspective, Political Science and Technology Forum, Issue No. 6, pp. 124–137. After the in-depth study of economic history, well-known economists including Schumpeter, Hicks, North conclude that financial pressure is the direct cause of social change generalized as “Schumpeter-Hicks-Noth proposition”; And according to his­ tory, there are actually many disorders directly or indirectly related to fiscal pressures or financial crises. Fan He. (1998). Constitution of Market Economy: Fiscal Problems in China. Beijing: Today’s China Publishing House, pp. 39–45. In fact, the law itself is one of the public goods provided by the state with financial funds. If the laws aren’t properly formulated or implemented, the overall social welfare will decrease and the possibility of financial risks and financial crises will increase. Therefore, more attention should be paid to the law itself, as well as its function in pro­ moting the overall social welfare. In addition, financial or fiscal crises can also function as an important entry for studying multiple legal issues including judicial independ­ ence, law enforcement and departmental legislation. However, the implementation of this law did not completely eliminate the fiscal defi­ cit. Only after the US Congress passed the bill to balance the budget proposed by the Clinton Administration in 1998 did the fiscal surplus become a reality. For a more detailed study, See Buchanan, J. (1991). Public Finance. Translated from English by Zhao Xijun. Beijing: China Financial & Economic Publishing House, pp. 199–201. For further reference, see Hyde, A. (2006). Governant Budgeting: Theory, Practise and Politics. 3rd ed. Translated from English by Yannan Gou. Shanghai: Shanghai University of Finance and Economics Press, pp. 235–258. Since the conclusion of the Treaty of Mayo, many countries have focused on achieving this goal because they think it has a bearing on the status of the Euro and thus on the future development of the entire European Union. The dependence degree of debt, in finance, is an important indicator which reflects how much of the financial expenditure depends on borrowing. Scholars tend to give optimistic, pessimistic and neutral views on whether there will be room for issuing government bonds, whether a fiscal crisis is likely to occur and whether tax increases or tax cuts should be implemented based on their own research. For example, China’s fiscal deficit was RMB 259.8 billion in 2001, RMB 309.8 bil­ lion in 2002 and RMB 318.8 billion in 2003. The scale of the deficit has continued to increase year after year. By 2014, China’s annual fiscal deficit had reached RMB 1.35 trillion. “Implicit debt” refers to debts that are not necessarily based on statutory or contrac­ tual obligations but are based on public expectations or political pressures that must be borne by the government for moral or expected factors (such as social security, especially pension defaults responsibility). “Contingent Liabilities” means the govern­ ment’s expenses that may occur under certain circumstances which are, at present, mainly the uncertain expenditure for coping with the financial crises. For example, the governments tend to shoulder the non-performing assets of the bank ultimately. As early as the early 20th century, the Italian financial scientist Pugiani put forward the question of “financial illusion” which representatives of Public choice theory, headed by Buchanan, paid much attention to. And we think the further theoretical expansion on this can be very helpful to the understanding of the financial distribution between the state and the people. For further reference, see Hyde, A. (2006). Governant

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Budgeting: Theory, Practise and Politics. 3rd ed. Translated from English by Yannan Gou. Shanghai: Shanghai University of Finance and Economics Press, pp. 338–339. For example, the principle of “no taxation without representation” in the 1215 Great Charter of the United Kingdom has not only formed the prototype of the statutory tax revenue but also laid the foundation for the ensuing legal principle, the principle of legal reservation or parliament remains. Generally, it established the basis for the decentralization of the modern constitution. Some scholars have studied the issue of “the financial crisis of France in 1788 and the fiscal origin of the revolution in 1789. For a more detailed study, see Hoffman, P. and Norberg, K. (2008). Fiscal Crises, Liberty, and Representative Government, 1450– 1789. Translated by Chu Jianguo. Shanghai: Gezhi Publishing House and Shanghai: Shanghai People’s Publishing House, p. 289. There are only very limited provisions on the budget approval, budget compilation and budget enforcement in China’s current constitution that are significantly different from those in countries such as Germany Finland, etc. where there are a large number of provisions on public economic issues such as budget, taxation and treasury bonds. China started the revision of the Budget Law since 2004 and didn’t finish it until August 2014 because there are so many controversies. Notably, with the revision of the budget law, the “integrity”, “normalization”, and “openness” of the budget has become a consensus. For example, there are similar constitutional provisions in countries like India, Greece, and Finland, and so on. Article 12 of the Budget Law in 2014 stipulates that budgets, at all levels, shall adhere to the principle of “overall and comprehensive arrangements, thrift and economy, con­ sistence with capabilities, emphasis on performance, and balance between revenues and expenditure. The so-called “deficit economy” as its name has implied, actually involves many aspects such as specific taxation, finance，trade and so on. There were once hot dis­ cussions on this issue in the 1980s. For a more detailed study, see Cagan, P. (1988). Deficit Economy. Translated from English by Benyuan Tan. Beijing: China Economic Pulishing House. Junpei Wu. (1993). Thoughts on Deficit economy. Beijing: China Social Science Press. The second paragraph of Article 12 in China’s Budget Law, revised in 2014, stipulates that the governments, at all levels, shall establish a balancing mechanism for budgets to be carried over to the next year. There are inherent connections among these cycles. For a more detailed study, see Shouwen Zhang. (2002). Of Periodic Evolvement of Macro-control Law. Peking University Law Journal, 14(6), pp. 695–705. There are connections between the “inverted U hypothesis” of the deficit and the “Huang Zongxi law” that embodies the implication of “regulation and disorder cycle”. Piketti believes that Kuznets’s theory, the first systematic theory formed using a huge statistical tool, a major contribution, had a huge influence not only in the 1980s and 1990s but it is also adored by people at present. See Piketty, T. (2014). Capital in the Twenty-First Century. Translated from France by Shusong Ba. Beijing: CITIC Press, p. 12. Because never has a real administrative law that specifically stipulates the tax-sharing fiscal system been made. Therefore, the allocation of tax sources, the distribution of taxes and the distribution of income all show extreme non-institutionalization and uncertainty, which not only increases the game costs of the central and local govern­ ments, but also seriously violates the principle of statutory tax revenue, as well as the basic constitutional spirit. The Ministry of Finance is carrying out reforms in the centralized treasury receipt and payment system and it proposes to amend the current system of state treasury bonds

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Distribution pressure and differences with a very low legislative level so as to enhance the implementation of treasury receipt and payment system. Many facts show that, although the state has repeatedly emphasized that taxation should be conducted in accordance with the law, the arbitrariness in tax collection remains high. For example, under some circumstances, it is difficult to achieve the basic rule of “levying based on rate”. And the illegal tax agreements, including tax eva­ sion and other phenomena are not uncommon. These reflect the overall lack of levying capacity and levying efforts. They also reflect the weak tax law awareness and the lack of enforcement of tax law. For more discussions on tax countries and budget countries, see Shaoguang Wang. (2007). From Tax State to Budget State. Readings, (10), pp. 3–13. Yinchu Ma argued that “treasury bonds and public debts differ from each other and cannot be regarded as one thing”. But in China, there is no difference between the two. See Yinchu Ma. (2001). Finance Study and Chinese Finance: Theory and Practice. Beijing: Commercial Press, p. 583. For example, article 35 of the Budget Law revised in 2014 in China stipulates that par­ tial indispensable funds for construction investment in the budget of a province, auton­ omous region, or municipality directly under the Central Government as approved by the State Council may be raised in the form of debts including local government bonds within the limit determined by the State Council. The size of debts shall be reported by the State Council to the National People’s Congress or the Standing Committee of the National People’s Congress for approval. The debts incurred by the government of a province, autonomous region, or municipality directly under the Central Government within the limit approved by the State Council shall be included in the budget adjust­ ment proposal at the same level, and be subject to the approval of the standing commit­ tee of the people’s congress at the same level. The debts incurred shall be accompanied with repayment plans and stable sources of funds for repayment, may only be used for expenditure for the public good under capital accounts, and may not be used for expenditure under current accounts. In addition, on May 19, 2014, the State Council approved 10 provinces and municipalities such as Beijing and Shanghai to spontane­ ously return local government bonds. The MOF also released the Pilot Measures for Spontaneous Self-return of Local Government Bonds in 2014. According to Article 28 of the Budget Law pre-amended by China in 2014, the scopes of revenues and expenditure in government fund budgets, state-owned capital operat­ ing budgets, and social insurance fund budgets shall be governed by laws, administra­ tive regulations, and the provisions of the State Council. However, there are a lot of controversies and even many changes in the drafts of the budget law on whether the local governments shall have the power of issuing bonds which shows people’s differ­ ent opinions on it. See Article 27 of the Budget Law before the revision in 2014 in China. Article 55 and Article 73 of the Budget Law before the revision of 2014 in China stipu­ lates that people’s congresses and their standing committees at all levels have the right of change, the right to withdraw from illegal budgetary adjustments made by govern­ ments and the legal responsibilities the relevant personnel have to undertake if they improperly increase the governments’ debts. China has fully recognized such issues. For instance, the Decisions on Several Important Issues concerning the Overall Deepening of Reform (referred to as “the reform deci­ sion”) made by the CPC Central Committee in 2013 emphasizes that “we must enhance the regulation of the tax preference especially regional tax preference. Preferential tax policies should be prescribed uniformly by the special tax laws and regulations, and improper tax preference policies should be cleaned up and regulated.” This has been repeatedly illustrated by scholars’ researches like North, has been con­ firmed by the development of human history and will continue to be substantiated by future development. See North, D. (1999). The Rise of The Western World：A New

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Economic History. Translated from English by Yining Li. Beijing: Huaxia Publishing House, pp. 9–13. In fact, the several constitutional amendments made by China in recent years are mainly in the economic field, which reflects the characteristics of the times. However, it seems that academic circles did not pay enough attention to them. “The “public-private dualistic structure” is of universal significance. For example, the basic assumption at the cognitive level is helpful for the fundamental analysis of many legal issues. Shouwen Zhang. (2001). A Fundamental Assumption of the Economic Jurisprudence. Modern Law Science, 23(6), pp. 46–55. See Shouwen Zhang. (2003). A Discussion on Establishing Fundamental Principle of Economic Law. Journal of Peking University (Philosophy and Social Sciences), 40(2), pp. 83–90. See Article 2 and Article 3 of the Chinese Constitution. In fact, the institutional reforms that all previous governments have tried to carry out aimed at transforming the functions of government so as to solve the problems of “ten sheep, nine herdsmen”, “holding down a job without doing a stroke of work”, and “eat­ ing fiscal meals”. Of course, only if such reforms are put in place can the problem be completely resolved. Otherwise, there may be a “law of Huang Zongxi” on institutional reforms, that is, after each reform, there will be a big rebound, which will make the organization more bloated, the fiscal expenses greater and the deficit problem more pronounced. For a more detailed study of Wagner’s Law, see Wildavsky, A. (2009). Budgeting: A Comparative Theory Of Budgetary Processes. Translated from English by Yannan Gou. Shanghai: Shanghai University of Finance and Economics Press, pp. 296–302. Only everyone gets what they deserve. Can this system be called reasonable when it is also an important manifestation of the distribution of justice? A good distribution sys­ tem should make all kinds of subjects have their own place. Of course, from a different perspective, there will be a different understanding of the distribution of justice. For a more detailed study, see Dazhi Yao. (2011). Distributive Justice: From the Standpoints of Social Vulnerable Groups. Philosophical Researches, (3), p. 107; Zhongqiao Duan. (2013). Distributive Justice, Equality and Deserve: Answering Prof. Yao Dazhi. Jilin University Journal Social Science Edition, 53(4), p. 34. Despite the different perspectives and fields of observation and judgment, Dickens’ phrase applies to many fields. For example, the rapid economic growth in previous years has convinced the nationals in many countries that the present situation is a good one. Many social and environmental problems, caused by the rapid growth, have also led many to think that this is a bad era. In terms of distribution, Confucius put forward the idea of “not worry about poverty, but rather about the uneven distribution of wealth” and “no inequality means no-poverty”, believing that both the states and families suffer from uneven distribution compared to scarcity. (The Analects, Chapter 16), which has a profound impact on the distribution culture. In many countries with planned economy, great attention was paid to narrowing the disparities in distribution, opposing the differences in individual distribution and emphasizing egalitarianism. The idea of “equalizing wealth” proposed in history aims at eliminating the disparity in distribution showing people’s attention to fair distribu­ tion in a certain period of time. However, the idea of “letting some people get rich first” reflects the acknowledgment and affirmation of the distributional difference in a certain period of time. See Shouwen Zhang. (2009). The Meridian of the Development of China’s Economic Law – From [the] Distribution Perspective. Political Science and Technology Forum, 27(06), pp. 124–137.

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64 From Confucius to Aristotle, from Rawls to Nozick, ancient sages and scholars through­ out history paid great attention to this central issue of distributive justice. Some schol­ ars think that the shift from the theory of classical distribution to the theory of modern distribution took place at the turn of the 19th century and the 20th century when peo­ ple paid more attention to the issue of the distribution justice. See Fleischacker, S. (2010). A Short History of Distributive Justice. Translated from English by Wanwei Wu. Beijing: Yilin Translation Publishing House, p. 115. 65 Some scholars have found that the Gini Coefficient of China reached 0.47 in 2004 and was already 0.407 in 1993. Apparently, both of these exceeded the internationally accepted warning line of 0.4. See Yongjun Liu, et al. (2009) Research on the Income Distribution Gap of Chinese Residents. Beijing: Economic Science Press, p. 2. Some even concluded that Gini Efficiency has exceeded 0.5. 66 Piketty, the French economist, reached this conclusion by “using extensive historical materials and comparative data which cover nearly three centuries and more than 20 countries while using a novel theoretical framework for further analysis”. See Piketty, T. (2014). Capital in the Twenty-First Century. Translated from France by Shusong Ba. Beijing: CITIC Press, p. 1. 67 In 1960, Rostow, an American economist, put forward the theory of “stages of eco­ nomic growth”, which divides the process of economic development of a country into six stages: traditional society, society of having takeoff, takeoff, maturity, mass con­ sumption and transcendence public consumption stage. At different stages, the require­ ments for distribution and consumption are different. See Rostow, W. (2010). The Stages of Economic Growth: Anon-Communist Manifesto. Translated from English by Xibao Guo and Songmao Wang, Beijing: China Social Sciences Press. 68 In terms of determining the key points of transferring payments, the state is leaning toward a more backward region in its development stage. In terms of arranging coun­ terpart support, the state emphasizes that provinces and municipalities in developed regions should support less developed regions. Generally, the central authorities also require developed regions to make their own arrangements for the funding required for some policies. 69 See S houwen Zhang. (2012).The Right to Economic Development: From the Perspective of Economic Law. Modern Law Science, 17(02), pp. 4–10. 70 According to Forbes magazine’s Tax Misery Index rankings, China was ranked second in the world, that is, the tax burden is considered very high although many institutions and scholars in China object the method of calculation. 71 In the year prior to the financial crisis of 2008, the wealth that the top 0.1% of house­ holds in the United States owned was 220 times that of the average income of 90% of the bottom-line families in the community. The richest 1% of the population owned 35% of the total national wealth. See Stiglitz, J. (2013). The Price of Inequality. Translated from English by Ziyuan Zhang. Beijing: China Machine Press, p. 3. 72 The risk dimension can be useful for analyzing both the issues of economic law and the issues of distribution. For a more detailed analysis, see Feirong Peng and Quanxing Wang. (2011). On the Government Accountability in the Distributive Justice: From the Perspective of Risk and Law. Journal of Social Science, (1), pp. 103–110. 73 The current VAT system in China stipulates a 13% low tax rate covering fields such as grain and oil, water, coal, gas and agriculture, which mainly solve the problems of the people’s livelihood. Furthermore, the stipulation on VAT exemption is also a manifesta­ tion of the spirit of a low tax rate system. 74 Now, consumption taxes on expensive jewelry, jewelry, jade, luxury watches, yachts, and so on, is also the embodiment of this spirit. However, on the whole, there is still much room to give full play to the role of consumption tax. 75 Reducing the tax burden and simplifying the tax system were the targets set forth explicitly in the 1994 tax reform. However, this goal has not yet been fully realized. After 2008, the implementation of the “structural tax reduction” by the state, especially

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the pilot program “replace business tax with value-added tax”, are all efforts in this regard. Some scholars think that fair distribution is the central issue in both the political econ­ omy and also the entire field of social science. In a word, distribution is one of the fun­ damental issues of society. See Thompson, W. (1997). An Inquiry into the Principles of the Distribution of Wealth Most Conducive to Human Happiness. Translated from English by Muli He. Beijing: Commercial Press, pp. 19–20. Some scholars believe that the main reason for the widening income gap is the unfair distribution of resources and assets which is, indeed, an important issue of real concern. See: More needs to be done to tackling inequality than economic legislating. Fang Cai. (2012). How to Understand the Reality of China’s Income Distribution Reform: An Analytical Framework for Seeking Common Ground while Reserving Differences. In: Jinglian Wu ed., Comparison Vol. 59. Beijing: CITIC Press, p. 22. Piketty’s research shows that the share of national income of the top 10% of Americans peaked twice in the 20th century, once in 1928 (before the Great Depression in 1929) and again in 2007 (The eve of the crisis). Therefore, he believes there is no doubt that the expansion of US income inequality will, to a certain extent, lead to the coun­ try’s financial instability. See Piketty, T. (2014). Capital in the Twenty-First Century. Translated from France by Shusong Ba. Beijing: CITIC Press, pp. 302–303. The differential principle is one of the basic rules in the economic law which con­ tributes to the understanding of the aforesaid regulation of distribution differences by means of economic laws. Shouwen Zhang. (2013). General Theory of Economic Law. Beijing: Peking University Press, pp. 7–10.

3

Relationship and structure of co-integrating distribution

As the main issues of distribution, distribution pressure and disparities can be ultimately attributed to unreasonable distribution relationships and structures. Therefore, it is necessary to coordinate and adjust unreasonable distribution relationships and structures as a way of achieving effective “co-integration”. Co-integration is an econometrics concept referring to the coordination, integra­ tion and adjustment to distribution relationship and distribution structure. Faced with a complicated distribution relationship, related issues cannot be solved only by the market or the market mechanism. National coordination should be introduced here for its important role in safeguarding the distribution relation­ ship and harmony, which is characterized by its special subjects, fields and meas­ ures. Therefore, many institutional practices have been implemented in China and the studies of these will be helpful to uncover the existing problems in distribu­ tion. Then, solutions can be proposed. There are two types of national coordination – (1) policy and (2) law. The “dual regulation” through law and policies helps to optimize the distribution structure. Distribution structure is an integral part of the whole economic structure. Studies of economic structure regulation help to clarify the specific problems existing in distribution structure. Therefore, incorporating the macro-economic structure helps to examine the dual regulation of the distribution structure. In the process of adjusting or optimizing the distribution structure, countries tend to use a great deal of market-boosting measures, including a series of legal norms which mostly pertain to economic law. Thus, it is necessary to take the leading elements of economic law as an example to analyze and reveal its func­ tions in adjusting distribution-related issues. To this end, the present chapter first discusses how governments coordinate the pluralistic distribution relationships and then explores the adjustments of the distribution structure and the overall economic structure. It further reveals the essence of “promoting” economic law in resolving distribution issues.

3.1 National coordination of pluralistic distribution relationships Resolving distribution issues relates to the adjustment of pluralistic distribu­ tion relationships in preventing distribution risks and distribution crises. The

Structure of co-integrating distribution 55 distribution relationships between country and people, enterprises and individ­ uals or the alleviation of fiscal pressure and living pressure, require national coordination. The birth of distribution issues, the expansion of distribution risks and the occurrence of distribution crises result from market disorder. Therefore, countries are focusing on national-level coordination in the distribu­ tion field such as the national social security system and the establishment of transfer payments, in order to regulate complicated and pluralistic distribution relationships. Strengthening national coordination is of great importance to the distribution field. It is necessary to explore the main objectives and specific measures adopted in coordinating distributions. The thought of systematology could also be inte­ grated into the analysis. In addition, national coordination on distribution should not only be studied in theory but should also be discussed through the combina­ tion of related systems in reality. For this reason, the following sections will ana­ lyze the national coordination of pluralistic distribution relationships and discuss relevant coordination ideas as well as their importance in solving the actual prob­ lems arising from distribution risks and crises. 3.1.1 Basic understandings of national coordination The coordination of distribution relationships by governments reflects the concept of coordination which can be traced back to ancient China.1 As a matter of fact, there is a close connection between the idea of coordination and system theory, both of which emphasize the internal and external coherence of a system to deter­ mine the overall effectiveness of the system. Therefore, coordination, as a means and as an end, involves the overall and efficient functioning of the system with many issues related to the system operating as a whole with the intention of real­ izing the overall goal. Coordination is needed to ensure that all relevant elements operate smoothly for the wellbeing of the entire system. From the perspective of semantic analysis, the term “Xie Tiao” (being coordi­ nated or to coordinate) has its usage in Chinese. As an adjective, it means “made fit and or match”2 and as a verb, it means “to fit and match”. Here we use it in its second sense. From the perspective of economic law, coordination by govern­ ments is irreplaceable in economic and social development, in the allocation of powers and rights, in the adjustment of distribution relationships and in the con­ struction of related institutional systems. Additionally, national coordination mat­ ters when economic and social development fails to keep the same pace, when the unbalanced allocation of powers and rights affects the protection of legal interests and when there are legal conflicts among adjustments of distribution relationships in time, space and territory. Strengthening national coordination is of great importance in the pluralistic and complicated relationship. The national coordination of distribution rela­ tionships can be understood in the following three aspects. Firstly, the national government is the subject of coordination. The national government plays a lead­ ing role when it participates in distribution or in secondary distribution – and it will last for the long-term. Secondly, coordination targets distribution since it is

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“economic coordination” that intends to boost the distribution of income, wealth and resources. Thirdly, coordination is achieved particularly via law and policy, that is, through the legitimate economic coordination instruments (Zixuan Yang 2009).3 From these, three basic types of distribution are distinguishable: the national government’s coordination, economic coordination and legal coordination. Together, they add to the analysis of coordinated distribution by governments and solutions proposed, as is illustrated in the following sections. Firstly, since the coordinating subject is the national government, the system related to national regulation on distribution relationship is more like public law. Specifically, finance law, tax law, fiscal law, price law and market regulation law are indisputably public law in nature given their focus on national and public interests4 which also determines the behaviour pattern of their agents, rights, obli­ gations and responsibility structure, the specific awareness of distribution system along with its structure and functions, the understanding of the distribution system and the relationships among economic law, civil and commercial law, social law and administrative law. Secondly, in terms of economic coordination, national coordination focuses on the distribution field related to the economy. Distribution is an extremely impor­ tant part of secondary social production. In general, the state does not directly interfere in the process of producing or exchange. The outcome of primary dis­ tribution will also be protected in accordance with the law. However, eminent problems in distribution that precede risks, crises and damages to the public inter­ est justify that the government’s involvement in the redistribution mechanism,5 or legislative activism intended to achieve sustained economic development, pre­ vents it from the ill effects of distributive crises. The coordination of distribution relationship at the national level is closely related to the market disorder theory, the system evolution theory and the theory of legal function. Market disorder in distribution requires national coordination of the distribution relationship. Therefore, a new distribution theory needs to be explored to make up for the weaknesses of the traditional system. We see that market disorder requires national coordination thus leading to system evolution. Here the key factor is system function. Thirdly, among all the measures taken in national coordination, legal meas­ ures play an important role. Meanwhile, the rule of economic law indicates that policies and measures should be gradually legislated. When economic law was applied to regulate the distribution relationship, economic law, in spite of its pol­ icy basis, requires legalizing the economic policies, as the legislation. The “statu­ tory principle” that runs through various branches of economic law, including the principles of statutory budget, statutory tax revenue and statutory money, is uni­ versally accepted (Baoshu Wang 2004),6 because of the restriction and enforce­ ment of public power, the influence of economic coordination on citizens’ rights and the legal requirement of economic law itself. In general, the statutory princi­ ple should guide the national coordination in various types of distribution so as to better reflect the spirit of the rule of law.7

Structure of co-integrating distribution 57 3.1.2 Goals of national coordination and the interest distribution National coordination of economic performance aims to “conform the economic performance with the requirements of objective rules, in order to promote the development of the national economy” (Zixuan Yang 2009).8 Similarly, the rule of distribution should also be complied to prevent distribution risks and distri­ bution crises, thus promoting economic and social development. Objective rule is a kind of law, senior to the regulation and legislation that are stipulated by humans, which cannot be created, changed or eliminated by people. Therefore, only when the distribution rule is fully abided, i.e. fully reflected in and utilized by the law, can the coordination of each type of distribution relationship can be more in line with the objective rule, thus making the economy perform in a sustainable way. Accordingly, when coordinating distributional relationships, the state must fol­ low the principles of distribution and “capitalize on the trend”9 which is, itself, effective coordination. Only by following objective rules and coordinating based on a distribution system governed by law can the state achieve its goal of promot­ ing economic development. Although the core objective of national coordination in distribution is the pre­ vention of risks and crises, as well as the promotion of economy and society, the theory schools – such as liberalism, interventionism, evolutionism and construc­ tivism – hold different attitudes towards the role, cost and benefit of national coordination. However, strengthening national coordination has been a common practice for each country, especially in terms of protecting human rights and pre­ venting risks and crises. Since the global financial crisis broke out in 2008, people have achieved a consensus on the importance of national coordination.10 According to the theory of institutional economics, the involvement of the gov­ ernment can be justified in terms of the supply of public goods given that efficient solutions to conflicts of interests among individuals are deterred by high transac­ tional costs. Therefore, a national government, as the supplier of public goods, should shoulder the role of coordinator. Indeed, national coordination itself aims to supply public goods. Considering the supplier of public goods shall be selfless, non-for-profit, with the highest status and strongest capacity, only national gov­ ernments could meet the requirements. When coordinating the pluralistic distribution relationships, the interests in need of protection are diversified. For instance, the interests protected by eco­ nomic law not only refer to the public benefit in society but also individual ben­ efits and state interests. Effective protection is required for state interests, fiscal interests, tax interests or even financial interests. If protection only covers public social interest, instead of the basic individual interest or the key state interest, then the public social interest is hard to achieve. Therefore, the coordination protects the interest of each subject, for the purpose of the balanced development of the subject interest, which is also an important part of economic law. As for adjustments to distributional relationships, the “appropriateness” of dis­ tribution does not equal absolute or relative egalitarianism (Zixuan Yang 2009).11

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Instead, it highlights that “any one could play their proper role” so that the legal interests of different subjects are protected. Then, effective protection can com­ bine different stages to achieve a balance between efficiency and equality. It can help to prevent the imbalanced focus on some subjects as well as prevent the influ­ ence brought by egalitarianism, thus ensuring distribution order and promoting the coordinated development of economy and society. 3.1.3 National coordination from the perspective of system theory The idea of government coordination among multiple distribution relationships is rooted in system theory which is often analyzed in terms of wholeness, hierar­ chy, structure and function of the distribution system,12 thus being susceptible to resolving many theoretical and practical distribution-related issues. Firstly, holists advocate for the overall coordination of distribution relation­ ships. In terms of distribution, social distribution could be regarded as a whole ecosystem. The subjects, such as the state, the enterprise and the individual are treated as part of the distribution ecosystem. As a result, we could reserve the dis­ tribution status and the distribution capacity of each subject, thus discovering the root of distribution conflicts. The distribution between the country and the people is not only meaningful in the constitution but also makes sense in the specific eco­ nomic law. The distribution reflects conflicts between private profits and social public interests13 – which need to be addressed emphatically. Secondly, hierarchical coordination refers to the coordination of the distribu­ tion relationship across different levels which are formed during the past eco­ nomic development as well as the hierarchical order. For instance, the revenue distribution between central and local governments and the revenue distribu­ tion between the governments at different levels are both related to hierarchical coordination. In addition, the issues related to distribution and coordination also exist in the field of domestic economic law and international economic law. After the global financial crisis broke out in 2008, the international community generally agreed to strengthen policy coordination and legal coordination in distribution. Therefore, cooperation and coordination in fields such as treasury, taxation and finance should be strengthened. Thirdly, structural and functional coordination is crucial because every spe­ cial structure has its own functions. Thus, internal coordination on the structure and function is of great importance. The effective solutions to distribution issues require effective adjustments to the internal structure of the relevant laws, render­ ing them capable of solving such issues. The branch laws of economic law are capable of affecting the regulation of distribution factors, thus playing an impor­ tant role in distribution issues. Furthermore, from a structural perspective, the prevention of distribution risks and distribution crises shall optimize the distribution structure in the economy in order to effectively solve the distribution issues.14 The number and percentage of legal norms in distribution shall also be strengthened. At the same time, it is

Structure of co-integrating distribution 59 necessary to focus on the proportion assigned to every entity in the overall distri­ bution system and make adjustments accordingly. The combinations of systems that regulate the distribution relationship create an ecosystem. For the internal and external balance, harmony inside and outside should be achieved, which refers to the internal coordinated relationship as well as the external coordination. Therefore, structural optimization shall be strength­ ened to regulate each legal system applicable to the distribution relationship. The structures covering subjects, acts, rights and obligation, as well as responsibility, should be fulfilled, thus making each structure more balanced and achieving the systematic function of each distribution system. 3.1.4 The system of national coordination of distribution relationships in practice Due to the importance of the distribution, the Chinese government has always attached considerable importance to various means such as laws and policies in coordination. There have been significant practices at the institutional level. For example, in 2013, the State Council approved the “Opinions on Deepening the Reform of the Income Distribution System” (hereinafter referred to as the “Opinions on Distribution Reform”)15 which reflects many of the theories and measures that this book has researched. The following discussion will exemplify the “Opinions on Distribution Reform” in consideration of the national coordina­ tion of distribution relationship. 3.1.4.1 National coordination in income distribution systems Income distribution systems are formed through national coordination of the income distribution relationship. “Opinions on Distribution Reform” emphasizes that the income distribution system is not only a basic system in China’s eco­ nomic and social development but also the cornerstone of the market economy. Since the reform and “opening”, China has gradually broken away from egali­ tarianism under the planned economy and has allowed and encouraged holders of capital, technology and management to participate in the distribution process according to their marginal products. At present, the distribution system in which distribution according to work is dominant and a variety of modes of distribu­ tion coexist has basically been established. The regulating framework of redis­ tribution has been primarily established through tax revenue, social security and transfer payment. However, the existing distribution system did not solve all the problems, espe­ cially the irrationaldistribution at a macro-level, the large distribution gap among residents, the disorder of income distribution and invisible and illegal income. Solving such complex problems would be very arduous and complicated and China still has a long way to go. Therefore, it is necessary to move from the cur­ rent situation and towards developing ex-ante expectations on long-term develop­ ment and well-organized progress.

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Structure of co-integrating distribution

Value theory unveils the challenges of dealing with issues of efficiency and fairness in primary distribution and redistribution. Based on the focus and understanding of efficiency and fairness, the “Opinions on Distribution Reform” addresses the importance of efficiency and fairness in the primary distribution and redistribution. To be more specific, efficiency may dominate at the primary distribution stage in order to create a fair competition environment and safeguard the dominant position of wages received by labour. However, fairness should be more pronounced at the redistribution given the intention to improve efficiency in the allocation of public resources and to narrow the income gap. Additionally, as for the means of resolving distribution issues, the “Opinions on Distribution Reform” highlight order in the market economy, give full play to the fundamental role of the market mechanism in the allocation of factors and prices, and at the same time, insist on government control aimed at balancing the distribution structure, regulating the distribution process, increasing the income of the poor and diminishing unreasonably excessive income.16 We see the national coordination of income distribution relationships through the focus on redistribution, government regulation and ordering of the distribu­ tion hierarchy. “Opinions on Distribution Reform” specifically enumerates the important measures in distribution which intend to encourage redistribution, increase investment in people’s livelihood, augment agricultural subsidies, com­ prehensively implement the free and compulsory education, establish a social security system, deepen the reform of the medical and health system, vigorously strengthen the construction of affordable housing, raise the minimum subsistence allowances for urban and rural areas, reduce poverty and raise the level of pension for retirees in enterprises. These measures have the positive effect of effectively guaranteeing basic human rights and contribute to preventing and resolving dis­ tribution risks and crises. The reform of the income distribution system through national coordination has multiple benefits including: (1) it helps to optimize the income distribution struc­ ture and build a long-term mechanism for expanding consumer demand and to accelerate the transformation of the development pathway; (2) it helps to solve the issues caused by unfair distribution, prevent an increase in the income gap, regu­ late the order of distribution, and maintain social justice, harmony and stability; (3) it releases the tension between labour and capital, cities and rural areas as well as government and markets, thereby promoting reforms in related fields and facil­ itating the market mechanism; (4) it upholds that the dividends of reform and development should be shared by all. This way, the reform serves as material and institutional foundation for the progressive realization of common prosperity. 3.1.4.2 Goals and measures taken by China to promote income distribution reforms In promoting the reform of income distribution, China aims to: (1) adjust the income distribution structure thus creating an open and fair institutional envi­ ronment; (2) adhere to distribution, seeing labour as the principle and various

Structure of co-integrating distribution 61 distribution modes as supplemental; (3) keep improving the primary distribu­ tion mechanism that labour, capital, technology, management and other factors are rewarded for according to their contribution, speeding up and improving the redistribution mechanism with taxation, social security and transfer payment as major tools;17 (4) increase the income of urban and rural residents, narrowing the income gap and standardizing the distribution order. In addition, reform ensures that the income of residents increases proportionately with economic develop­ ment, that labour remuneration grows with the improvement of labour productiv­ ity to systematically form a rational and orderly income distribution pattern and to promote sustainable and healthy economic development, social harmony and stability. Considering the requirements above and the prominent issues related to the current distribution gap, distribution structure, distribution order and distribu­ tion pattern, “Opinions on Distribution Reform” set forth the distribution system reform goals for China, as follows: First, with regard to the total amount, the income of urban and rural residents should be doubled.18 In terms of the distribution structure, the middle-income groups should be expanded an “olive-type” distribution structure should be put in place. The distribution gap should be systematically narrowed and the large income gap between the region and residents effectively should be bridged, and the number of people in need of poverty alleviation programmes would signifi­ cantly drop. Second, the distribution order should be considerably improved while protecting legitimate income, adjusting excessively high income, regulating invisible income and eliminating illegally obtained income. Third, a reasonable distribution pattern should be maintained by means of increasing the proportion of resident income in the national income distribution, the proportion of labour remuneration in the primary distribution and the proportion of public expenditure including social security and employment in public finance. In order to achieve those goals, both incentives and restrictive measures need to be adopted by rel­ evant systems based on economic law with a view to establishing a “promoting type” of distribution system capable of solving the problems of distribution. 3.1.4.2.1 THE PRIMARY DISTRIBUTION PROMOTION SYSTEM

First, build an employment promotion system. Employment can directly affect income and distribution. China promulgated the Employment Promotion Law19 and placed special emphasis on promoting fair employment opportunities in the document “Opinions on Distribution Reform”. The specific measures have been listed as follows: (1) give full support to the service industries, labour-intensive enterprises, small and micro enterprises and innovative technology enterprises so as to create more jobs; (2) improve tax-reduction, public service jobs, job train­ ing, social insurance, skill appraisal subsidies and other policies intended to foster youth employment, assist rural migrant workers, poor people in urban areas and veterans; (3) improve and implement small-scale loans and financial incentives to encourage independent entrepreneurship. The promotion measures mentioned

62

Structure of co-integrating distribution

above involve various economic law systems including various laws such as fis­ cal, tax, financial, market and industrial laws. Second, address the system promoting the reasonable growth of wage. To nar­ row the income gap, it is necessary to promote the reasonable growth of wages and salaries of middle- and low-income workers. “Opinions on Distribution Reform” stipulate the following important measures: (1) establish a wage deter­ mination and growth mechanism that detects supply and demand changes in the labour market as well as the revenue of enterprises; (2) improve wage guide­ lines while establishing a unified and standardized survey on enterprise wage and the wage disclosure system; (3) make timely adjustments to the minimum wage according to economic development, price fluctuation and other factors. In conclusion, reasonable wage increases for middle- and low-income earners are significant in ensuring fundamental human rights, narrowing the income distribution gap, mitigating distribution risks, stimulating domestic demand and promoting steady economic growth – all of which constitute the main goal of economic growth. Third, evaluate the system promoting the growth of residents’ property income. To solve the problem of income distribution, it’s also necessary to increase the property income of residents. To this end, “Opinions on Distribution Reform” puts forward the following measures: (1) speed up the development of multi-level capital markets, implement a dividend/bonus system of listed companies,20 and strengthen regulatory measures so as to protect the legitimate rights and inter­ ests of investors, especially small and medium investors; (2) promote reform of interest rate liberalization, moderately expand the floating range of interest rates on deposits and loans, protect the rights and interests of depositors and strictly regulate bank charges;21 (3) enrich fund products such as bond funds and money funds. In fact, all these measures are closely related to economic law, especially those laws governing securities and banking. 3.1.4.2.2 THE DISTRIBUTION ARRANGEMENT SYSTEM

In general, the redistribution system is based on the relevant systems of economic law and social law. China is currently pursuing an upgraded redistribution adjust­ ment mechanism using the major tools of taxation, social security and transfer payments. Firstly, in terms of fiscal law, the main objective is to improve the public financial system and the transfer payment system, adjust the fiscal expendi­ ture structure and vigorously promote basic public service equalization. Secondly, in terms of tax law, the major goals are to increase tax adjustments, reform the personal income tax system, improve the property tax system, promote structural tax cuts and reduce the tax burden on low- and middle-income earners as well as small and micro-enterprises.22 These measures undoubtedly favour a tax system that promotes structural optimization and social welfare. Thirdly, in the area of social security law, China is committed to building a social security system with a whole coverage of the rural and urban residents. The system should equally centre on enhancing fairness, adaptive liquidity and sustainability; continuously

Structure of co-integrating distribution 63 improving the social insurance, social assistance and social welfare so as to stead­ ily raise the level of protection. Among all the institutions, the “promoting” measures require more attention. For example, in terms of personal income tax law, China intends to promote fair distribution by adopting the following measures: (1) speed up the establishment of a comprehensive and classified individual income tax system; (2) improve the levy, management and penalties of personal income tax for high-income earners whose total income will fall in the scope of the expropriation to narrow the distri­ bution gap; (3) establish and improve the two-way declaration of personal income system and a unified national taxpayer identification number system to regulate the collection of taxes; (4) eliminate tax exemption on personal income tax and other bonuses obtained by foreign individuals from foreign-invested enterprises so as to achieve fair distribution. China intends to apply some important property tax systems to promote the fairness of income distribution. For instance, with regard to the law of real prop­ erty tax, China is planning to: (1) fulfil the taxation system such as real estate ownership and transaction, expanding the range of the property taxes on resi­ dential housing;23 (2) elaborate on the policies of the differentiated real property tax, strengthen tax collection and management of stocking houses. In terms of resource tax, the government will increase the tax duty level on the resource tax, expanding the range. In addition, China is also conducting studies on imposing the inheritance tax at the appropriate time. 3.1.5 Brief summary Given the pluralistic and complicated distribution relationships, national coor­ dination is vital to the effective alleviation of financial and living pressure, the elimination of the income gap and the prevention of distribution risks and crises. The purpose of national coordination is to make distribution more “appropri­ ate” and to make complex pluralistic distribution more harmonious with a view to amending the distribution imbalance. Due to the ability of market participants to solve unfair distribution, distribution disparities, chaotic distribution order and irrational allocation patterns in the context of market failure, it is necessary to strengthen national coordination. Coordination implemented by the national government will be strong in its implementation. At the same time, the national government also needs to consider the legitimacy of laws and the reasonableness of the economy, in accordance with the legal measures applied to the specific distribution relationships in the economy. China has been focusing on reform to deepen the income distribution system. The objective and theory are in line with that of national coordination. At the same time, national coordination should reflect the system theory. Therefore, in deepening the reform of the income distribution system, a rethinking of the sys­ tem and the adoption of holistic values should be considered to strengthen the top design and mechanism coordination,24 which is fundamental to the macro-level adjustment of the distribution structure.

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Structure of co-integrating distribution

3.2 Dual-adjustment of the distribution structure There are two main instruments to coordinate distribution relationships: (1) policy and (2) the law. Considering that distribution activities and distribution relation­ ship are directly related to the distribution structure, the adjustment of economic structures will directly influence the solution to distribution issues. Therefore, the distribution structure in the following context will be regarded as an integral part of economic structure, to discuss the economic structure and the policy and legal issues. The special role of policy and law, as well as the importance of legal norms to the distribution activities, will be illustrated as key measures to adjust each type of structural regulation. 3.2.1 Dual-adjustment of economic structure and distribution Structure Economic structure can have a direct effect on the quality and quantity of eco­ nomic development. That means the one-sided emphasis on economic growth will inevitably lead to problems making it extremely difficult to surpass the “limit of growth” and to achieve sustainable economic development (Meadows et al. 2006).25 Therefore, while focusing on economic growth, we must continue to opti­ mize economic structure. In fact, the adjustment of economic structure is a basic issue that a country needs to constantly address26 given its long-term and perpetual impact on social distribution. In many industries and fields, effective economic development requires con­ tinuous structural adjustment in the economy and the enhanced regulation of economic law. The layout is formed with the coexistence of economic structural adjustment and the coexistence of policy and law. The proposition of dual adjust­ ment is thus proposed.27 Moreover, when adjusting economic structure, effective regulation should be made on the distribution structure in particular. Distribution structure should be regulated before other types of structure in the larger economy can be well regulated. Therefore, the distribution structure, especially the dual regulation issue, should be focused on. This type of “Dual Regulation” can directly deter­ mine whether the income distribution of a country is fair or not and whether the economy could maintain a stable and growing trend. Therefore, it’s necessary to conduct comprehensive and systematic studies into the “dual adjustments”, espe­ cially from the perspective of economic law. In fact, both the general economic structure and the specific distribution struc­ ture rely on effective regulation by economic law. The relationship between policy regulation and legal regulation should be well coordinated to change the stereotype that the policies are focused on instead of law in reality. Therefore, the normal structure of economic law should be strengthened and the legislation structure should be regulated to enhance the rule of law level in the regulation of economic structure. Enhancing the distribution structure regulation and the level of the rule­ of-law in the economic structure has been important propositions in the legal

Structure of co-integrating distribution 65 studies of economic laws. Adjusting the economic and distribution structure on a national level involves many rights and responsibilities. It is uniquely by intro­ ducing and emphasizing the adjustment of economic law that structural adjust­ ment can be better justified, legitimate rights and interests of the relevant parties can be protected, steady economic growth can be achieved, public welfare and basic human rights can be secured and economic law adjustment goals can be achieved. 3.2.2   Structural regulation relies on effective  adjustment by economic laws Both the overall adjustment of economic structure and the specific adjustment of distribution structure depend on effective regulation by economic law. The intrin­ sic link between the two phenomena can be unveiled by analyzing the means. In general, the so-called economic structures which include industrial structure, investment structure, consumption structure, distribution structure and regional structure contain complicated relationships intertwined in fields including society, politics and law, which affect the stable development of the economy and society as well as the long-term peace and political stability of the country. Since the outbreak of the economic crisis in 2008, China has placed more emphasis on the adjustment of those structures, endeavouring to solve the problems of structural imbalances or uncoordinated development. For example, in terms of industrial structure, China has proposed a plan to adjust and rejuvenate “ten major indus­ tries”.28 In terms of the consumption structure, China has emphasized the need to increase the purchasing power of the people and to constantly expand domestic demand. In addition, many measures including “bringing home appliances to the countryside”29 have been implemented. In terms of distribution structure, we have taken various measures such as fiscal and taxation policies to solve the unbal­ anced distribution ratio among countries, enterprises and individuals, as well as among populations.30 In terms of geographic inequality, to tackle problems such as imbalanced development and the dual structure in urban and rural areas, some regulations have been issued to promote regional development,31 to name but a few. Many of the structural adjustment measures combine policies and legislation. Therefore, structural adjustment cannot be perceived as merely economic policy, but as part of written law. As a matter of fact, economic law regulations need to ensure substantive and procedural justice in structural adjustment and to protect legitimate rights and interests. Economic law acts on, and reacts to, the adjustment of the distribution struc­ ture providing it with legal guarantees. The distribution structure adjustment con­ stitutes economic policy in nature whereas economic law belongs to legislation. Given that adjusting the distribution structure directly involves the rights and interests of all kinds of entities, the relationships between policies and laws need to be properly managed. That means comprehensive and effective adjustment of economic law is necessary.

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Structure of co-integrating distribution

When adjusting the distribution structure, it’s necessary to modify the eco­ nomic law system to satisfy the prerequisites and the institutional basis for the adjustment. This explains why all countries pay attention to the strengthening of structural legislation. At the same time, the “validity” of economic law adjustment must be kept in mind. Given that the purpose of adjusting the distribution struc­ ture is to prevent and resolve distribution crises, economic law adjustments must also comply with the “performance principle”. In other words, the goal of opti­ mizing the distribution structure and ensuring structural adjustment is achieved is to promote sound economic operation and coordinated development. In addition, adjustments through economic law should be “regulatory”, that is, and it should be the combination of positive encouragement norms and negative restriction norms given the inherent consistency with policy manifested during adjustments to the economic and distribution structures. For example, each of the industrial structure adjustments can be mandatory or arbitrary, binding or guid­ ing. Fully grasping the regulatory nature of economic law contributes to a bet­ ter understanding and resolution of the issue of legalization of various structural adjustments. 3.2.3 Dual-adjustment problems In “dual adjustments”, there is a very prominent issue called “strengthening pol­ icy and weakening law”. The issue refers to the phenomenon that there is a heavy reliance on all kinds of economic policies (fiscal, financial, industrial, foreign trade) which concern the distribution structure. On the other hand, the correspond­ ing legislation and law enforcement are lagging behind, resulting in a relatively low level of legalization of the distribution structure adjustment. As mentioned above, although the adjustment of the distribution structure is an economic issue, the adjustment of interests, rights, obligations and responsibilities of the relevant parties must be clarified according to the law. In particular, the powers of the government with regard to distribution adjustment ought to be limited by the law. Unfortunately, there is currently little or no legislation in certain areas meaning that policy plays a significantly dominant role. For example, with regard to the distribution structure, there is still a lack of comprehensive plans in China. In addition, the policies and legal norms on distribution have different objectives and are very fragmented. This has led to chaotic and unfair distribution. In fact, similar problems also exist in other struc­ tures whose changes also impact distribution. For instance, the current legislation governing the industrial structure, an important area, has not been appropriately designed. It mainly comprises of the state council’s laws and regulations and the guidance catalogue.32 In terms of the investment structure, the highest level of direct legislation is administrative regulations, while relevant substantial and pro­ cedural laws are rather deficient. Doubts expressed about the huge investment of RMB four trillion in 2008 reflect concerns people have, regarding insufficient or unlawful legislation in areas such as the budget law, the national debt law and the investment law.33 In terms of the consumption structure, issues relating to the

Structure of co-integrating distribution 67 spending capacity, consumption level and price index are all directly linked to the consumption structure adjustment. In addition, similar issues exist in the regional structure. For example, in order to solve the regional development imbalance, China has issued a series of “opinions” and related documents34 based on the differences among the eastern, western, central and north-eastern regions and the features of different economic zones. However, the adjustment of the regional structure has a far-reaching impact on the national economy, has been more affected by the policies and has received less scrutiny with regard to the rule of law. To sum up, economic measures and policies alone are insufficient to address the distribution structure adjustment and the overall economic structure. In addi­ tion, it is necessary to apply legislation, especially economic law. To raise the level of the rule of law in economic restructuring, it’s necessary to impose appro­ priate policies and laws, strengthen legislation and improve the levels and the quality of legislation. At the same time, law enforcement should be strengthened to render it effective. Enforcement is directly related to the adjustment of eco­ nomic law itself. 3.2.4 “Dual adjustments” and the structural adjustment of economic law To solve the prominent problems arising from the “dual adjustments”, it is neces­ sary to make some amends to economic law especially by amending its normative and legislative structures. The normative structure focuses on the internal consti­ tution of economic law norms, including the main parties of economic law, the rights and obligations as well as the obligation and responsibility structures. The legislative structure, alternatively, focuses on the internal constitution of the leg­ islative system of economic law, including the laws, regulations and rules which belong to economic law. The two structures are closely related to each other. The adjustment of the normative structure can be reflected in the legislative struc­ ture through the changes it brings about. Similarly, adjustments in the legislative structure will impact the structure of rights, obligations and responsibilities of the subjects. To this end, attention should be paid to the “dual structures” of the norm and legislation as adequate adjustments are undertaken. The sections that follow will focus on the normative structure of economic law. Adjusting the economic structure within the paradigm of the normative struc­ ture of economic law involves two parties: (1) the entity which rules economic structural adjustment, that is, the government and its functional departments; (2) the party who is under the influence of the adjustments, that is, the market partici­ pants. In different economic structures, in spite of the various combinations that may exist, the parties can be roughly divided into these two categories, otherwise considered as the “dual structures” of the subjects. Those parties are entangled in the complex structures of rights and obligations due to conflicts of interest in economic law and the allocation of numerous powers and rights. For example, the central government’s power to adjust its economic structure, an important macro-control power, has a direct impact on the overall

68

Structure of co-integrating distribution

economic operation and how the economic system is improved. Economic entities also enjoy specific rights in accordance with the law. These include investment rights, distribution rights and consumers’ rights, each of which is related to vari­ ous economic structures. For instance, the investment right involves the amount of investment, investment area, investment scope, investment structure, industrial structure and regional structure; the distribution right refers to the expectation of the return on investment and the privilege to participate in income-sharing which is closely related to the distribution and consumption structures; the consumption rights include enterprise consumption rights and individual consumption rights, production consumption rights and living consumption rights. These structures are closely correlated. In conclusion, the structural adjustment or institutional arrangement in economic law can directly influence the arrangement as well as the structures of specific rights and obligations, thereby directly affecting eco­ nomic adjustment. In fact, all specific economic structures including the industrial structure, investment structure, consumption structure and distribution structure correspond to a specific “normative structure”. Normally, the adjustment of the normative structure directly affects the adjustment of various economic structures, and to adjust the economic structure is to adjust the specific normative structure. For example, as a very important economic structure, the adjustment of the industrial structure involves institutional arrangements such as market access and exit, the qualifications of enterprises and their employees, investment rights and distribution rights of market participants. Given the connection between econom­ ics and law, the adjustment of the industrial structure has the potential of altering the ownership structure which entails the proper allocation of various kinds of rights and powers. In fact, in the industrial restructuring process, the determina­ tion of market access and exit of different subjects in different industries belongs to the exercise of industrial control power. Sometimes, there could be conflicts between the regulation by authority and the ownership of the relevant market players. Therefore, it is necessary to specify investors considered qualified as well as the limits and boundaries of the regulatory power of the state in industries so as to effectively resolve issues related with the allocation of rights and powers and to form a rewarding structure. Both constitutional law and economic law may involve the protection of the property rights of market players and the exercise of power delegated to different levels of government as well as its functional departments.35 Resolving various structure-related problems and constantly improving economic law may enable the country to adopt far-reaching economic laws and regulations to achieve the goal of adjusting the economic structure. In the process of adjusting and fulfilling the structure of economic law, we must pay attention to the intrinsic links among various economic structures. For instance, the consumption structure includes issues like consumption capability (including production-consumption capability and living-consumption capabil­ ity) and consuming rights.36 Meanwhile, in the entire distribution system, gov­ ernments, enterprises, individuals and other entities, as well as their respective

Structure of co-integrating distribution 69 proportions, will lead to different consumption capabilities which are likely to affect the overall structure. The determination of the relative weights of public spending, the consumption of enterprises and households by a country has an impact on the investment and industrial structure. Therefore, the adjustment of the distribution structure can influence the other structures including investment, consumption and even the industry, thereby further affecting regional develop­ ment and the entire economy. Internal relations among the various types of economic structures are the basis for exercising the macro-control power of economic law, for safeguarding many rights such as investment rights, consumer rights and distribution rights. Furthermore, the effective allocation of powers and rights will enhance the coor­ dination of various structures and improve the internal structure of economic law. 3.2.5 Major economic law issues pertaining to dual adjustment The “dual adjustment” between the economic structure (or specific distribution structure) and the law and the adjustment undertaken within the economic law structure itself, aim to solve a series of important economic law issues. These include the system, the macro-control power and the allocation and protection of various interests and rights of market players, the institutional adjustment imple­ mentation and the coordination of various departmental laws and legislative struc­ tures in economic law. Further studies may shed more light on “strong policy and weak laws” during economic structural adjustments. From an institutional perspective, adjustment of the distribution structure and even that of the overall economy all relate to specific systems. For example, the adjustment of the distribution structure involves the overall distribution system, especially the fiscal and taxation system – while the adjustment of the industrial structure involves the planning system or specific industry management. The for­ mation of the systems is directly related to economic law and given that all kinds of economic structural adjustments are subject to certain management systems, it’s necessary to start from adjustments and reforms in the management systems as well as the limitations of authority of the relevant economic laws. Directly related to the above issues is the authority in the economic structure or the specific distribution structure. We thoroughly investigate the entire legal or political system to determine which departments or institutions are delegated the power in particular fields, including adjusting the distribution or industrial structure. The institutions with the power to undertake adjustments are also embodied in the macro-control authority at the national level. These powers include the power of industrial regulation and distribution which appear to be less “macro” and more “comprehensive” when compared to the power of fiscal and taxation control and the power of financial regulation though it is more targeted on specific microeco­ nomic activities than planning and control power. Governments should coordi­ nate various macro-control powers – especially the power to undertake structural adjustment and the power to adjust the regional structure.

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Structure of co-integrating distribution

In order to effectively limit the power of structural adjustment and fully protect the specific rights and interests of individuals and entities, it’s necessary to use various specific stipulations of economic law simultaneously so as to optimize economic structures. For example, when adjusting the distribution structure, it’s necessary to increase the proportion of middle-income earners and endeavour to form the “olive” shape (Keqiang Li 2011)37 income distribution structure so as to increase the proportion of resident income in the overall national income dis­ tribution, the proportion of labour remuneration in the primary distribution, the incomes of urban and rural residents and to ensure wages and salaries rise with economic growth. The income of subjects and their spending capacity as well as the income distribution system are included in the system, therefore, comprehen­ sive adjustment is required through financial, tax banking, securities and social security laws. Adjustments by law can be observed in the concrete norms of economic law. For example, in response to the financial crisis, the “ten industries” were adjusted and rejuvenated, thereby setting out a series of important measures, including financial subsidies, export tax rebates and concessional loans. These specific measures involve distribution and are directly related to the adjustment of sys­ tems, structural adjustment and the specific rights of various subjects. Our discussion helps to further explain why the adjustment of economic law is vital to the economic structure (including the distribution structure) and why it is necessary to constantly promote the legalization of structural adjustment. In fact, the prominent distributional problems that exist in economic restructuring, such as illegal budget adjustment in fiscal and tax laws and inadequate transparency in fiscal revenue and expenditure,38 have a negative impact on the economy particu­ larly distribution. The problems are motivated by the “policy first” notion as well as the absence of legality and procedural justice. Therefore, we still have a lot to do with regard to the long-standing “policy before law” conundrum. 3.2.6 Brief summary The adjustment of the economic structure (including the distribution structure) and economic law which entails the “dual adjustment” at different levels and of different natures with the former largely depending on the latter, is necessary for the sound operation of the economy. However, in the “dual adjustment” pro­ cess in China, the “policy before the law” dilemma cannot be ignored due to the many negative effects on the adjustment of various concrete economic structures. Therefore, it is a perpetual and challenging task to constantly improve the distribu­ tion structure as well as the rule of law during economic restructuring. To ensure the effectiveness and legitimacy of economic restructuring, law-makers should reconsider economic law. Alternations in the normative or legislative structure of economic law may resolve the important issues while the effective improve­ ment of economic law and the realization of economic restructuring could not be achieved without effectively executing the “dual adjustment” of economic law, and coordinating the “dual adjustment” of the policy and the law. Similarly, they

Structure of co-integrating distribution 71 are also essential to the rule of law in economic restructuring as well as the fair­ ness and the legitimacy of structural adjustment. The principles also govern the adjustment carried out in the economic structure when solving the issues of distribution. The adjustment could be understood from different perspectives. Firstly, it could be interpreted as the most fundamental and meaning adjustment to economic law and to the economic structure. Secondly, it refers to the coordination of policy and law to strengthen the significance of legal adjustment. Thirdly, to resolve the “abuse of policy and absence of law” dilemma, it is necessary to improve the structure of economic law by adjusting the normative and legislative structure of economic law from content to form, that is the third level of dual adjustments. Given the close association of the first three aspects of “dual adjustments”, special attention should be paid to the coordination of the three aspects. The rationality of the internal structure needs to be observed from a system­ atic and global perspective in the distribution and the overall economic structure. When determining whether a certain structure is reasonable, it is indispensable to use the structural analysis pertinent to the distribution problem and economic law research (Quanxing Wang & Ping He 2008).39 In addition, the importance of structural analysis partly relies on its connection with the principles (Zhang 2013)40 of economic law. The differences among the capabilities (such as distribution ability), rights and scales have a direct impact on the balance and optimization of the economic structure. An effective structural analysis based on the prevailing differences in realities and the resulting structural imbalances is efficient in the all-round resolution of distribution structure-related issues.

3.3 Promoting and regulating the norms in economic law The reasons why economic law helps to solve the distribution problem, such as distribution pressure and differences, and promote the effective adjustment of the distribution structure lies in its special structure and its prominent regulations which combine positive encouragement and negative prohibition, thereby con­ tributing to solving the distribution problem from these two aspects. Compared with restrictive stipulations, encouraging stipulations in economic law may have a greater impact. Next, we will discuss the relevant issues and highlight the role of economic law in crisis management. 3.3.1 Background of the promoting norms in economic law China’s reform and “opening” has brought about remarkable change in the econ­ omy and society, as well as in economic law41 which has effectively promoted rapid economic and social development through the adjustment of complicated distribution relationships. As a matter of fact, the goal of “promoting develop­ ment” is endogenous in the normative structure and legal function of economic law.

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As to the purposes and means, economic law speculations can be divided into two categories. While some are intended to restrict or prohibit certain activities, others encourage or promote them by their very nature. The traditional prefer­ ence for “prohibiting norms” has led to relatively insufficient research about the promoting norms. Since China’s reform and “opening”, the promoting norms of economic law have played a crucial role in effectively solving distribution problems and managing the distribution risks and crises. The study on promoting norms intends to under­ score the many differences among economic law and other traditional laws in order to reveal the important function of economic law in settling distribution problems, to promote economic and social development, and to clarify the importance of eco­ nomic law itself, thus promoting theoretical development and system improvement. Given the role of economic law in resolving distribution issues,42 the academic community needs to further study how to use the economic law system to solve the issues of market failure including unfairness and to promote economic and social development which is an important task for both theoretical research and system construction. Consequently, this book intends to define the promoting norms of economic law, to analyze its main types as well as the legislative practice in China so as to further explore the effect of promoting norms on both distribution and socioeco­ nomic development. 3.3.2 The rationale behind the promoting norms “Promoting norms” refer to the branches of economic law that are intended to solve distribution problems and to promote economic and social development by encouraging statutes. Promoting norms are influenced by the features, structural functions and system principles of economic law. Therefore, this part determines the rationale behind this function. Firstly, compared to other legal branches, economic law is more closely related to economics and administrative regulation. Economic law stems from the legali­ zation of multiple economic policies and corresponding economic instruments. Economic law combines positive encouragement and promotion, together with negative restrictions and prohibitions. Moreover, promoting norms serve as an important way of enhancing both fair distribution and economic and social devel­ opment. A multitude of promoting norms often inherently guarantee development. Economic law, as modern law for promoting development, has an outstanding feature of policy and is an important tool for the state to promote fair distribution and economic and social development. Secondly, judging from the structural function, the theme of contemporary society is the development of economy, society, politics and law. These are areas around which development-based researches have concentrated (Shouwen Zhang 2005).43 Law, including economic law, must back social development. Therefore, promoting norms in economic law is necessary so as to guarantee the fair distribu­ tion of social resources and promote economic and social development.

Structure of co-integrating distribution 73 To reach the goals above, a specific normative structure is a must for economic law because of the causation between structure and function. And promoting norms formed within economic law contribute to enhancing fair distribution and economic and social development. Moreover, the norms are mainly shown as a large number of encouraging norms of the economic law which contribute to guar­ anteeing fair distribution as well as promoting economic and social development. Thirdly, from the perspective of the system design, to reach a promoting func­ tion, the spirit of “promotion” must be reflected in the objectives, basic princi­ ples, subject structureand arrangements of rights and interests in economic law. Therefore, the spirit of fair distribution and economic and social development should be embodied in the purpose of economic law. Values – including modera­ tion, fairness and efficiency – should be reflected in the principles of economic law and other legal branches. Measures of antitrust, anti-unfair competition which focus on promoting fair distribution and economic and social development should be included in the overall or specific fiscal taxation regulations with a view to promoting fair distribution and economic and social development. The analysis shows that the promoting norms of economic law are consistent with the regulatory features of economic law and fully reflect the regulatory func­ tion. At the same time, the promoting norms rely on specific structures of eco­ nomic law including the composition of promoting norms and restrictive norms, as well as the specific subject structure, power structure, responsibility structure and modulation structure which determine the specific function of economic law in promoting fair distribution and economic and social development. Thus, from the perspective of system design, the philosophy and spirit of promotion should be integrated into the entire system. 3.3.3   The specific categories of the promoting norms The primary goal of promoting norms is to guarantee fair distribution, achieve dis­ tribution justice and promote economic and social development (Rawls 1988).44 However, the term “promoting” indicates activism with both incentive measures and negative promotion or restrictive measures. In general, more attention should be paid to positive measures when studying economic law promotion norms. In addition, the promoting norms can also be divided into direct promoting norms and indirect promoting norms; respective promoting norms and overall promoting norms. There are norms which aim at certain types of individuals, and industries which are often regarded as direct and individual norms. Furthermore, some norms aim at macroeconomics and social development as a whole. These norms, which belong to a higher level, are usually considered as indirect or over­ all norms due to the fact that they are derived from direct, individual norms. In addition, promoting norms can be divided into the categories of general or specialized, according to related legislation. Promoting norms are usually either general or belong to various legal branches including fiscal law, tax law, finan­ cial law, competition law and industrial law. There is also specialized legisla­ tion directed towards a specific area. This legislation is centralized, specific and

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focused on an industry, region or association. All promoting legislation is directly or indirectly connected with the solution to distribution problems. Thus, when promoting economic law, equal attention should be given to both special and general legislation. In general, legislature based on the principle of “different treatment”, solves the problem of distribution imbalance in the development of industries, regions and enterprises and guarantees fairness and overall efficiency by providing sup­ port to certain industries, regions and enterprises. The promotion of industrial development includes the promotion of various sectors: agriculture, automobile, tertiary, transportation and husbandry. The promotion of regional development includes the development of large regions such as the western, northeast and cen­ tral regions as well as the special regions such as coastal areas, economic and technological development zones, former revolutionary bases, areas inhabited by ethnic minority groups, remote and border areas and poverty-stricken areas. Enterprises including small and medium-sized, state- and private-owned, as well as those located in townships and villages, are equally promoted. It is worthy to note the close-knit promotion of industries, regions and enterprises. For example, industrial promotion directly affects enterprises in the industrial area and the pro­ motion of the area directly affects related industries and enterprises in the area etc. In fact, these types of promoting norms enhance the resolution of issues of “urban-rural structures” “eastern and western structures”, and “large and small structures”,45 from different angles and the resulting imbalances, corresponding economic efficiency, fair distribution and other related issues. Various promotion means are crucial when it comes to the promoting norms of economic law. These means are usually various legalized economic policy instru­ ments including fiscal and taxation, finance, competition, industry and foreign trade. A variety of legal means are at the core of promoting norms through which we can not only study the specific path to the distribution problem from different aspects but also conduct a “coherent study” on the various sectorial laws of eco­ nomic law in order to determine and refine similarities among promoting norms. The promotion means are mainly stipulated in various kinds of incentive con­ cessions and are directly associated with the solution to distribution problems. Among these are institutional concessions including fiscal concession (i.e. fiscal subsidies and special transferring payment), tax concessions, financial concession (i.e. the low-interest loans system), competitive concession (like the exception system) and industrial preferential system (i.e. the investment incentives)are vital to the distribution of interests among relevant participants and to the resolution of distribution-related issues. In fact, China’s reform and opening-up is closely linked to the distribution of benefits and the implementation of a large number of promoting measures. Without the effective promotion of multiple means, it may be impossible to ensure sound macro-control and market regulation, to effectively solve distribution problems, and to guarantee rapid economic and social devel­ opment. Economic reform started with the permission to “production to house­ holds” and continued with the decentralization of power, the transfer of profits to enterprises, the return of wealth to the people as a means of realizing common

Structure of co-integrating distribution 75 prosperity and, in an all-round way, to build a well-off society. The entire process and the goals of reform are directly linked to issues of distribution. 3.3.4 Legislative practice of promoting norms in economic law 3.3.4.1 Decentralized and centralized legislation China’s promoting norms are mainly reflected in economic and social law, both of which are directly related to the adjustment of distribution relationships. Since the reform and “opening” of China, the promoting norms of economic law have experienced rapid growth. Attention has also been inverted from the decentral­ ized to the centralized model which promoting norms in fiscal and taxation law, financial law, planning law and competition law, as well as some low-level laws or regulations, simply labelled as “promoting”. Currently, the laws and regulations which are labelled “promoting” include Law of the People’s Republic of China on Promotion of Small and Medium-sized Enterprises; Law of the People’s Republic of China on Promotion of Agricultural Mechanization; Law of the People’s Republic of China on Promotion of Employment Promotion; Law of the People’s Republic of China on Promotion of Private Education (2013 Amendment); Law of the People’s Republic of China on Promotion of Cleaner Production (revised in 2012); and Law of the People’s Republic of China on Promotion of Circular Economy.46 These laws include many promoting norms that help to skew/tilt the allocation of relevant resources to areas in need. For example, the Law of the People’s Republic of China on the Promotion of Agricultural Mechanization stipulates that: People’s governments at or above the county level shall incorporate the pro­ motion of agricultural mechanization into the national economic and social development plans and gradually increase capital investment in agricultural mechanization based on financial support and preferential taxation policies… so as to promote the development of agricultural mechanization. This law involves the planning law, financial/fiscal law, tax law, fiscal/financial law and several other laws. At the same time, Chapter VI of Law of the People’s Republic of China on Promotion of Agricultural Mechanization provides various support and incentives such as financial subsidies, preferential tax treatment and discount loans to achieve a “lean distribution” off/on agriculture. In addition to the general provisions, there are also special provisions in fiscal law, financial law, planning law and other department laws including measures of “support”, “encouragement” and “reward” which are aimed at making specific stipulations on tilt distribution, which are directly related to the distribution of the interests of relevant subjects and which contribute to fair distribution as well as economic and social development. In addition to the laws, there are a large number of normative documents equiv­ alent to administrative law which contain considerable promoting norms. Since

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the reform and opening up, the state council has promulgated many laws and regulations containing promoting norms in the areas of finance, taxation, bank­ ing, industry and competition. For example, the normative documents directly promulgated or forwarded by the state council that contain the words “promotion” are over 80. Most documents are directly connected to economic and social devel­ opment and involve the “promotion” of various industries, regions and markets. Those documents are mainly related to industries, enterprises, regions, mar­ kets, foreign trade and prices. Among them, the normative documents aimed at promoting industrial development are predominant and are directed towards industries including automobile, steel, fodder, agricultural product processing, coal, circulation, husbandry, dairy and real estate.47 These industries are critical to the national economy and the people’s livelihood. However, some of them are relatively weak and need to be effectively promoted through legalized economic means. This partially explains why the State Council has formulated the Interim Provisions on Promoting Industrial Structure Adjustment aimed at directly or indirectly resolving distribution problems. In addition, normative documents pertaining to regions include the develop­ ment of the western regions, the rejuvenation of the northeast region and the rise of the central region.48 These regions have a direct bearing on resources and profit distribution among the different regions. Some important markets which have a great impact on the national economy and the people’s livelihood, such as the real estate and capital markets directly affect the income distribution of related parties and require steady and healthy development.49 3.3.4.2 Characteristics of legislation periods Marked by the establishment of a market economy system in 1992, the develop­ ment of China’s economic law since 1978 can be divided into two phases. In the first phase, economic law was far from flawless given that it was influenced by many factors, some of which included reforms and a deficient economic and legal system. In fact, the function and goals of economic law were unclear and legisla­ tion intended to promote economic law was decentralized. Judging from the release date of the relevant legislation, all laws that have “promotion” as part of the title were introduced after the establishment of the mar­ ket economy or in the 21st century. For example, the normative documents prom­ ulgated by the State Council were mostly released after the implementation of the market economic system. This shows that before the market system was imple­ mented, the centralized or comprehensive legislation of promoting norms was insufficient. At the same time, it also shows that the more the market economy is pushed forward, the more comprehensive promotion norms are needed. The promotion is based mainly on interest redistribution, in particular, government revenue transfer. In fact, the strategy to “decentralize power and profit sharing”, constitutes a major part of the adjustment of benefit and is very important to the legislation to promote norms in different periods. Whether the incentives of finan­ cial/fiscal subsidies or tax, discount loans, etc., are directly related to the transfer

Structure of co-integrating distribution 77 of government revenues and interests. In fact, the government promotes overall economic and social development as well as the stable and healthy development of important areas by adjusting unfair redistribution. This measure allows for the realization of substantive equity, safeguards overall social and public interests and promotes the healthy and coordinated development of both the economy and society. Although there were few specialized promoting norms before the establish­ ment of a market economy in China, it’s necessary to understand them from a broad view. In fact, at the initial stage of China’s reform and opening up, there existed many substantive norms of economic law in the form of policies even though, at the time, few norms of economic law existed.50 Those systems that came into actual effect reflect the purpose and spirit of economic law, which, in the broad sense, embody economic law. For example, there were institutional arrangements which showed the spirit of promotion in the early stage of economic law. The household responsibility sys­ tem prescribes that agricultural households could retain part of their production after submitting a certain proportion to the government and the collective organi­ zation. This was in accordance with the laws51 which had a direct influence on the income of the people. As a broad fiscal and taxation arrangement, the institution of remuneration linked to output greatly mobilized the enthusiasm of farmers and led to the initial success of the rural reform. Similarly, in the process of urban enterprise reform, the institutional arrangement to “replace profit delivery by taxes” constitutes an important incentive for enterprises and individuals. In fact, it is the form of income distribution which gave birth to the autonomy of market players (including the subjects/entities of economic law). This is not an arrange­ ment in civil or administrative law but an obscure economic law that renders the economy of the entire country more reasonable that reduces the transaction costs among various types of entities and that improves the overall social welfare. It should be noted that these are all various functions of promoting norms. 3.3.5 Brief summary Promoting norms are vital in addressing distribution problems. As an important part of overall economic law, distribution problems are directly related to the characteristics of economic law, the functional structure, and the design princi­ ples. The “promotion” in the promoting norms means a wide range of catego­ ries of promotion including direct and indirect promotion, individual and overall promotion, general and specific promotion, all of which involve the distribution of benefits. Although the centralized legislation of promoting norms was rela­ tively inadequate in the first decade or so of China’s reform and opening up, the decentralized legislation and the institutional arrangements that are substantively significant in promoting norms should still not be overlooked. For example, meas­ ures or policies like “Household responsibility system”, “replacing profit delivery by taxes” and “tax reform” mean a lot to China’s reform and opening-up and are worthy of further exploration.

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The promotion/promoting norms of economic law act as an important way of coordinating and adjusting the distribution structure, resolving distribution prob­ lems, preventing distribution risks and crises. Therefore, various kinds of distri­ bution issues can be resolved by studying the promotion-oriented economic law, strengthening economic law regulation and continuously improving the level of the rule of law.

Notes 1 In ancient China, the idea of “harmony between man and nature” emphasizes the coordination between man and nature. See Keli Fang. (2003). “Harmony between Man and Nature” and Ecological in Ancient China. Social Science Front (5), pp. 94–103. 2 The basic meaning of “Xie Tiao” is usually understood as “coordination, harmony, and marching together”. If the state of coordination is not reached, adjustments should be made so as to “make it fit”. 3 For further information to understand national coordination, consult: Zixuan Yang. (2009). Theory of the State Coordinating. Beijing: Peking University Press, p.127. 4 Each and every branch of economic law has distributive effects, making the system a major coordinator in distribution relationships. 5 Redistributive policies should be based on the budget, transparent taxation and transfer methods. See Kasper, W. and Streit, M. (2008). Institutional Economics: Social Order and Public Policy. Translated from German by Chaohua Han. Beijing: the Commercial Press, p. 373. 6 See Baoshu Wang, ed. (2004) The Theory of Economic law. Beijing: China Social Sciences Publishing House, p. 38. 7 The “Reform Decision “of 2013 clearly proposed to implement the statutory principle of tax revenue，a special emphasis on the statutory principle of the allocation field. See Shouwen Zhang. (2014). Statutory Principle of Taxation should be a Priority in Rule of Law. Global Law Review, 36(01), pp. 55–57. 8 See Zixuan Yang. (2009). Theory of the State Coordinating. Beijing: Peking University Press, pp.127. 9 According to Sima Qian’s theory of “good karma”, following the trend of distribu­ tion problems is a good way to resolve them. See Shouwen Zhang. (2014). Legal Adjustments to the Relation Between Government and Market, China Legal Science, (5), pp.60–74. 10 After the outbreak of the global financial crisis of 2008, countries have stepped up macroeconomic regulation and market supervision thereby reflecting the crucial role played by countries and governments as well as highlighting the relevance of economic law. See Shouwen Zhang. (2009). Analysis to the Financial Crisis from the Perspective of Economic Law. Legal Forum, 24(3), pp. 71–78. 11 See Zixuan Yang. (2009). Theory of the State Coordinating. Beijing: Peking University Press, pp. 361–362. 12 Many scholars have paid attention to the method of systematic analysis in their works. See Ruifu Liu. (2000). The Theory of Economic law. Beijing: Peking University Press, pp. 21, 24–25. 13 This contradiction, as the basic contradiction of economic law, is embodied in vari­ ous fields of economic law which helps to understand why it is necessary to combine the “visible hand” and the “invisible hand” when coordinating distribution relation­ ship. See Kimsawa Ryu. (2005). An Introduction to Economic Law. Translated from Japanese by Man Daren. Beijing: China Legal Publishing House, p. 27.

Structure of co-integrating distribution 79 14 Besides cyclical factors that caused the 2008 financial crisis, were structural factors which particularly caused unfair income distribution by relatively distorting prices. See Shuguang Zhang. (2010). Challenges Brought by the International Financial Crisis Facing Microeconomics. In Jianming Wang ed. Business Cycle and Constitutional Order. Hangzhou: Zhejiang University Press, p. 17. 15 On February 3, 2013, the State Council approved the document, Opinions on Deepening the Reform of the Income Distribution System raised by the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Human Resources and Social Security in which it clarified the four major goals of the income distribu­ tion system reform. It goals envisaged the doubling of the income between urban and rural residents by 2020, the narrowing of the income distribution gap, the significant improvement of the income distribution order, and the improvement of income distri­ bution pattern. 16 Consistent with this, the “Reform Decision” of 2013 also specifically intended to “standardize the income distribution order, improve the mechanism and policy system of income distribution regulation and control, establish a personal income and prop­ erty information system, protect legitimate income, regulate excessively high income, regulate implicit income, eliminate illegal income, increase the income of low-income people, increase the proportion of middle-income people, strive to narrow the income gap between urban and rural areas, regions, and industries, and gradually form an olive distribution pattern”. 17 In this regard, the “Reform Decision” in 2013 also has the same statement. 18 This multiplication plan is very important. If the per capita real income of urban and rural residents can be doubled by 2020 instead of 2010, then the income growth of middle and low-income people will be faster, people’s living standards will be raised in an all-round manner, and the distribution problem will be alleviated to some extent. 19 This law was approved by the 29th meeting of the Standing Committee of the 10th National People’s Congress on August 30, 2007 and came into force on January 1, 2008. 20 For example, in December 2013, the China Securities Regulatory Commission specifi­ cally formulated the Regulations on the Supervision of Listed Companies No. 3 – Cash Dividends for Listed Companies in order to further regulate the cash dividends of listed companies, increase cash dividend transparency, and earnestly safeguard the legitimate rights and interests of investors. 21 For example, the Circular on the Exemption of Certain Service Charges from Banking Financial Institutions issued by the China Banking Regulatory Commission, the People’s Bank of China, and the National Development and Reform Commission (Yinjianfa [2011] No. 22) came into force in July 2011. 22 Multiple relevant acts had been taken. For example, State Administration of Taxation released Notice of the State Administration of Taxation on Implementing the Preferential Income Tax Policies for Small Low-Profit Enterprises on April 2, 2014. 23 There has been much debate on property tax reform. Some argued the failure experi­ ence should bring a conclusion to the reform. More recent documents in 2013 show policymakers preferred the term “Fang Di Chan” (tax on real estate and land usage) to “Fang Chan Shui” (tax on real estate), which may indicate a shift of emphasis. 24 In May 2014, following the approval of the State Council, a joint inter-ministerial meet­ ing system was established to deepen reform of the income distribution system. The joint meeting consists of 21 departments and units including the National Development and Reform Commission whose responsibilities are to coordinate various tasks so as to deepen the reform of the income distribution system, undertake research to deepen the major issues regarding the income distribution system reform, and make overall income distribution plans to inform policies, industries and prices.

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25 In the 1970s, the economists of the Rome Club raised the issue of “the limit of growth”, which was not widely considered at the time. However, the large number of problems that exist today have led to the conclusion that this theory is perpetual and research on the feedback loop mechanism between population growth and capital growth is very meaningful. See Meadows, D., Randers, J., and Behrens, W. (2006). Limits to Growth: The 30 Year Update. Translated from English by Tao Li. Beijing: China Machine Press, pp. 43–46. 26 Many economists such as Feisha, Clark, Lyondorf, Kuznets, Rostow, Chanari, Lewis, and Timbern have done in-depth studies on the basic problems of economic restructur­ ing. They have made significant contributions and their research provides important economic basics for exploring the legal issues concerned with economic restructur­ ing. 27 Some economists once pointed out that China’s economic restructuring has entered a period of “double adjustments”, a combination of cyclical and structural adjustments. This book is more concerned with the “double adjustments” at both the economic and legal levels, as well as policy adjustments and legal adjustments. 28 At that time, China intensively introduced ten industrial restructuring and revitaliza­ tion plans for the automotive, steel, textile, equipment manufacturing, shipbuilding, electronic information, petrochemical, light industry, non-ferrous metals and logistics industries, covering all major industrial sectors of China. The core of the numerous implementation rules and related policies supporting the “Top Ten Plans” mentioned above is to adjust the structure and change the mode of development. 29 For example, the policies of home appliances, agricultural machinery, automobile and motorcycle destined for the countryside, halving purchase tax for small-displacement passenger cars, and the policy of replacing old-fashioned home appliances and automo­ biles are all important measures that have caused widespread concern. 30 See the State Administration of Taxation’s Notice on Further Strengthening the Administration of Collection of Individual Income Taxes of High-income Persons (Guo Shui Fa [2010] No. 54); the Ministry of Finance and the State Administration of Taxation’s Notice on Adjusting the Business Tax Policy for the Transferring of Individual Housing (Financial Tax [2009]) No. 157). 31 See Some Opinions on Further Implementing the Revitalization Strategy of North­ eastern China and Other Old Industrial Bases (Guofa [2009] No. 33), etc. 32 For example, the Interim Provisions for the Adjustment of Industrial Structure issued by the State Council in 2005, and the multiple-annual versions of the Industrial Development Guidance Catalogue approved by the State Council. 33 The huge budget expenditure involves budgetary adjustments which China has already stipulated clearly in the Budget Law. However, the State Council has not implemented the budgetary adjustment procedures and the National People’s Congress has not exer­ cised its power to supervise the budget. This situation has aroused doubts in different quarters. 34 For instance, the State Council’s Some Opinions on Further Implementing the Revitalization Strategy of North-eastern China and Other Old Industrial Bases (Guofa [2009] No. 33), etc. 35 Professor North held that some mechanism should be designed to equilibrate the social and private return rates because once the ownership is not determined or implemented, there will be inconsistencies between them which will affect a country’s economic growth. This assertion is of great significance to the study of relationships between economic structural adjustment and legal structural adjustment, and to emphasize the protection of relevant subjects in the process of structural adjustment. See North, D. (1999). The Rise of The Western World: A New Economic History. Translated from English by Yining Li. Beijing: Huaxia Publishing House, p. 7. 36 To increase the consumption power of residents, , it’s necessary to adjust the national income distribution structure, raise the income level of low- and middle-income res­

Structure of co-integrating distribution 81

37 38

39 40 41 42

43 44

45

46

47 48 49 50

idents, emphasize the role of employment and labour remuneration in primary dis­ tribution, and focus on the role of social security and public services in secondary distribution which are also important problems when adjusting the national income distribution structure. See Keqiang Li. (2010). Few Issues regarding Economic Restructuring and Sustainable Development. Qiushi Jounal, (11), p. 3. During the revision of China’s Budget Law, the “openness and transparency” have always been emphasized and establishing a comprehensive, standardized, open and transparent budget system” is regarded as an important legislative objective of the revision of the “Budget Law”. In addition, not only do many important international organizations attach great importance to fiscal transparency, China also places spe­ cial emphasis on the transparency of financial revenues and expenditures in institu­ tional practice. See Ping Zhang. (2010). The Current Status, Gap and Improvement of China’s Public Financial Transparency Based on International Perspective. Research on Economics and Management, (09), pp. 64–69. See Quanxing Wang and Ping He. (2008). A Brief Discussion on the Structural Research Method in Economic Law Research. Journal of Chongqing University (Social Science Edition), 14(5), pp. 103–106. See Shouwen Zhang. (2013). General Theory of Economic Law. Beijing: Peking University Press, pp. 7–10. Regarding the origin of economic law, although there is lack of consensus among scholars, most of them believe that Chinese economic law developed in tandem with the reform and opening-up. The joint production contract responsibility system, “profit-and-tax reform”, “transfer­ ring and refinancing loans”, industrial and commercial taxation reforms, fiscal sys­ tem reforms are all major institutional adjustments in the distribution field and play an important role in resolving the distribution problems of China. See Shouwen Zhang. (2005). The Development Law Science and Development of Law Science. Law Science Magazine, (3), pp. 3–7. Rawls believes that in order to justify the outcome, “it is necessary to limit social and economic processes within the scope of appropriate political and legislative systems”. See Rawls, J. (1988). A Theory of Justice. Translated from English by Huaihong He, et al. Beijing: China Social Sciences Publishing House, pp. 255–256.Therefore, promotion-type economic law legislation is very important for ensuring distribution justice which show outstanding policy or political nature. Not only is the problem of the dual urban-rural structure prominent in China, but also the problems of east-west dual structure in the eastern and the western regions, the “binary structure of large and small enterprises” in large enterprises and small and medium-sized enterprises are severe. These directly lead to many distribution problems which need to be resolved through economic regulation. There is also a law similar to the People’s Republic of China Law for Promoting the Transformation of Scientific and Technological Achievements (implemented on October 1, 1996). In terms of the name, it can also be called “the promotion of scientific and technological achievements”. See, among others, The Opinions on Promoting the Development of Health Services Industry of the State Council in 2013, and the Interim Provisions on Promoting Industrial Structure Adjustment of the State Council in 2005. For example, the State Council’s Several Opinions on Further Promoting Western Development (2004) and the General Office of the State Council’s Opinions on Promoting the North-eastern Old Industrial Base to Further Expand Openness (2005), etc. For example, the General Office of the State Council’s Circular on Promoting the Steady and Healthy Development of the Real Estate Market (2010). China’s economic law legislation in the early period of reform and “opening” was mainly embodied in the field of tax law. This situation has a direct relationship with

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the attempt by China to legally resolve the distributional relationship among the state, enterprises and individuals. At the same time, this was also a significant institutional basis for the reform and “opening”. 51 China has long implemented physical taxes in the field of agricultural taxation. The typical form of taxation is that which farmers need to “pay the grain” to the country. The joint production contract responsibility system not only reflects the distribution relationship between the state and the peasants but also constitutes a fiscal and taxation system arrangement.

4

Legal optimization of

distribution structures

The discussions in the previous chapters indicate that the law is necessary for gov­ ernments to coordinate distribution relationships, given that the law constitutes an important means of adjusting distribution structures and solving distribution prob­ lems; that the prevention and mitigation of distribution risks and crises depend on the regulation of economic law and the comprehensive rule of law. Particularly in view of the utilization of legal means to adjust distribution structures, this chapter will go on to discuss the legal optimization of distribution structures, i.e. improv­ ing distribution structures not only from a general legal adjustment perspective but also from the substantive optimization perspective with a view to efficiently solving distribution problems. Considering that the optimization of distribution structures relies on effective regulation of relevant laws (in particular, economic law that directly impacts dis­ tribution) and that distribution structures have important effects on distribution problems, this chapter begins with a discussion on the relationship between dis­ tribution structures, distribution systems and revenue distribution powers from the legal perspective. The approach intends to unravel the relationship between distribution structures and economic law adjustment, as well as the necessity and possibility of using economic law and other legal means to adjust distribution structures. We further discuss institutional causes of distribution structures and issues that arise thereof, functions and particularities of economic law and other legal systems in solving distribution problems and the impact of distribution rights or powers on distribution structures. The chapter concludes by examining distribution theories of economic law, in particular, theories related to distribu­ tion structure adjustment, and come up with measures for improving economic law and enhancing regulation against the background of the existing distribution structural imbalance, the increasing distribution gap and the distribution inequal­ ity problems in order to better protect various distribution rights, maintain the distribution order and realize distribution justice.1 It should be noted that this chapter focuses on the internal relationships of distribution structures, the adjustment of economic law to macro distribution sys­ tems and legal systems, and the influence of economic rights on the different types of distribution structures in economic law, in order to find the scope of eco­ nomic law, its limits, its limitations and its relationship with other relevant legal

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adjustments. We intend to reveal the complexity of the adjustment of distribution structures as well as the necessity of economic law adjustment. Finally, it is our intention to illustrate how the optimization of distribution structures should be promoted through the adjustment of specific systems in economic law.

4.1 Necessity and relevance of structural optimization 4.1.1 Why are distribution structures optimized? Since ancient times, distribution has always been related to the national econ­ omy and people’s livelihood. Distribution has also involved many areas includ­ ing the economy, society, politics and law. It has a bearing not only on political stability, economic growth, social development and cultural prosperity but also on national wealth accumulation and basic human rights protection. Distribution problems, including misallocation or unbalanced distribution, have been at the origin of many disputes, institutional evolutions and regime change over the years in ancient and modern China as well in foreign countries.2 Therefore, great atten­ tion needs to be paid in seeking solutions to distribution problems. The reform and opening-up of China and rapid economic growth have contrib­ uted to the swift expansion of economic aggregates and social wealth. However, for many reasons, distribution problems, such as excessive distribution gaps, unfair distribution and unbalanced distribution have become increasingly promi­ nent. The dramatic increase in inequality has affected economic development, social solidarity and social harmony,3 creating an urgent need for appropriate adjustments to the economic base and superstructure. As mentioned earlier, the realistic need to solve the revenue distribution problems was the direct reason for the reform and “opening-up” of China.4 Therefore, seeking a long-term solution to distribution problems remains a major issue that China must focus on. It is also the mission of China’s reform and “opening”. The above allocation problems are directly linked with unreasonable distribu­ tion structures. The distribution structures have been very instrumental in influ­ encing distribution functions in the distribution systems of various countries over different historical periods. Therefore, in order to solve all distribution problems, effective adjustments need to be made to distribution structures. Only in this way can distributional imbalance be prevented and “partitioning and contention” effectively realized as a way of achieving national and public security. From the perspectives of development economics, development sociology and development politics, China’s economic and social development has now reached a critical stage. With the acceleration of industrialization, urbanization, marketi­ zation, informatization and internationalization, a “dual structure” has emerged in various forms and distribution imbalance has become increasingly severe leading to severe distribution problems. In order to circumvent the so-called “middle­ income trap”5 that many countries have not succeeded in avoiding, alleviate vari­ ous types of social conflicts and resolve social disputes to ensure stable economic growth as well as social and political stability, it is necessary to effectively adjust

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distribution structures, legally regulate distribution activities and maintain dis­ tribution order. At the same time, with respect to various development-related distribution problems, further study on “developmental jurisprudence” (Shouwen Zhang 2005)6 is necessary. How distribution structures are developed and adjusted is subject to specific distribution systems. Care must be taken in designing distribution systems given that their merits and demerits directly affect distribution equity, bear on distribu­ tion justice and are related to the rule of law. As long as distribution systems are included, whether that includes constitutional law or other laws, distribution powers and rights need to be efficiently defined among the relevant entities and distribution structures should be effectively adjusted to ensure they are rational and legitimate in order to solve the various distribution problems arising in the course of economic and social development. As the framework and concept of “development law” suggest, distribution structural adjustment relies on effective legal adjustment, whether such adjust­ ment relates to wealth, income or related resources, power or interests. Of all legal means, economic law and specific fiscal and taxation laws serve as “weapons for the separation of wealth”. As typical “distribution laws”, their adjustment is of farreaching importance. To optimize distribution structures, various laws – especially economic adjustment laws or specific fiscal and tax laws – need to be optimized. Strengthening the adjustment of economic law or relevant laws with the purpose of promoting the optimization of distribution structures is also closely related to the macro background of changing the economic development model. At present, China has shifted its focus from “economic growth” to “economic development”;7 emphasizing the quality and efficiency of economic development, as well as the importance of social distribution and social equity. As mentioned above, changing the economic development mode requires adjustment to a variety of structures, including distribution structures. Economists have discussed this issue for a while, but research in legal academia is still lacking. We think it is necessary to explore the use of legal adjustment to optimize distribution structures from the legal perspective. In fact, the large number of real-life distribution issues have led to complicated economic, social and even political problems. Improper, uneven and inequitable distribution is due to imbalances in distribution structures. To achieve a relatively balanced distribution, structures must be adjusted. On the other hand, distribu­ tion structures themselves are also an important part of the economic and social structure. As the systems theory and structural functionalism research indicate, a system’s structure determines its function and a sound structure produces positive function.8 Only by constantly optimizing the distribution structures can economic and social systems become balanced and reasonable. 4.1.2 The legal relevance of the optimization of distribution structures The optimization of distribution structures, in particular the specific distribution systems and the relevant distribution powers, pertains directly to legal adjustment.

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To this end, it is necessary to explore the close relationship between distribution structures and distribution systems in order to clarify the influence of distribution systems on distribution structures. It is also necessary to further clarify the impact of the powers of revenue distribution allocation on distribution structures. These two aspects are discussed separately as follows. 4.1.2.1 The internal relevance of distribution structures and distribution systems Within a country’s distribution systems, distribution structures determine distri­ bution functions. To achieve the positive function of distribution, it is necessary to formulate effective distribution systems that allow for “normal distribution” and distribution equilibrium by adjustments to various distribution structures. In recent years, China’s macroeconomic distribution structure has attracted significant attention. For example, since the reform and opening-up, there has been a clear trend in the share of revenue of governments, enterprises and individ­ uals. Speaking generally, from 1978 to 1995 when the “More Self-determination and More Yield” (Jian Zheng Rang Li) policy was implemented, the proportion of national fiscal revenue in the entire revenue distribution systems declined, and the proportion of the personal income of residents increased. However, since 1996, the proportion of revenue for governments and corporate bodies has increased while that of residents has decreased. As a result, the trajectory of change in the proportion of national fiscal revenue appears as a “U-curve”, while personal income changes for residents are represented by an “inverted U-curve”,9 a nota­ ble phenomenon in Chinese macro-economy calling for attention. In view of the rapid growth of national fiscal revenue and corporate profits, and the slow growth of personal income, it is necessary to use legal means to adjust the unreasonable distribution structures, increase the proportion of residents’ personal income and enhance the distribution rights and consumption capabilities of residents in order to solve the unbalanced distribution structures problem. In addition, the urban-rural, industrial and regional structures are also related to specific legal systems. It is precisely the arrangements in various specific legal systems that directly affect the formation of various specific distribution struc­ tures. The influence of legal systems on various types of specific distribution structures should be the starting point and prerequisite for studying economic law and related legal adjustment issues. Clarifying the direct influence of the legal systems on distribution structures will be helpful in analyzing the necessity and feasibility of legal adjustment. In fact, the various legal systems involved in the distribution of financial resources (including distribution among individual income, corporate profit, and national fis­ cal revenue) constitute various distribution systems for private and public goods and have a direct impact on various types of distribution structures. Meanwhile, where “nature–man dualism” “resources limitation” and “stakeholders” are commonplace, distribution (considered an important issue that runs through many economic and social fields)10 and distribution relationships(viewed as the basic economic or social

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relationship) significantly impact the legal and other superstructures which, in turn, affect the formation of various types of specific distribution systems. How best to settle disputes is a very important function of law. The various legislations in different jurisdictions have shown that distribution systems usually focus on the subjects, objects, time and space, rights and methods of distribution, thus forming subjects, objects, time and space rights and other distribution structures which directly affect distribution results and assess whether distribution is improper or unbalanced, as well as the potential for distribution to lead to other types of problems. For example, from the structure perspective of the subject in a distribution structure consisting of “labourers” and “owners of capital and other factors”,11 the decline in the income distribution ability of labourers on one side, and the increase in the distribution ability of the owners on the other side, has widened the distribu­ tion gap of distribution subjects; in the distribution structure consisting of rural residents and urban residents, a decline in the income of residents in rural areas may directly lead to excessive urban-rural gaps. These differences in distribution among different subjects directly lead to problems of excessive distribution gaps and imbalances which require resolution by adjusting distribution systems. In addition, the structure of the above-mentioned subjects is also closely related to geographical structure. Subjects with different distribution capabilities are very unevenly distributed in space thereby forming a geographical distribution gap, e.g. the North versus South gap on the international front, the east versus central and west gap in China, as well as the aforementioned urban versus rural divide.12 From the objects’ structure perspective, the unbalanced distribution of wealth, income and resources in different industries and fields has also created a gap in corresponding industries or fields. The cause of such gaps can be ultimately traced to distribution systems. In summary, an internal connection exists between distribution structures and distribution systems. On the one hand, distribution systems determine the for­ mation of distribution structures; on the other hand, distribution structures are a realistic reflection of distribution systems. As an important component of the dis­ tribution system, economic law significantly influences the formation of various types of distribution structure. Therefore, the adjustment of distribution structures cannot be separated from the regulation of economic law. 4.1.2.2 The allocation of revenue distribution rights is key to the adjustment of distribution structures Various distribution problems that are caused by unreasonable distribution struc­ tures call for the adjustment of distribution structures; from the legal perspective, the cause for distribution problems is mainly the unreasonable allocation of rev­ enue distribution rights. Therefore, the key to the adjustment of the distribution structures is to change the allocation of revenue distribution rights. Revenue distribution rights, often simplified as revenue rights or distribution rights, are the rights of relevant subjects to receive revenue based on certain rights

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or powers. It is an important category that calls for special attention. As a right that directly affects the survival and development of relevant subjects, it has an influence on individual human rights, on corporations (especially how they oper­ ate), on NGO stability and functioning and on the normal state operation and efficient supply of public goods. Therefore, different entities in the distribution systems have the right to distribute revenue, and the allocation of revenue dis­ tribution rights directly affects the rationality of distribution structures and the fairness of the distribution process from start to finish. In reality, nationals enjoy revenue distribution rights based on various rights including labour, equity, credit and intellectual property, while the government enjoys the revenue distribution power based on various powers including taxa­ tion, fee collection and state ownership. This is what is known as the government versus nationals binary structure. However, the power of the government and the rights of nationals are not of the same nature and cannot be seen as equal. The disequilibrium with regard to revenue distribution rights or powers leads to dif­ ferences in distribution ability of relevant subjects and furthers distribution results which lead to problems including distribution gaps, unfair distribution, and unbal­ anced distribution structures. To solve such distribution problems, it is necessary to optimize distribution structures and change the allocation of distribution rights or powers from a legal perspective in order to render distribution systems more reasonable. For example, it may be desirable to recognize some reasonable distribution gaps so as to encourage competition and seek efficiency in the market economy. However, in order to not materially impede economic development and to destroy social stability, the distribution gaps must be moderate and reasonable. In China, due to the fact that the income of farmers and workers is generally low, the reve­ nue distribution gap between different groups is becoming substantially large, and the Gini Coefficient has continued to rise.13 This phenomenon had considerably dampened domestic demand. Attempts by the government to introduce meas­ ures including public investment over the years to stimulate domestic demand have failed to produce the desired results. Following the 2008 financial crisis, in the face of a dramatic drop in external demand and sluggish exports, China also launched numerous measures such as large-scale public investments, structural tax cuts and “home appliances to the countryside” policy to expand the domestic market, especially the rural market. At the same time, the principle of “increas­ ing low-income groups, expanding the middle-income group, and restricting the expansion of the high-income group” was established as a way of reforming the revenue distribution system. The principle also intended to narrow the revenue distribution gap and improve the consumption ability of residents. To achieve the goal of narrowing the income gap, it is necessary to change the current allocation of revenue distribution rights or powers through various laws so as to achieve common prosperity. Efforts should also be made to address the issue of unfair distribution. Respect for labour, equitable distribution and fair distribution14 are important for all coun­ tries. If monopolies, resource endowments and other non-market factors exist,

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there will undoubtedly be distribution gaps in different industries and regions. In fact, initial distribution is conducted in accordance with general market principles and does not fully represent fair value given that there is great market failure in fair distribution. This is also why the Chinese government began to stress the importance of fairness in initial distribution.15 Furthermore, from the distribution system perspective, if “rich country and rich people” or “rich people and strong country” is the ideal rule,16 structural imbalances will occur in the current distribution system: the government’s fiscal revenue has witnessed excessive growth for many years while the income of resi­ dents has seen slow increases over the same period; the proportion of the salary of residents in the initial distribution has continued to decline. The unbalanced distribution structure not only impedes the development of the private economy but also affects the sustainability of the public economy. Therefore, it’s key to adjust the imbalanced distribution structure. To solve distribution problems, particularly the issues of excessively large distribution gaps and unfair distribution, and to adjust unbalanced distribution structures, it is necessary to change the allocation of existing revenue distribution rights as well as the comprehensive coordination of relevant systems. Regulating economic law can be of crucial importance in such a change. This would mean putting different emphasis on different revenue distribution rights and adjusting distribution outcomes for different subjects.17 In addition, given that the economic regulation system, as well as other legal departments, have an influence on the distribution structure, a comprehensive per­ spective shall be taken when researching for the optimization of the structure. This may contribute to the discovery of the intrinsic connections between dif­ ferent mechanism and the specialities of the economic law. All legal branches must collaborate to reach the common goal of optimized policy. The correlation between legal systems and other legal adjustments reveals the particular nature of economic law regulation and explains the necessity of coordinated and comple­ mentary economic law, other laws and comprehensive adjustments.

4.2 Diversified legal adjustment of distribution structures As mentioned above, the relationship between distribution structures and distri­ bution systems calls for the adjustment of distribution structures, the optimiza­ tion of distribution systems and the allocation of distribution rights from a legal perspective. This chapter discusses specific distribution systems and diversified legal adjustments of the distribution structures as it reveals the particularity of economic law’s regulation. Considering that there are various distribution structures and that people usu­ ally pay attention to initial distribution and redistribution (in a few cases, the “third distribution” [Yining Li 1994]18 as well), we will discuss distribution structures as a result of initial distribution and redistribution. This way, we reveal the impor­ tance of traditional laws such as constitutional laws and civil and commercial

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laws with regard to initial distribution and the importance of modern laws such as economic laws and social laws on redistribution. Then we explore the particular­ ity as well as the scope of fiscal law regulation. 4.2.1 Initial distribution and traditional legal adjustment of distribution structures In light of the importance of distribution systems, Article 6 of China’s Constitution specifically stipulates that the basic principles for distribution in China are “from each according to his ability, to each according to his work” and “a distribution system in which distribution according to work is dominant and diverse modes of distribution coexist”. Correspondently, the constitution also stipulates that “the State upholds the basic economic system in which public ownership is domi­ nant and diverse forms of ownership develop side by side”. Since the forms of ownership and the distribution of products are important parts of the production relationship, they had a relatively strong correspondence and consistency in the period after the introduction of the 1982 Constitution. However, with the deepen­ ing of reform and the “opening” of China, and with the development of the market economy, the correspondence between the dominant position of public ownership and the principal status of distribution according to work has gradually weakened. In addition, the proportion of distribution by factors has gradually increased, resulting in the principle of “a distribution system in which distribution accord­ ing to work is dominant” and is reflected in the number of people participating in distribution, rather than the amount for distribution. This phenomenon brings to light the widening distribution gap with the coexistence of multiple ownership economies and multiple distribution methods. The provisions of the constitution, regarding distribution systems, apply to initial distribution by individual members of the society, and form a distribution structure combining “distribution according to work” and “distribution according to factors”.19 Among these, people have a different interpretation as to whether “work” in terms of “distribution according to work” refers to workload, work product or labour rights.20 As for the various factors accounted for in the “distribu­ tion by factor”, they consist of capital, resources, technology, and management. The various factors contribute to production and operation in different ways, resulting in different market values or “weight” in revenues and forming a distri­ bution gap. In recent years, it is precisely the emphasis on “distribution by fac­ tors” and the increase in the ability of owners of capital and other factors to gain revenues that result in differences in distribution, widened distribution gaps, and aggravated unfair distribution.21 Therefore, economic analysis and legal research need to be conducted to assess the respective proportion of labour and other ele­ ments in distribution and to determine whether the labour portion is too low or in decline. From a legal perspective, distribution according to work directly involves labour rights or labour property rights, while distribution according to factors involves a series of rights such as equity, credit, intellectual property rights, and

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further, investment rights. Each type of right entails revenue distribution rights; in other words, revenue distribution rights are an important component of the property rights of relevant subjects. Wage, remuneration, operating income, divi­ dends, interest and royalties, etc.22 These rights are of great significance in initial distribution. The “force” and “benefit” between power and rights and between specific types of rights are not balanced; additionally, the “force” and “benefit” are not the same concept. Different types of rights have different returns given their different nature and this has a significant impact on the distribution gap and fair distribution. The dif­ ferences in the level of capability of various types of rights need to be studied in depth. The above discussion mainly focuses on the distribution structure combining “distribution according to work” and “distribution according to factors” as stipu­ lated by the constitution. Such structure corresponds to a series of important rights and thus forms an important structure of rights. Because the rights of different subjects are of a different nature, tension does exist between labour and capital, as well as between labour rights and investment rights leading to contradictions between labour and capital that affects revenue distribution gaps. Revenue distribution rights established by the constitution are directly related to the protection of basic human rights and constitute important research objects of human rights theory and constitutional theory. The realization of revenue dis­ tribution rights is related to the specific property rights owned by various subjects. Human resource stands out from other factors of production such as capital, land and technology, and is thus treated differently by the law. Owners of those factors may face disputes and are conciliated by law. Generally, labour laws, property rights law, contract law, intellectual property law, company law, bank law, securities law, insurance law and bankruptcy law contain specific provisions of various rights and constitute an important source of the initial distribution systems. Strengthening the coordination of these laws regarding revenue distribution rights is extremely important for solving distribu­ tion problems. In short, from a legal point of view, distribution structures are right structures composed of revenue distribution rights and of benefits enjoyed by various types of entities. The revenue distribution rights are based on the property rights of labour force and capital and are embodied in both the constitution and related spe­ cific distribution systems. Overall, the various types of property rights involved in initial distribution and relevant revenue distribution rights are mainly established and protected by traditional laws such as the constitution and civil and commer­ cial laws. 4.2.2 Redistribution and modern legal adjustment of distribution structures Initial distribution focuses on the contribution of various factors in the market, places greater emphasis on efficiency, and less on fairness thereby making it

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difficult to solve problems such as the widening revenue gap. In order to make distribution among social members more reasonable while admitting a moderate gap, the state must prevent polarization and implement “secondary adjustment” distribution systems, which are also known as redistribution systems. Redistribution is secondary distribution undertaken by the government based on initial distribution.23 It is structural adjustment aimed at limiting initial distribution, and it seeks to make distribution fairer and more reasonable, so as to slow down or prevent possible unfairness, inequality and imbalance in initial distribution. In the process of redistribution, modern laws such as economic law and social law are required and they play an even more important role given that the distribution structure involving market entities or between residents and individuals, and the effective adjustment of the distribution structure between the state and the nation­ als. Among these, financial means including transfer payments and financial sub­ sidies, tax incentives such as tax reductions and exemptions, and social security means can all be important means of redistribution which include a series of impor­ tant rights and powers such as national fiscal rights, tax rights and social security rights. The allocation of these powers and rights is directly related to whether the distribution problem such as the excessive income gap can be effectively solved. From both the historical and realistic perspectives, an excessively large dis­ tribution gap and unfair distribution have or occur in most countries during the modernization process. The 1971 Economics Nobel Prize winner Simon Smith Kuznets contemplated the relationship between per capita wealth growth (effi­ ciency) and per capita wealth distribution (fairness) from the perspective of devel­ opment economics. In the early stage of development, per capita wealth growth will increase the revenue gap, but at a certain stage, as per capita wealth grows further, the revenue gap gradually narrows thus forming an “Inverted U Curve”24 in which income distribution changes with economic development. Although there are different views towards the “Kuznets Hypothesis”, the reality of devel­ opment in China and related countries suggests such a hypothesis is valuable, and people are increasingly aware that the government’s effective distribution systems, notably the effective regulation of economic law, are key to preventing the distribution gap from widening. Many laws in a country’s legal system aim to distribute revenue, wealth, and resources. For example, heritage distribution in inheritance law, residual assets distribution in bankruptcy law, enterprise profit distribution in corporate law, sal­ ary distribution in labour law. Many laws involve distribution norms to varying degrees, but they are mainly used to solve the problem of primary distribution. Relatively, economic law is typical “distribution law” as it is particularly helpful in solving the problems related to the distribution and redistribution of national income, as well as the distribution of resources in the public economy as well as the distribution of social wealth. Therefore, economic law is insurmountable in analyzing the distribution issue, and attention should be paid to its functions in solving distribution problem – it is precisely because of its functions that eco­ nomic law is commonly used in adjusting distribution structure as straightforward and key adjustment measures.

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Modern economic law designed to address market failures such as distribu­ tion imbalances has a direct and important impact on various subjects’ interests. They can be used to adjust the distribution structure, achieve redistribution goals, ensure fair and appropriate distribution and prevent misallocations and imbal­ ances. Excessively large distribution gaps actually reflect improper and unsuitable distribution and can easily turn into inequitable distribution; large distribution gaps and unfair distribution are distribution structure imbalance at the macro level. To solve these closely related distribution problems, it is especially neces­ sary to have effective regulation of economic laws. In summary, the distribution structure is not only an economic structure but also a legal structure, especially legal rights structure. Be it initial distribution or redistribution, distribution between market entities or between state and market, they correspond to a series of rights. Therefore, the adjustment and optimization of the distribution structure need relevant laws such as economic law.

4.3 Structural optimization in economic law 4.3.1 Structural optimization in economic law theory The optimization of the distribution structure by regulating economic law requires theoretical guidance and support to reflect the corresponding concepts and values and ensure systemic, scientific and intrinsically consistent structural adjustment and economic law construction. The distribution theory,25 as well as specific theories regarding the distribution structure adjustment, need to con­ stitute an important component of economic law theory. In economic law, the optimization of distribution structure theory should be the core given that from a distribution perspective, the institutional arrangement or adjustment of the entire economic law is primarily in relation to distribution structure optimiza­ tion. In this regard, the theory and system of the entire economic law can be reanalyzed. A series of specific theories in economic law can be extracted from the theo­ retical discussions and related institutional practices in previous chapters. These include relevance theory, utility theory, goal theory, moderation theory, system theory and category theory that constitute important theoretical bases for effective structural adjustment. We summarize these below. First, relevance theory emphasizes the interaction between distribution and institution, as well as between distribution structure optimization and economic law regulation highlighting their importance as the basis for economic law to optimize the distribution structure. Without such interaction, economic law regu­ lation will not work on the distribution structure. As mentioned above, numerous distribution systems in economic law significantly influence the formation and change of the distribution structure. Meanwhile, the distribution of the revenue rights of several subjects by economic law directly determines the rationality of the distribution structure. To optimize the distribution structure, we must ration­ ally allocate the right to revenue distribution in economic law. Relevance theory

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justifies the necessity and feasibility of “optimizing the distribution structure via economic law”, and stresses the need, in economic law to constantly address the problem of misallocation of revenue rights. Second, utility theory emphasizes the particular effects of economic law in the distribution structure optimization. The previous discussion suggested that differ­ ent types of laws have different functions regarding distribution structure optimi­ zation. Traditional laws play a greater role in initial distribution, while modern laws have a greater role in redistribution. From the macro-control perspective, the utility of economic law in resolving redistribution issues is even more compelling. On the other hand, given the effects of economic law on the relevant elements of initial distribution, its pertinence to initial distribution cannot be ignored. In distribution structure optimization, economic law has its usefulness as well as and an extensive scope. Third, goal theory emphasizes the fact that economic law is a typical “distri­ bution law” and its main objective is to promote economic, social justice and a healthy performance and development of the economy and society by standardiz­ ing distribution behaviours and ensuring distribution rights and benefits intended to realize efficient macro-control of resource allocation and further economic fair­ ness and social equity. Distribution structure optimization also helps to improve the efficiency of macro-control and resource allocation, ensure and promote fair and just distribution, and promote stable economic growth and social harmony and stability. It can be concluded that the goals of distribution structure optimiza­ tion are consistent with those of economic law regulation. The goals of economic law have a direct bearing on the aforementioned func­ tions as well as its particular values. Values such as fairness, efficiency, order and justice are equally important for distribution structure optimization. Effective economic law adjustment and distribution structure optimization contribute to improving distribution fairness, increasing distribution efficiency, ensuring the distribution order and thus achieving distributional justice. Fourth, moderation theory emphasizes that distribution among various subjects should be moderate and “proportional”.26 It purports that distribution structure optimization relates directly to the constitution, human rights, and macro-control theories and further maintains that revenue or wealth distribution should be pro­ portionate and not cause undue harm to nationals, be it to restrict government power, protect basic human rights or to ensure the efficiency of regulation and control. Moderation theory also includes certain important ideas that can provide guidance on distribution structure optimization. For example, because the role of government is to provide public goods, it should not engage with the peo­ ple in the scramble for profit. In addition, the revenue of the government should not be excessive but only to the level that enables it to provide public goods. Furthermore, to achieve the goal of “prosperous nations and rich people”, gov­ ernment’s taxes and levies should not prejudice the base of finance and taxation. According to the Laffer curve, a country’s taxation must be moderate, i.e. the

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tax rate cannot be too high, and the tax burden must be rationalized in order to support additional tax sources. In practice, the US 1986 Taxation Reform Act,27 which embodies Laffer’s idea, is an example of tax reforms worldwide. China’s “broad tax bases and low tax rates” policy is also an example of moderation the­ ory. Similarly, the “half principle”,28 formed by the Federal Constitutional Court of Germany in judicial practice, emphasizes that private property should mainly be used for private purposes and that tax over private property should not exceed “half” of its due or actual returns, so as to better protect private property rights. A benign “take and give relationship” is very important in such process – it is a prerequisite for positive interaction between the government and the people, and an important basis for the continuous improvement of government legitimization. Moderation theory also relates closely to goal theory. It emphasizes that both distribution structure optimization and economic law regulation should highlight “appropriateness” and conform to the moderation principle of economic law. Only by appropriate distribution can we achieve fairness and justice, sound distri­ bution order and sustainability of all subjects and their actions. Fifth, system theory emphasizes that, given the complexity of distribution problems, distribution structure optimization and solutions to distribution prob­ lems should be considered systematically as a whole. In addition, these solutions are possible due to support from various systems of economic law. To fully real­ ize distribution structure optimization, it is necessary to constantly improve the legal structure of economic law, achieve “dual adjustment” of both the distribu­ tion and economic law structure and enhance coordination between economic law and other relevant legal systems so as to better regulate various types of distribu­ tion relations and form a sound distribution order. Besides, system theory also emphasizes that economic law has a direct influ­ ence on the allocation of rights and the spread of wealth. To better give full scope to the function of economic law, close attention, as well as timely adjustments, must be paid to its structural rationality and actual operation. Sixth, category theory emphasizes that a large number of systems in economic law relate to subjects, behaviours, rights, obligations and responsibilities for dis­ tribution, which form a series of important “distribution” categories aimed at solving distribution problems, preventing distribution imbalance, ensuring dis­ tribution order and achieving fair distribution and justice. These categories are very important for building a more systematic “distribution theory” of economic law. On the other hand, through distribution categories, the entire economic law and economic legal jurisprudence can be re-examined to better understand why “economic law is distribution law” and why “distribution is an important clue throughout the entire economic law”. The above is only a brief analysis of several important distribution theories that affect distribution structure adjustment. These theories have important values for improving economic law and advancing distribution structure optimization. This means specific distribution issues can be adjusted by economic law if we apply such theories.

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4.3.2 Practice of economic law in structural optimization To adjust distribution structure and promote its continuous optimization, it is nec­ essary, in practice, to continuously improve distribution systems in economic law, and focus on resolving, at a macro level, the problem of distribution structure imbalance, excessive distribution gaps and unfair distribution. These issues need to be addressed taking into account the above-mentioned distribution theories and by adjusting the internal structure of economic law, changing the unreasonable allocation of rights/powers and comprehensively promoting the improvement of specific systems of economic law. 4.3.2.1 Adjustment to structural imbalance through economic law Distribution structure imbalance is a major issue that should be resolved by economic law. Economic law should be perfected by aiming, in particular, at important and specific distribution structures. For example, the governmententerprises-individuals structure has always attracted much attention;29 as has the high-middle-low income structure. In view of these two types of structures, eco­ nomic law should clearly and reasonably define the distribution rights of various types of subjects and ensure fair legal protection. As mentioned earlier, the proportion of the revenue of residents in national income and the proportion of labour remuneration in initial distribution have been relatively low in China in recent years. As an important embodiment of distribu­ tion structure imbalance, the issue of the “two proportions” has drawn great atten­ tion from the country and the society.30 In the long term, how to increase the “two proportions” is not only an important mission for distribution structure adjustment but also an important goal for economic law adjustment. 4.3.2.2 How economic law can adjust the low-income proportion of residents Many important arrangements should be made in (the national revenue) economic law including introducing various distribution means, to address the low income proportion of residents (in the national revenues), by not only increasing the rev­ enue of residents but also its proportion. In terms of increasing the revenue of residents, a variety of means in economic law can be used. For example, transfer payments, financial subsidies and social security can increase revenues to achieve “for the people”; residents’ tax burden should be appropriately alleviated through various tax laws and regulations so as to achieve “give more and take less” and substantially increase disposable per­ sonal income (DPI) of residents. In addition, the government should increase the proportion of residents’ reve­ nues by adjusting economic law. Since the beginning of the 21st century, China’s fiscal revenue has continued to be significantly higher than the GDP growth rate for many years, and its share in the overall national revenue has been rising year

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by year. This phenomenon has led to considerable criticism (Chongen Bai & Zhenjie Qian 2009).31 Through improvements in economic law, a reasonable rev­ enue distribution structure between government and residents should be formed to ensure the order of revenue distribution and solve the “excessive collection” problem of fiscal and tax law. There are many economic and legal reasons for the constant increase in government revenue. One of the most important legal reasons is “double taxa­ tion”. Whether double taxation is viewed from the taxation, legal or economic perspective, it severely damages the people’s rights and interests and affects the development of relevant parties. At present, the unreasonable taxation and double taxation caused by uncoordinated economic and legal systems, as well as the resulting excessive tax burden have had a direct effect on the improve­ ment of income levels and their overall proportion for residents, and therefore, worsened the issue of double taxation. It should be a key to perfecting the existing fiscal and taxation system. In recent years, the Chinese government has pushed for “business tax to VAT” reform in order to solve the double taxa­ tion problem. Furthermore, specific systems of economic law need to be improved in order to increase the proportion and overall amount of residents’ revenue. China’s corporate income tax law and personal income tax law are continuously improv­ ing with the aim of reducing the tax burden on companies and individuals and achieving fairness; China’s property tax system is constantly developing includ­ ing real estate tax and resource tax pilots reforms.32 In the process of these institutional changes, China has been trying to integrate the concept of fair distribution. Although all attempts to promote fair distribution in the direct tax system are important, the impact of the commodity tax system on distribution should not be overlooked. After all, China’s main tax is still a commodity tax, and the tax bur­ den for residents is essentially derived from commodity taxes. In the case where residents are both consumers and final bearers of commodity taxes, how to reduce the tax burden on certain commodities and thus relatively increase residents’ dis­ posable income is a question worthy of in-depth study. Last but not the least, we must also pay special attention to the adjustment and improvement of fiscal law. For example, excessive government funds and charges directly affect the amount and proportion of the revenue of residents; the so-called “land finance” issue also affects the revenue of residents and requires improvement in the tax-sharing system, normalization of the distribution order and adjustment of the distribution structure. On the other hand, the continuous improvement of economic law is required as a solution to the historic “Huang Zongxi Law”,33 the prevention of increases in the tax burden of residents and the effective implementation of a reasonable distribution system in the long term. Since the relationship between the distribution structure adjustment and the legal adjustment of distribution relationship are all complicated problems, the improve­ ment of relevant systems requires comprehensive contemplation from multiple angles.

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4.3.2.3 How to adjust the low proportion of labour using economic law The relatively low proportion of labour remuneration in the initial distribution process directly affects the “olive-shaped” income distribution pattern, further social stability. Increasing the proportion of labour remuneration in initial distri­ bution also requires changes and adjustments in economic law. In the relevant statistical analysis, the resident personal income usually includes four types: wage income, transfer income, property income and operat­ ing income. Over the years, the proportion of wage income for Chinese residents has been about 80%. Under such circumstances, the wage income should fully reflect the principle of distribution according to work and increase the “weight” of the income for distribution of labour. The increase in the proportion of labour remuneration needs to be achieved by adjusting and improving various economic law systems. Take commodity taxes as an example, sales revenue and operating revenues, etc., are directly related to labour remuneration and are taxable. Therefore, vari­ ous commodity taxes including VAT, consumption tax and business tax all affect labour remuneration. The taxation thresholds for VAT and business tax also affects the final level of labour compensation. As stipulated in the tax law, labour remuneration is also directly related to sala­ ries, service fees and copyright royalties as well as income from the production and operation of individual, industrial and commercial households and income from contracted business operations of enterprises, etc. Institutional adjustments in these areas, in particular, in taxation items, rates, reductions and exemptions, etc., have a direct impact on the labour remuneration of residents.34 Even in the area of corporate income tax, labour remuneration is an important factor to be considered when deciding deductible items. In other words, whether to deduct and how to deduct (quota or reimbursement), relates not only to the wage system but also the corporate income tax system. It can be concluded that income tax has a significant impact on labour remuneration. As mentioned earlier, adjustments to the various tax systems including the abo­ lition of agricultural taxes in 2006, all focused on increasing the overall remunera­ tion amount. Increasing the proportion of labour remuneration at the macro level also touches on the relationship between labour income and capital gains, as well as various aspects of the system. From a tax law perspective alone, how taxes are levied on these two types of revenue involves distribution structure adjustment. Based on the division between industrious income and non-industrious income, industrious income such as labour remuneration should be lower, so as to protect the interests of most middle- and low-income earners. To protect the interests of middle- and low-income earners and increase their labour remuneration, it is also necessary to address the “weight” of the prop­ erty rights of the labour force. The wage and other related systems that include labour remuneration should be further improved taking fairness and efficiency into account. Otherwise, unilateral emphasis on fairness, regardless of overall effi­ ciency, will eventually affect the improvement of residents’ revenue levels.

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4.3.2.4 Using economic law to adjust the excessive distribution gap and imbalance This distribution structure imbalance interacts with excess in the distribution gap and this requires intervention from economic law. In this section, we begin by discussing how to adjust the distribution gap. Large income gaps among individu­ als, one of the major for society, may actually be caused and worsened by imbal­ ances in other areas. For example, the wide distribution gap between various local governments directly affects the income distribution of residents. Financially con­ strained local governments usually place greater emphasis on the collection of fiscal revenue that impacts financial capabilities and spending power of resident. The fiscal disparities between the central and local governments and among local governments should be resolved mainly through the improvement of a tax-sharing system, especially through the transfer payment system.35 In relation to the distri­ bution gap between the government and residents as a whole, resident revenues growth should be at the same pace with economic growth or even faster. This makes it possible to achieve a substantial and rapid increase in residents’ overall revenue and further promote economic development. With regard to the excessive distribution gap among residents, “diminishing superabundance” and “supplementing deficiency” should be achieved by improv­ ing financial subsidy and various types of taxation systems. Since the excessive distribution gap is attributed to complicated causes, its solution will also involve many ancillary systems. For example, the distribution gap resulting from exces­ sive income for certain personnel of monopolistic industries (especially large state-owned enterprises) requires stronger legal regulation on the wage standard, cost accounting and bonus contributions of such enterprises so as to make revenue distribution more reasonable. In addition, the distribution gaps among residents have a relation with industry gaps and regional disparities. From the point of view of economic law, regional disparities relate to horizontal imbalances in fiscal transfer payments. In terms of reducing industry disparities, SOEs’ state-owned capital operating budget sys­ tems can play a role. Distribution gaps are inevitable, but their significance is limited in a market economy that emphasizes competition and differences. If labour of equal volume and quality cannot receive the same remuneration, unfair distribution issues will arise. Wages in different industries vary. For instance, the average wage in the securities industry can be nine times the average wage in the livestock industry (Dongsheng Zhang 2013).36 However, such large disparities do not directly and necessarily relate to employees’ labour or efforts. Rather, it is mainly due to the industries’ particularity or monopoly, which is undoubtedly unfair. The correla­ tion between the distribution gap and unfair distribution is apparent.37 The solution to all kinds of distribution problems requires the cooperation of various economic law systems. For example, the cooperation between fiscal law and tax law is very important given that it relates to revenue. Additionally, fiscal law, in relation to expenditure and their cooperation, solves the fair distribution

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problem in a better manner. In addition, unfair distribution can have multiple manifestations. For example, in a country with low tax compliance and ineffective tax collection, substantial unfair distribution will occur for law-abiding residents. Similarly, irrational tax benefits or ineffective enforcement of arbitrary tax relief will also cause unfair distribution while excessive non-tax revenues and chaotic distribution order will certainly worsen the case. All these problems should be gradually solved by continually improving the economic law system.

4.4 Theoretical refinement of structural optimization Considerable importance needs to be placed on distribution and related problems should be solved effectively given its bearing on survival and development, stabil­ ity and security and solidarity and harmony. In the new era of China’s economic and social development, contradictions between all parties have become increas­ ingly prominent and distribution problems have become acute. It is urgently nec­ essary to constantly optimize distribution structures in the process of transforming the economic development model. An unreasonable distribution structure is an important cause of distribution problems. Since distribution systems determine the distribution structure and the distribution structure reflects distribution system, the key to optimizing distribu­ tion structures is to change the allocation of revenue distribution rights/powers in distribution systems, stipulating clearly their “weight” and attribution, so as to better protect the relevant subjects, maintain the distribution order and achieve distribution justice. Various laws have different functions for optimizing distribution structures. The laws include constitutional law, civil law, commercial law and other tra­ ditional laws which are more prominent in solving the problems of initial dis­ tribution while modern laws, such as economic law and social law, are more effective in solving the problems of redistribution. Among all laws, the adjust­ ment of economic law is unique in that it not only helps to solve redistribution problems but also helps to solve initial distribution problems due to its influence on the various elements involved in initial distribution. Therefore, economic law plays a prominent role in distribution structure optimization with broader effects. Theoretically, economic law, as a typical “distribution method” itself, contains “distribution theory” that includes relevance theory, utility theory, goal theory, moderate theory, system theory and category theory. These theories can provide theoretical guidance on distribution structure optimization and theoretical support for the adjustment and improvement of the specific system of economic law. From the institutional perspective, in light of China’s major realities concern­ ing its current unbalanced distribution structure, excessive distribution gaps and unfair distribution, it is necessary to adjust the internal structure of economic law, change its unsound allocation of rights as well as alter the mode of decentraliza­ tion. At the same time, the theory of distribution of economic law should be con­ sidered as a way to continuously improve specific systems.

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Based on the above discussion, it is necessary to reiterate that governments should constantly optimize the distribution structure to solve distribution prob­ lems. Distribution structures are not only the cause of distribution problems but also an important embodiment of a country’s legal structures and rule of law and they reflect the capabilities of a government and the rule of law. Therefore, dis­ tribution structures always have a bearing on the overall picture and cannot be ignored in economic, social and political systems. In addition, as a rights structure, the core of the distribution structure is the allocation of revenue distribution rights/powers. We should not only study the economic structure of distribution, but also its legal structure and continue to solve distribution problems through distribution structure optimization and by adjusting the structure of legal rights and obligations. As a major issue in economic and social development, distribution problems are an important research area of economic law. It is fundamental to adjust eco­ nomic law and it is crucial for research to be undertaken in view of adjusting the distribution structure to promote balanced, sustainable, and healthy economic and social development. Therefore, refining the “distribution theory” in economic law helps to enrich and advance the development of the overall theory of economic law. The “distribution theory” in economic law involves many distribution con­ cepts, such as distribution functions, subjects, behaviours, powers, rights, capa­ bilities, imbalances, fairness, efficiency, order, justice, performance, structures and rule of law, all of which closely relate to many disciplines including philoso­ phy, political science, economics and sociology, and require in-depth study. If the above-mentioned concept systems are established and improved upon, the overall theoretical study of economic law will be greatly improved. In summary, distribution problems are typical “complexity problems”, and dis­ tribution systems are typical “complexity systems”, resulting in extremely com­ plicated distribution structure optimization issues. In the process of optimizing the distribution structure, although very important, economic law regulation has its limitations. To effectively optimize distribution structures and better solve distri­ bution problems, we should systematically consider the coordination of various legal systems and policy measures, and comprehensively improve distribution structure adjustment scientifically and legally so as to form a sound distribution order and promote the benign and coordinated development of the economy and society.

Notes 1 Many scholars have discussed distribution justice. For example, John Rawls proposed in his Theory of Justice a principle of justice with sequence, and stressed that govern­ ments need to intervene in order to achieve such a principle. However, Friedrich Hayek opposed the concepts of social justice and distribution justice,as did Robert Nozick who held a laissez-faire view and opposed government intervention in distribution. In spite of this, an increasing number of scholars view distribution justice as important because they encourage governments to maintain fairness and justice in distribution.

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2 In the Analects of Confucius, Confucius said “Inequality rather than want is the cause of trouble”. This is an important distribution idea by Confucius that still has practical sig­ nificance. Throughout history, chaos has resulted from distribution imbalance caused by uneven distribution, inequality and unfair practices. Consequently, it is important to maintain a high degree of vigilance against distribution risks and distribution crises that may be caused by unbalanced distribution. 3 Conflicts, increased social solidarity and social harmony can be reduced by solving distribution problems. See Durkheim, E. (2000). The Division of Labour in Society. Translated from the French by Dong Qu. Shanghai: Sanlian Bookstore, pp. 159–186. 4 The major motivation behind China’s reform in both urban and rural areas was to solve the problems with distribution. See Shouwen Zhang. (2009). The Meridian of the Development of China’s Economic Law – From [the] Distribution Perspective. Political Science and Technology Forum, 27(06), pp. 124–137. 5 The concept of the “middle income trap” was proposed by the World Bank. It empha­ sizes that when a country’s GDP per capita reaches around US $3,000, economic growth stagnates, there is polarization between rich and poor, corruption and demo­ cratic chaos and other problems are not uncommon due to internal and external reasons including economic development patterns. These lead to a decline in competitiveness making the transformation to a high-income country difficult. To this end, China must adjust its distribution structure in a timely manner and endeavor to circumvent such a trap. 6 Distribution is an important issue that needs to be resolved in a country’s economic and social development as well as legal system development. “Development law” that aims to study outstanding legal issues in development should make distribution an impor­ tant research object. See Shouwen Zhang. (2005). The Development Law Science and Development of Law Science. Law Science Magazine, (3), pp. 3–7. 7 Back in 1995, China proposed to the “change economic growth mode…by transform­ ing from an extensive pattern to an intensive pattern”. In recent years, China has placed more emphasis on “speeding up the transformation of the economic development mode and such a transformation involves the entire economic and social development process in all fields”. 8 Structural functionalist, Robert Merton held that manifest functions are the conse­ quences of a social process that are sought or anticipated. An improvement in distribu­ tion structural may facilitate manifest functions. 9 The tax-sharing Reform (Fen Shui Zhi) in 1994 and the large-scale changes in tax law are important reasons for such change. See Shouwen Zhang. (2009). The Meridian of the Development of China’s Economic Law – From [the] Distribution Perspective. Political Science and Technology Forum, 27(06), pp. 124–137. 10 As mentioned above, David Ricardo believed that the rule for adjusting distribution was the basic issue of political economy, emphasizing the importance of the distribu­ tion systems; John Bates Clark believed that the distribution of wealth among different entities was a crucial economic issue. In fact, distribution is also a very important legal issue. 11 There are five major factors involved in distribution: labour, land, capital, manage­ ment and technology. Early economists such as Anne-Robert-Jacques Turgot focused on labour, land and capital, and their corresponding revenues, wages, rents and prof­ its (including dividend and interest, etc.). See Turgot, A.R.J. (2007). Reflections on the Formation and Distribution of Wealth. Translated from France by Risong Tang. Beijing: Huaxia Press. Most of the above-mentioned factors can be categorized as material and human resources, even though labour, given its importance, is often listed separately, thus forming the labourer vs owner of capital and other factors subjects structure. 12 Many resources, including income, wealth, rights and power are to allocated. But dis­ tribution structure mainly focuses on income or wealth. Though income and wealth

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are usually positively related and are used interchangeably, they are different concepts. Wealth constitutes of actual resources including land and real property. Powers and rights are legal arrangements. With respect to China’s Gini Coefficient, there are different statistics due to lack of offi­ cial data and unified calculation. However, both official and unofficial statistics have shown that China’s Gini Coefficient was 0.4 in 2000. In 2013, the Gini Coefficient published by the National Bureau of Statistics exceeded 0.47. Fair distribution relates to “desert”, the core of which stresses that justice is when a man gets what he deserves. Aristotle, Adam Smith, and Immanuel Kant all discussed the meaning of “deserve”. It is generally accepted that the revenue a person deserves should be proportional to their contribution, diligence and effort. The Chinese government has recognized that a “reasonable income distribution sys­ tem is an important embodiment of social fairness”. It therefore proposed that “initial distribution and redistribution should deal with the relationship between efficiency and fairness, and redistribution should focus on fairness”, and emphasizes “protection of legal income, adjustment of excessive income, and the elimination of illegal income”. Both the “rich people” (Yumin) thoughts proposed in Shang Shu and the “sufficient resources” thoughts advocated by Confucius (see The Analects of Confucius) empha­ size the importance of enabling people to become rich. See Dingqi Wang. (2000). The Yumin Thoughts in the Shang Shu. Social Science Research, (4), pp. 128–131. The economics community has researched the weight of various revenue distribution rights from value and contribution perspectives. More research on how to quantify such weight is required. Yining Li proposed the concept of “third distribution” in his book Shareholding Systems and Market Economy published in 1994. He believed that in addition to initial distribu­ tion and redistribution, there is a third distribution which involves voluntary donation. To date, however, the impact of the “third distribution” on the overall distribution is still quite small. Since 2007, China has reaffirmed its adherence to and improvement of the distribution system in which distribution according to work is dominant and a variety of modes of distribution coexist. In addition, China has emphasized the improvement of the system where “labour, capital, technology, management, and other production factors partici­ pate in the distribution system according to their contribution”. This makes the dis­ tribution structure of “distribution according to work” and “distribution according to factors” clearer. In early discussions, some economists held the view that “work” should refer to the rights to own workforce, and believed that this will help to protect the interests of labourers. See Xianguo Yao, Jiqiang Guo, On Labour Rights, Academic Monthly, 1996, No. 6, p. 44. Subject differences, geological differences, and historical differences are the main fac­ tors that contribute to distribution difference. Distribution difference and unfair distri­ bution lead to structural risks and, therefore, require the effective regulation of fiscal laws. See Shouwen Zhang. (2011). Distribution Difference and Regulation of Fiscal Law. Tax Research, (2), pp. 71–76. These income forms are taxable regardless of their nature. China’s Tax Law has listed all the aforementioned income forms as tax items. Some scholars have categorized redistribution into aid redistribution, compensatory redistribution, insurance redistribution and fairness redistribution. See Angang Hu, Shaoguang Wang, et al. (2003). The Second Transformation: National Institutional Construction. Beijing: Tsinghua University Press, pp. 275–311. Simon Smith Kuznets raised the Inverted U Curve hypothesis in Economic Growth and Income Inequality, American Economic Review, 45(1), pp.1–28. Since the various distribution theories cannot be summarized into a unified theory that can be commonly used, accepted or verified, the general macro distribution the­

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ory has been “unsatisfactory”. See Fennebrunner, B. (2009). The Theory of Income Distribution. Translated from English by Min Fant. Beijing: Huaxia Press, p. 371. In view of this, it is necessary to refine a “distribution theory” capable of guiding the dis­ tribution structure adjustment in economic law. Aristotle believes that justice must be modest and equal. He emphasizes that the fair­ ness of distribution lies in proportionality, while injustice lies in the violation of propor­ tion principle. See Aristotle. (2003). Nicomachean Ethics. Translated from Greek by Shenbai Liao. Beijing: Commercial Press, pp.134, 136. The basic idea of the Tax Reform Act of 1986 in the United States is to cancel ex-gratia payments, increase fairness, broaden the tax base, lower tax rates, simplify tax admin­ istration and promote economic growth. Such a way of thinking is still of significant importance. See US Congress. (1986). Tax Reform Act. (100 Stat. 2085, 26 U.S.C.A. §§ 47, 1042). The Federal Constitutional Court of Germany has developed the theory of optimal property rights taxation, emphasizing that the overall tax burden on taxpayer prop­ erty should apply the “half principle” to prevent excessive taxation. See Kechang Ge. (2004). Basic Issues in Tax Law (Fiscal Constitution). Beijing: Peking University Press, pp. 177–178. For an analysis of revenue distribution among residents, enterprises and government, please refer to Xiaolu Wang. (2013). National Income Distribution Strategy. Beijing: Learning Press, and Haikou: Hainan Publishing House, pp. 52–27. As early as October 2007, China proposed to “improve the proportion of residents’ income in the distribution of national income and increase the proportion of labour renumeration in initial distribution”. Since then, the common consensus has been “to reasonably adjust income distribution relations, use reasonable efforts to increase the ‘two proportion’, reverse the income gap expansion trend as soon as possible”. For a detailed analysis, please refer to Chongen Bai and Zhenjie Qian. (2009). Who Are Taking Residents’ Income – An Analysis of China’s National Income Distribution Pattern. Chinese Social Science, (5), pp. 99–115. The pilot real estate tax reform involves revenue distribution between the government and taxpayers. The pilot resource tax reform involves not only the relationship between the government and taxpayers, but also between the central government and the local governments. Zongxi Huang believes that taxes and royalties reforms in history usually increase the burden on the people due to increases in various “miscellaneous royalties” after the reform. The idea was summarized by Professor Hui Qin as “Huang Zongxi’s Law”. The system of increasing labour remuneration needs comprehensive consideration and design. For example, China’s personal income tax implements is a classified income tax system which is unfair and which tends to increase residents’ tax burdens. Taxation items such as service charges and copyright royalties fall into labour renumeration, but the actual tax level is relatively high and does not encourage diligent work. With respect to the problems in the transfer payment system, China proposes to “opti­ mize the structure of transfer payments, gradually increase the proportion of general transfer payments, clean up and integrate special transfer payments”. This will help significantly to solve the central and local distribution problems if effectively imple­ mented. See Dongsheng Zhang ed. (2013). Annual Report of Income Distribution of Chinese Residents. Beijing: Economic Science Press, p. 91. Such unfair distribution reflects unreasonable distribution. Some scholars consider that it may be more appropriate to replace “fair distribution” with “reasonable distribution”. See Yining Li. (1994). Rationality and Coordination of Income Distribution. Social Science Front, (6), pp. 9–17.

5

Distribution-oriented rule of economic law

As stated in the previous chapter, due to distribution pressure triggered by fiscal policy and the necessity to ensure the wellbeing of individuals and based on the need to prevent fiscal risk and crisis and to reduce the risk of unbalanced distribu­ tion, governments employ policies and laws to “adjust” the distribution structure. This phenomenon has given rise to multiple proactive regulations. Through the “co-adjustment” to distribution relation and structure and the optimization of dis­ tribution structure, rule of law in the economy is also improved. In fact, in the development of rule of law in the economy as way to solving the issue of distribution has always been one of the main goals of the “distribution­ oriented rule of law in the economy” and it makes solving distribution issues the primary objective for the establishment of the rule of law in the economy. Therefore, understanding the guiding role that distribution plays in the estab­ lishment of the rule of law in the economy enables us to examine the contexts and problems associated with the development of the rule of law in the economy through the approach or dimension of distribution and thus offering theoretical and policy support for advancing the development of the rule of law in the econ­ omy and better solving the distribution issue. Therefore, building on the discussions in previous chapters and from the distribution-oriented perspective, this chapter focuses on the distribution path to understand the development of the rule of law in the economy. By exploring the institutional changes in economic law, an explanation is provided for the emer­ gence and development of economic law, for the consideration of solutions to the distribution issue as an important target and for the function of economic law as a regulator of distribution. We further discuss major problems existing in the field of distribution with the aim of revealing the future direction of the development of the rule of law in the economy.

5.1 Distribution orientation and the two types of distribution 5.1.1 Why the distribution path matters It has been only 100 years since the commencement of modern economic law. Therefore, compared to other branches of law, the history of economic law in

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China is rather short.1 Approximately every ten years, this academic community reviews the past as well as looks into the future, thereby accumulating knowledge, reinforcing consensus on theories and advancing institutional development (Hong Ma 1989; Changqi Li 2009).2 Through such reviews, many confusing theoretical issues have been resolved. However, some paths leading to the deepening of our understanding are still foggy and need to be clarified. To this end, we need to examine the “meridian” or pathway of the historical development of the rule of law in the economy in China. The term “meridian” is borrowed from Chinese medicine. It refers to the trunk path that runs through the human body and by extension the path that runs through an economic system of economic law. The study of economic law shares the same concept of “meridian” of economic law itself. Identifying precisely this “merid­ ian” helps one to better comprehend the outline and gain an overall perspective of the study of economic law. It also aids people in discovering issues deeply rooted in the construction of the economic law system and legal research thereby provid­ ing guidance toward the resolution of issues and the development of economic law. To this end, uncovering the “meridian” that is hidden in the confines of the body of economic law study is of crucial importance. The first question one might ask is, what is the “meridian”? Answers to this question differ among researchers. From the perspective of necessity, the “merid­ ian” penetrates through and connects every aspect of economic law. For example, chronically, it penetrates every period; contextually, it is indispensable. Therefore, one can analyze the main relationship between economic law institutions and the­ ories from the perspective of “meridian” and thereby capture the main contents that one needs to focus on. Throughout the development of economic law, there are at least three note­ worthy paths. The first path is the adjustment to the distribution relationship, oth­ erwise called the distribution path. It is directly related to the attribution of the benefit and target of economic law adjustment. Following this path, one can learn the initial motivation of the reform, the focus of institutional arrangements and the driving force of the change of economic law institution. The second path is the policies related to the distribution of benefits. Through changes in these policies over time, one can see the transition process from politics to economy-guided policy and understand the important role that economic policy plays in the reform and “opening” and the development of research and an economic law system. The third path is to legalize the above economic policy or the so-called “the path to the rule of law”. Through these various paths, it is easy to perceive that with the deepening of reform, the adjustment to distribution relations and the changes in economic policy, law and the rule of law undergo changes accordingly. Because of these changes, economic law was born, and it became stronger. The three paths mentioned above, namely the paths of distribution, of policy and of the rule of law are mutually compensating and correlated. Actually, they are the three “meridian” lines that are vital to economic law. They run through the birth, study and development of economic law. At the same time, they consti­ tute the indispensable parts of the development of the economic law system and

Distribution-oriented rule of economic law 107 research. Identifying these three “meridians” helps to better capture and solve the issues in economic law systems and research. Each one of the three mutually penetrating paths involves problems in vari­ ous aspects. We narrow our discussion’s theme by adopting a distribution ori­ entation perspective. Following the path of distribution, we will review changes in Chinese economic law system and economic regulation which initiated and developed alongside the reform and “opening” of China. We then will explore distribution issues that relate to the functioning of the government, the economic policy and the development of law and uncover their internal connection. We will close the discussion by emphasizing the importance of the distribution path as the “meridian” that penetrates economic law, its study and its function in promoting the future rule of law in the economy of China. 5.1.2 “Two distribution types” with an impact on the reform and “opening” and the development of economic law Economic law is usually regarded as prototypical “distribution law”. Both ancient philosophers and elite researchers in this field attach great importance to the issue of distribution.3 Studies on and the institutional development of eco­ nomic law cover a wide range of issues including the distribution of the finance of the state, the income of citizens and the division of financial power among the state organs or the property rights allocation between market subjects, etc. This illustrates that the perspective of distribution is crucial in the study of economic law. In fact, economic law involves a wide range of issues related to distribution including departmental law which involves distribution issues in every aspect. For example, taxation law involves fiscal revenue distribution, financial law involves the allocation of currency supply while the area of competition law involves the distribution of competition rights. All of these involve the distribution of power, rights and interests between the relevant subjects. In view of the development of China’s economic law, the distribution of interests of nationals (including individ­ uals and enterprises) and the financial distribution by the state are two important types of distribution. The primary motive of adjusting the two types of distribu­ tion not only drove the country’s reform and “opening” but also led to the birth and development of economic law. 5.1.2.1 Basic motivation: the need to adjust the distribution of individual interests Modern Chinese economic law was born in the early stages of China’s reform and “opening”. Under the traditional planned economy system, the institution of economic laws aiming to resolve the “two failures” –i.e. market failure and gov­ ernment failure – was impossible. It is the reform and “opening” that gradually laid the microscopic foundation and macroscopic structure of the adjustment of economic law. Therefore, the emergence and development of Chinese economic

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law are deeply intertwined with China’s reform and opening. It is the most impor­ tant legal achievement that can be associated with it. Historically, the need for the distribution of interest for both individuals and corporations was the basic motive that drove China’s reform and “opening”. It is generally believed that the precondition for reform resides in the inability of production relations to meet the requirements of the development of productive forces to which the distribution relation is crucial. The loop of order-disorder in the history of China is closely related to the distribution relation. Before the magnificent reform and opening up in 1978, whether in urban or rural regions, the need to resolve distribution issues relating to individual interests already existed. It is because of these demands that the household contract responsibility system was first implemented in rural regions where people suffered the most. This was in areas including the famous Xiaogang Village in Fengyang, Anhui Province. Through the implementation of the household production contract, the house­ hold work contract and other similar reforms, the distribution relation was better adjusted and this increase led to a significant increase in the farmers’ initiative and to the initial success of reform in the rural area. The success boosted the con­ fidence of decision-makers to put forth urban reform. Started in 1984, the urban reform centred on the reform of enterprises and was, therefore, directly connected to the interest distribution among the state, the enterprises and the individuals. In the course of reforming enterprises, whether the emphasis was on decentralization and interest concession or separation of powers and establishment of the mod­ ern enterprise system,4 whether it was on property rights reform, price reform or other reforms, the ultimate outcome was the distribution of interests given that the essence of reform is to change the existing interest distribution method in favour of new distribution relations. The need for adjustment to the interest distribution of individuals was the ini­ tial motivation for China’s reform and opening and the emergence of economic law. It directly propelled the initiation, reform and development of economic law in China. The redistribution and adjustment of individuals’ interests require not only the inheritance of conventional regulations and institutions but also the crea­ tion of new regulations and norms to deal with the problems that conventional regulations and institution failed to or could not adequately resolve. It should be noted that economic law was formulated because of the practical demand for reg­ ulations on individual interest adjustments. Additionally, the need for the adjust­ ment of individual interest distribution reflects individual profitability. However, apart from this profitability, economic law also needs to take into consideration social welfare in order to adequately balance the two goals. Supporting public welfare, on the other hand, is directly related to the state’s financial distribution. 5.1.2.2 Direct motivation: demand from the state financial distribution The need for individual interest adjustment was the principal motive in promoting China’s reform and opening and it also constitutes an important driving force for the emergence of related economic law. On the other hand, the need for state-level

Distribution-oriented rule of economic law 109 financial distribution is the direct motivation for the advancement of a “construc­ tive” type of economic law. According to Schumpeter and research conducted by other well-known economists, as well as the resulting “Schumpeter-Hicks-North Theorem” (Fan He 1998),5 it could be concluded that financial pressure is the direct cause of reform. This theorem is also applicable to China. In fact, before the reform and “opening”, China’s economy was “on the brink of collapse” (Hua Guofeng 1978)6 as the economic pressure at that time was unbearable. As a result of the lack of vitality and economic inefficiency, the difficulty in maintaining sta­ ble and continuous corporate profits increased day-by-day pushing the state finan­ cial system, which, at that time, depended mainly on profit from enterprises, to the breaking point. This situation compelled the state to undertake reforms. From a present-day perspective, it was the urgency to solve the financial crisis as soon as possible that served as the direct and crucial motivation for the state to reform urban enterprises. From the perspective of development, adjusting the distribu­ tion relationship between enterprises and the state and to effectively locate these two in the initial distribution were precisely the issues the state had to focus on. Given this scenario, it was crucial to give precedence to the state and enterprises while reforming interest distribution among the state, enterprises and individuals. Its significance is not only reflected in the financial or economic aspect but also in the legal aspect. From an economic law perspective, only after resolving the basic distribution relationship and allowing enterprises to have their own interests, can they become truly independent, be the real legal entity they are supposed to be and serve as the foundation of the main body of the market economy. This is based on this understanding that the state can employ economic law as a tool for market macro-adjustment and regulation. Otherwise, the development of a commodity economy and economic law will be beyond imaginable. State financial distribution is deeply related to the state’s public functions which include economic and social functions mainly aimed at providing public goods. Therefore, the state’s financial distribution is different from the distribu­ tion of individual interests and should reflect the degree of social welfare. Because the state’s financial distribution comes from the income of individuals and enter­ prises, their interests can conflict with the state and public interests leading to fur­ ther conflict between individual profitability and public welfare.7 This can further evolve into a conflict between efficiency and fairness – the resolution of which requires relevant laws and regulations. However, in the traditional law system, each departmental law has its own well-defined applicable jurisdiction which can­ not be easily expanded. Therefore, a new departmental law is needed to resolve the conflict – that is, the economic law. In summary, because it is fundamental and it serves as the direct motivation, the distribution of individual interests and state financial distribution further pro­ mote the in-depth development of the reform and opening up as well as economic law. In the field of economic law, the most important goals and functions of the economic law adjustment include paying close attention to the relation between individual interests and state financial distribution, resolving the basic conflict between individual profitability and social welfare and simultaneously taking

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into account both efficiency and fairness. Those goals run through and connect relevant economic law systems and become the key path of the development of economic law. The adjustment of the distribution relation falls under the category of “complexity problem”. As economy and society develop and as the reform and “opening” of China deepens, the problem will become more and more complex and the resolution to it requires more complete economic law systems as well as progress in economic law research.

5.2 Shift of the focus of distribution and the “U-curve” 5.2.1 Focus of distribution: a shift from product-oriented to right-oriented The above discussion on the distribution of individual interest and the distribution of national finance explains, from an economic perspective, the motives and rea­ sons for the reform and “opening” of China. With the widespread existence of the private-public binary structures of desires, goods and interests, the above-men­ tioned two types of distribution tend to continuously drive the nation’s reform and “opening”, and promote the development of economic laws which, at the same time, represent and protect the fruits of reform and “opening”. Furthermore, with the progress of the two types of distribution, the focus has shifted from productoriented to right-oriented thereby establishing a direct relationship with changes in economic structures, institutions and legal systems. During the planned economy period, shortage of products (in Kornai’s terms “shortage economy”)8 called for arrangements such as monopolized purchase and personal distribution quota, etc. In addition to the National Planning Commission and the Ministry of Finance, functional departments such as the Ministry of Materials and the Ministry of Commerce were also established to address the distribution of materials and products. At that time, materials or products were the focus of distribution. During the commodity economy period, as products became tradable, national deployment was no longer in terms of distribution and the government was no longer entitled to direct appropriation but had to recog­ nize the independence, interest and legal rights of various players. At a micro level, property rights and creditors’ rights have become increasingly important, and other forms of rights related thereto have become increasingly varied. The rights of parties to transactions and the powers of regulatory bodies have become scarce resources. How to define and protect property rights and how to ensure the effective exercise of different rights by different players has become a prominent issue. The process of defining rights is equally the process of the distribution of rights and interests, and therefore a distribution issue. The reason why the distribution of rights has become the focus is that transac­ tions have become significant in terms of both volume and complexity in the com­ modity economy and that it is essential for both individuals and wider society to ensure transaction security and efficiency and reduce transaction costs and risks. According to the Coase Theorem, when the transaction costs are not zero, the initial allocation of property rights can be highly significant to allocate resources

Distribution-oriented rule of economic law 111 efficiently. Civil laws, commercial laws, economic laws and other laws that have the potential to affect the initial allocation of property rights have a fundamental impact on the allocation of rights – they directly affect the cost of microtransactions and the cost borne by the entire society. It is important, at both the micro and macro levels, to emphasize the influence of economic laws on the allocation of rights in view of improving the relevant economic laws. Notwithstanding the general discussion on the allocation of rights above, it should be noted that such an allocation usually includes division of powers, as well as rights allocation in specific legal practice. The reform and “opening” and the development of economic laws are, in fact, a process where powers and rights interact with each other – the government’s multiple economic powers have been decentralized or resolved, while the rights of the market have grown. The government has gradually shifted from a centralized administration to a layered decentralization in an attempt to create an environment where market players, as free economic subjects, can be active and innovative. Economic laws have played a positive role in facilitating such a process. The laws have established systems and institutions for the decentralization and adjustment of powers, particularly the powers to macro-control over economic and market regulation. This is more so given that civil laws and commercial laws have not been sufficiently developed to address issues regarding power decentralization or to make stipulations on issues relating to institutional laws. In general, the process of the allocation of economic powers and rights is a process where institutional laws and specific market regulatory laws have originated and have been developed. The development from a planned economy to a commodity economy and further to a market economy does not pertain solely to the nation’s reform and “opening” process, and the shift of the distribution focus from products to rights, but also, it is a process where economic laws have emerged and developed. It is helpful for the analysis to map out the development of economic laws from the distribution perspective. 5.2.2 An empirical analysis: the “U curve” in distribution and its implications 5.2.2.1 The presentation of “U curve” That the distribution of individual interest and the distribution of national finance are the important motives for reform and “opening”, and that the shift of the distribution focus from products to rights, fosters qualitative research on the basic approach to the reform and “opening” from a distribution perspective, and help to reveal the inherent and fundamental issues in the creation and development of economic laws. As distribution is directly related to the quantity of income or wealth, the flow and increment of which directly reflects the direction of distribution and the adjustment of related powers and rights relating, empirical studies regarding the types of distribution can help to discover the track of reform and “opening” and the economic law development thereby exacerbating the change in the division of government functions and powers. Considering that

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the distribution of national finance may explain the relevant issues in a more straightforward way, we use national finance as an example to illustrate the “U curve”9 (Kuznets 1955) in distribution. Furthermore, through tracking the “U curve” we will reveal the route of institutional reform from the planned to the market economy, the change of the government’s economic functions and the development of economic laws. A state’s fiscal revenue and expenditure are indicative of its participation in the distribution of national income. Analysis of fiscal revenue and expenditure may help determine the distribution of the government’s fiscal and functional powers, the supply of public goods, and the limitation or expansion of specific government powers. Considering that the data we have access to on fiscal revenue and expend­ iture is relatively accurate and can be used to reveal the relationship between the government and the people, it is feasible to investigate changes in the functions of government by examining the fiscal statistics. We set out a table which shows the relevant fiscal revenues and GDPs from 1978 to 2018 (Table 5.1). The table above can be analyzed in two ways according to absolute numbers and relative numbers. From an absolute number perspective, the financial rev­ enue was above RMB100 billion and remained stable each year between 1978 and 1984, and then increased slightly to RMB200 billion each year from 1985 to 1990. Since 1992 when the market economy was introduced, fiscal revenue Table 5.1 China’s GDP and fiscal revenues from 1978 to 2018 (100 mm RMB) Year GDP

Fiscal revenue

Fiscal revenue / GDP (%)

Year

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

1132 1146 1159 1175 1212 1367 1643 2005 2122 2199 2357 2665 2937 3149 3483 4349 5218 6242 7408 8651 9876

31.0 28.2 25.5 24.0 22.8 22.9 22.7 22.2 20.7 18.2 15.7 15.7 15.7 14.5 12.9 12.3 10.8 10.2 10.4 11.0 11.7

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

3645 4063 4546 4892 5323 5963 7208 9016 10275 12059 15043 16992 18668 21782 26924 35334 48198 60794 71177 78973 84402

GDP

(Source: National Bureau of Statistics, all data rounded up)

89677 99214 109655 120333 135823 159878 184937 216314 265810 314045 340903 401513 473104 519470 568845 641281 685993 740061 820754 900310

Fiscal revenue

Fiscal revenue /GDP (%)

11444 13395 16386 18904 21715 26396 31649 38760 51321 61330 68518 83102 103874 117254 129143 140370 152269 159605 172593 183360

12.8 13.5 15.0 15.7 15.98 16.5 17.1 17.9 19.3 19.5 20.0 20.7 22.0 22.6 22.7 21.9 22.2 21.6 21.0 20.3

Distribution-oriented rule of economic law 113 1000000

35

900000

30

800000

25

700000 600000

20

500000 15

400000 300000

10

200000

5

100000

0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0

GDP

Fiscal Revenue

Fiscal Revenue/GDP (%)

Figure 5.1 GDP, fiscal revenue and fiscal revenue/GDP of China (1978–2018)

has increased by around RMB100 billion per year. From the year 2000, the annual rate of increase has been RMB200 billion per year. From a relative num­ ber perspective, we apply the index of the ratio of fiscal revenue against GDP which many Chinese scholars are using in recent years. From the late 1970s to early 1990s, although the absolute number witnessed a relatively slow increase, the GDP at the same period increased substantially each year. With the rising trend, the ratio of fiscal revenue against GDP declined until 1995 when the ratio dropped to the lowest point of 10.3%.10 In 1996, the ratio was 10.4% before rising to form a curve of “first decrease, then increase”. The curve is a U shape with a relatively large pointing up due to the relatively long selected period and a relatively low ratio of fiscal revenue against GDP (see the diagram below) (Figure 5.1). 5.2.2.2 Implications of the “U Curve” The “U curve” above helps to analyze various important issues of China’s reform and “opening” and in the development of economic laws. For instance, the “U curve” can roughly reveal changes in the government’s economic functions, as well as changes in the functions and objectives of economic laws. It also helps to reveal the institutional reforms for rights allocation and power division and to extend Wagner’s Law. Distribution of interest is thus essential for the study of reform and “opening” and the development of economic laws. Below we briefly examine these issues.

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5.2.2.2.1 THE “U CURVE”, THE ECONOMIC FUNCTION OF THE GOVERNMENT, THE DISTRIBUTION OF RIGHTS AND ECONOMIC LAW FUNCTIONS

Given that fiscal revenue relates directly to fiscal expenditure, which, in turn, relates directly to the government’s exercise of public functions, especially national economic and social functions, the following interaction between fiscal revenue and the government’s economic function is noteworthy. On the one hand, change in fiscal revenue tends to have an impact on the exercise of the govern­ ment’s functions – the higher the fiscal revenue, the better the conditions are for the government to exercise its economic functions, while lower fiscal revenue has the ability to constrain the government’s exercise of its functions. On the other hand, the government, in order to better perform or expand relevant functions, inevitably requires more fiscal revenue which it plans to increase via institutional arrangements. Economic laws should pay particular attention to the interaction between fiscal revenue and government functions. As shown in the diagram, the ratio of fiscal revenue against GDP reached 31.1% in 1978, an indication of the government’s strong and all-encompassing economic functions during the planned economy period. However, considering the circumstances at that time, the basis for such high a ratio was quite slim given that the fiscal revenue was mainly drawn from the profits of state-operated enter­ prises. The institutions in charge of distribution at that time deprived the enter­ prises of their development potential and individuals of their income, which in turn generally dampened individuals’ enthusiasm, leading to the lack of efficiency and latent problems. Realizing the problem created by institutions in terms of dis­ tribution and their repercussions on the entire economy, China initiated reforms by launching the planned commodity economy and later the market economy. As mentioned above, the transition of China’s planned economy to a market econ­ omy, from the fiscal revenue distribution perspective, is a “U curve”. That means, the ratio of fiscal revenue against GDP went down gradually with the “decentraliza­ tion” reform and dropped to the bottom at the beginning of the market economic system. As the understanding of the market economy and the government’s eco­ nomic role deepened, the people began to realize that the market economy required the government’s macro-control and regulation and that such functions, as well as social functions, needed to be further strengthened. In a legal sense, the transition and legalization of the government’s function constitute a process where powers and rights interact with each other and where quantitative change accumulated to qualitative change. On the one hand, the government’s regulatory powers reduced gradually in terms of scope and volume; on the other hand, the rights of enterprises and individuals expanded gradually, and their interests increased accordingly. The “decentralization” at the early stage of reform and “opening” was a process through which individuals obtained more rights. Such a process not only influences con­ stitutional laws, administrative laws, civil and commercial laws but also directly influences the emergence and development of economic laws. Reading from the history of economic laws, at that time, the initial functions and objectives of economic laws corresponded to the government’s functions and objectives. When the government’s economic functions were obscure, it was

Distribution-oriented rule of economic law 115 difficult to determine the functions and objectives of economic laws. In the era of substantive reform, the government’s changing economic functions would directly impact the construction of relevant institutions leading to the correspond­ ing change in the objectives of specific economic laws. This explains why dur­ ing the planned economy era, decision-makers could not reach an agreement on the functions and objectives of economic laws. With the gradual establishment of market institutions, the government’s economic functions, in particular, its economic and market regulation functions11 together with economic law macrocontrol, market regulation functions and relevant objectives have become clearer. A better understanding of the functions has contributed to the unification of eco­ nomic legislation and the advancement of the theory of economic laws. 5.2.2.2.2 FURTHER DISCUSSION ON THE APPLICATION OF THE “U CURVE”

First, the above “U curve” is an indirect illustration and an extension of Wagner’s Law. In accordance with Wagner’s Law, fiscal expenditure will increase with the expansion of the government’s functions (Buchanan & Musgrave 2000).12 On the other hand, fiscal revenue and allocation will impact the fulfilment of government functions. China’s history proves that with the “decentralization” reform and tran­ sition from a planned to a commodity economy, the ratio of fiscal revenue against GDP declined, creating a corresponding reduction in the government’s function to directly administer the economy. Wagner’s Law may be extended this way: the reduction of fiscal revenue or the decline in the ratio of fiscal revenue against GDP would have a “shrinking effect” on the government’s function which would further reduce the size of fiscal revenue or expenditure. Of course, such extension is only a theoretical hypothesis and needs to be examined across various historical periods and different countries over time. Second, the above “U curve” may be applicable to other circumstances over a long time and in different contexts: (a) it may be applicable to countries that are in a transition period. In the transition to a market economy, the government’s func­ tion would initially reduce, then expand, and economic legislation would expand gradually turning the transition process into a U curve; (b) from a “big history” perspective (Renyu Huang 1997),13 the historical development from free compe­ tition to monopoly, and from no intervention to intervention, then to moderate intervention may form a U curve; (c) the government’s functions may undergo reforms, and the volume of economic legislation and their impact on the economy would change periodically and form certain changing cycles14 of economic laws, which may also form a continuous “U curve”; (d) periodic economic development would result in periodic adjustment of economic law (e.g. the cycle of macrocontrol law is consistent with the anti-cycle requirements), where the curve for such periodic change may be a U curve. To intercept a section of the “U curve”, it is possible to investigate various issues and help to predict economic and legal development, prevent volatile fluctuation and mitigate the effect of relevant cycles so that economic and social shocks can be mitigated and the goal of stable devel­ opment can be better achieved.

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Finally, the above “U curve” can reveal the track of construction of economic laws and jurisprudential study. As mentioned above, financial distribution tends to impact the government’s function and vice versa; similarly, the government’s function tends to impact the institutional law, which is part of economic laws and further specific market regulation. Therefore, change of the government’s functions not only impacts constitutional laws and administrative laws, but also economic laws. The construction of economic law should be to the direction and orientation of financial distribution as well as changes in the government’s func­ tion. Similarly, the track of jurisprudential study on economic laws is consist­ ent with the track of these aspects. This would be one of the important rules for China’s economic laws and linked jurisprudential studies.

5.3 The changes in distribution policy and the development of economic law 5.3.1 The spiral regression of economic policy: “centralization-separationcentralization” The above-mentioned distribution relationship would directly affect the immedi­ ate interests of related subjects. Therefore, at the beginning of the reform and “opening”, adjusting the distribution relationship was a significant part of eco­ nomic policymaking. In fact, the distribution policy was the primary focus of various economic policies at the time. In addition, with the deepening of the reform and “opening”, both property right relationships and price relationships directly related to distribution gradually became major elements of economic policy. Subsequently, differences in approaches to reform appeared, with vary­ ing emphasis on property right or on price reform. Since the reform has been a gradual “crossing the river by feeling the stones” endeavour, it was difficult to formulate norms in relation to many aspects of the formation of legislation. At the same time, standardized forms of governing the behaviour of the people were indispensable. This brought to prominence the role of various kinds of economic policies or distribution policies. At the early stages of the reform, economic policy or distribution policy was not very mature and evidently had remnants of a planned economy. In fact, these were important instruments upon which the state directed and managed reform in related fields. Initially, many important economic policies were issued in the form of documents from the Central Committee of the Communist Party of China or the state council. For instance, the “No. 1 Documents” on rural reform for a consecutive period of time issued by the Central Committee of the Communist Party of China and the “Decision on Economic Restructuring”15 in 1984 con­ tained considerable amounts of distribution policies. The economic policies of this period were characterized by the close integration of party policies and public policies as well as political policies and economic policies with more prominence on the direct management function of economic policies. With the intensifica­ tion of reform and “opening”, especially with the improvement of statecraft and governance, the state has begun to attach importance to the implementation of the

Distribution-oriented rule of economic law 117 rule of law and to advance reforms in accordance with the law. At the same time, the employment of economic policy has gradually matured. Economic policy has become an important public policy and, through its direct indirect regulation on economic activity, has achieved remarkable results in the application scope of economic policy and implementation effect. Although economic policy is an important approach to regulating the economy in all countries, the specific function differs sharply across different historical periods and different economic systems. In a planned or controlled economy, the state has an economic monopoly and it controls the market. That means economic policies applicable to the market economy are not likely to be effective. On the contrary, in a commodity or market economy, the country executes a macroscopic market regulation system thereby exerting tremendous influence on economic policy. China has experienced both periods during the process of China’s reform and “opening”, meaning the characteristics of the two periods may contribute to a better comprehension of the development process of economic law. In fact, in a fully or predominantly planned economic period, the state, in many respects, needed to implement a “unified regulation” (i.e., control)16 result­ ing in restriction over individual freedom including the freedom of business. In addition, certain economic activities were banned, and the distribution policy was subjected to numerous restrictions as well. Therefore, the period of control was also the period of “restriction”, and economy-related policies mainly served the purpose of control and restriction. With the recognition of the shortcom­ ing of control and restriction, the state began to “split the power” in economic policies or specific distribution policies. The so-called “separation”, including the emancipation of the mind, the decentralization of power and the release of bondage, is also called “untying”, and essentially constitutes the reform in itself: “open” is to open the door of [the] country, open markets and open up barriers to ensure freedom of trade. Such “opening” facilitates the emancipa­ tion of the mind and the change of system that unreasonably restricts economic freedom. Included is the “opening” of the distribution field. Of course, to avoid the many negative effects, “separation” should be gradual and appropriate. In fact, after a wider separation, growing problems of market failure have led to a more profound awareness of the necessity of moderate government regulation which was facilitated by the period of “opening” or “separation”. Thus, it could be concluded that Chinese economic policies or distribution policies have expe­ rienced three different periods: initially restriction, then separation and, finally, moderate regulation. The above three periods of economic policy or distribution policy, from the perspective of the state, reflect a process from the initial concentration to separa­ tion or “opening” towards moderate concentration, which can also be referred to as “centralization-separation-centralization”. But “centralization” that is a reflec­ tion of a moderate degree of control is different from the previous one. These two “centralizations”, which highlight a spiral regression pattern, are not at the same level. In fact, it is a regression which is consistent with the “U-shaped curve” of the previous fiscal distribution. It also indicates that the financial allocation of the

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state has a positive correlation with economic policies, economic functions and economic law of the country. In the process of “centralization-separation-centralization”, the stage from the original “restriction” to “opening” comprises the first shift from “centralization” to “separation”, and during this process, the national plan instruction – as well as related controlling factors – decreased day by day. With the “opening”, the state monopoly and market control gradually loosened, and “simplified working processes and softening the terms” or “decentralization of power and transfer of profits” became the mainstream economic policy of the period. The implementa­ tion of these policies saw the macro-foundations of the adjustment to civil and commercial law and economic law. With the gradual transformation from a planned to a market economy, the main form of economic policies also gradually became clear as they evolved system­ atically from the initial comprehensive rural and enterprise policy to the fiscal, taxation, industry, competition and foreign trade, etc. policies with close links to the market economy. The government has gradually learned to use economic policy more consciously for macro-control and market regulation. Particularly, the application of economic policy became more mature after the establishment of the market economic system target in 1992. For example, in 1993, the state employed relevant monetary policy and financial law to carry out macroeconomic regulation and control in the financial field to resolve the issue of the overheating of the economy and thereby, eliminating the factors resulting to the financial crisis that occurred in many countries in the aftermath of 1997. Then after the flood of 1998, the positive fiscal policy was adopted for many years and it successfully solved the problem of insufficient domestic demand, deflation and the subsequent economic depression.17 For many years, the main focus of China’s macro-control has been on the cold and hot fluctuation of the economy. That explains why the state implemented a robust regulation in the transition period with the aim of maintaining the economic order. The relevant economic legislation would usually reflect these economic policies which are relatively mature, stable and important. From this vantage point, there­ fore, “economic law is the legalization of economic policy” and it “plays an impor­ tant role in safeguarding the effective implementation of economic policies”. There exists an intrinsic connection between the objectives and tools of economic policy on the one hand, and the adjustment objectives and adjustment means of economic law. This connection establishes a close interrelationship between economic policy and economic law underlined by the fact that economic law shows strong policyoriented characteristics.18 Following the path of economic policy, we can also com­ prehensively grasp the entirety of economic law and economic jurisprudence.    specific impact of economic policy on economic law – taking  5.3.2  The fiscal and taxation distribution as an example It is well known that China’s economic system reform has been developed along the route of progressive decentralization of power and transfer of profits. On one

Distribution-oriented rule of economic law 119 hand, through the constant referral of power to enterprises and the granting of profits to the private economy, market players have gradually grown and enter­ prises have become independent market entities. On the other hand, the govern­ ment could build a more standard and stable financial system of tax federalism by changing the functions of government, innovating the financial system and adjusting the distribution relationship between the different levels of government. The above two aspects respectively involve two types of distribution, namely, the distribution of individual interests and the financial distribution of the state. Since both types of allocation involve fiscal and taxation policies within economic poli­ cies, this section focuses on fiscal and taxation policies as an example to analyze the path of the reform and “opening” and the path of development of the economic law. As mentioned before, financial pressure was a direct cause of China’s reform and “opening”, while individual interest distribution had been the fundamental motivation for it. In the late 1970s, the country was faced with two contradictory problems. First, the sustenance and development of enterprises and individuals required funding. As a result, a policy was initiated to ease the burden, trans­ fer power and grant additional benefits. However, the alleviation of the financial pressure meant that the state had to guarantee the sustainable growth of the fiscal revenue. In fact, as the “North Paradox” reveals the “country is both a source of economic growth and the cause of economic decline”. If this is viewed from the opposite perspective, then it could logically be concluded that individual interests are also the source of economic growth and the cause of economic decline (Coase, Allchian & North 1994).19 Therefore, the economic policy of distribution must adequately balance these two factors. At the beginning of China’s reform and “opening”, the state needed to consider how to promote the development of enterprises and increase the remuneration of individuals. In terms of fiscal and taxation policies, at that time, fiscal and taxation instruments were not important regulatory tools due to a weak economic founda­ tion. With the deepening of the reform and “opening”, and with the increasing GDP that surpassed the rate of fiscal growth (known as the U-shaped curve), the role of fiscal adjustment and distribution has become increasingly obvious. Fiscal and taxation policies have become vital tools for income distribution and macrocontrol in the country. It is noteworthy that in the process of reforming the “decentralization of power and transfer of interests”, the state gave up some power in order to gain finan­ cial revenue due to the pressure to maintain a certain level of fiscal revenue. At the same time, the state made great reservations when transferring fiscal power thereby leaving some enterprises with quite heavy burdens. Such a practice was a deviation from the principles of fair tax burden. For example, after the imple­ mentation of the “changing profits into taxes” in China, the income tax rate for large- and medium-sized state-owned enterprises was as high as 55%. Moreover, companies were likely to be subject to enterprise income adjustment tax, which imposed excessively high tax burdens on such enterprises. In addition, collec­ tively owned enterprises were subject to a higher excess progressive tax rate of

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eight levels of up to 55%. Foreign-invested enterprises with no historical “bag­ gage” were the least taxed. And the nominal tax rate was only 33%. In practice, the actual tax rate for a lot of enterprises was just 15% or under. State-owned enterprises contribute the bulk of financial revenue meaning that the more produc­ tive the enterprises are, the heavier their tax burden. The fiscal and taxation policy at that time was described as “the cattle that plows the most field gets whipped most seriously”, so its “ratchet effect” was very prominent.20 And this led to the long-plagued problems that the state-owned enterprises have during China’s eco­ nomic development. In addition, even though preferential distribution to foreigninvested enterprises contributes to the implementation of “opening” policies such as attracting foreign investment, such practice jeopardizes the principle of fairness and results to the issue of discrimination in distribution. As we have seen, such taxation system discriminated domestic and foreign-invested entities and the 1994 Tax Reform failed to resolve the problem. It was not until the New Year’s Day in 2008, with the implementation of the new enterprise income tax law, that the discrimination against domestic entities was eliminated (Shouwen Zhang 2008).21 Two corporate tax reforms signify the manifestation of the intensive adjust­ ment to corporate tax policy in the early 1980s and early 1990s respectively. From 1983 to 1984 the “changing profits into taxes” policy was implemented in two steps (associated with the shift from appropriation to loan,22 which also involved distribution). This policy facilitated the cultivation of market subjects by allowing enterprises to pay taxes instead of turning overall profits to the state. The “1984 tax reform” generated the following outstanding problems regarding the tax poli­ cies and tax systems: (1) the tax law is not unified; (2) the tax burden is unfairly allocated and; (3) the tax system is not concise. Because of these problems and along with the requirements of the fair tax burden and fair competition required by market economy, China carried out extensive tax reforms in the early 1990s and from then on, the state’s tax policy began to show more evident indications of market-orientation and the weights of a fair tax burden increased. Historically, changes in fiscal and taxation policies in China have been imple­ mented via the process of “centralization-separation-centralization”. In the begin­ ning, when the form of the enterprises was comparatively identical, the state’s tax policy on Public Enterprises was relatively “centralized”. With the increase of the forms of enterprises, especially the increase of the amount of foreign-invested enterprises and private enterprises, the state started to formulate different tax poli­ cies according to the various forms of enterprises. Correspondingly, the legislative power to regulate the income tax of domestic enterprises is generally devolved to the State Council, and the tax rate is constantly lowered to realize “decentraliza­ tion of power and transfer of profits”. This, in other words, constitutes the process of “separation”. As problems pertaining to scattered legislation and tax injustice deteriorated, the central government began to take back taxing power for the state sought to solve the problems that appeared in the period of “indulgent legisla­ tion” or “extensive/coarse legislation”. Accordingly, the goal of the tax reform of 1994 was defined as “unification of the tax law, the fairness of the tax burden, simplification of the tax system, and reasonable decentralization of power”, to

Distribution-oriented rule of economic law 121 achieve the goal of safeguarding fiscal revenue and macroeconomic regulation and control. Because of the effort to achieve these objectives, the practice of con­ centrating power in finance and taxation appeared again. At the same time, based on the requirement of the financial statutory principle, the state imposed stringent requirements for the standardization and legalization of various fiscal and taxation policies. As stated in the section above, economic law is the legalization of economic policy. The legalization of all these fiscal and taxation policies constitutes an important part of economic law. Therefore, the development of an economic law system is in accordance with the changes in these fiscal and taxation policies. Through changes in fiscal and taxation policies that are directly related to distri­ bution, the mystery of the regular pattern of development of economic law is also clear.

5.4 The system and theory of distribution Based on the evolution of the market economy, the development of legislation and legal theory in economic law, marked by an amendment to the constitution in 1993 which established a market economic system,23 can approximately be divided into two phases: the first stage, from 1978 to1993, which is a period when the theory of economic law developed along with the economic system reform and the initial progress of China’s legal system, thus giving birth to various theories in both economic law and economic jurisprudence; the second stage, from 1993 to the present, witnessing the steady development of economic law and economic jurisprudence, during which, due to the common economic basis, the scholars of economic law field accordingly have reached a consensus about the basic theoreti­ cal knowledge of the market economy and legal system construction which not only make the goal of the legal system construction more clear and certain, but also contribute to the steady development of economic law. 5.4.1 The construction of an economic law system through the distribution line The idea of “taking economic construction as the centre” as proposed by the third plenary session of the eleventh CPC of 1978 had a huge influence both on China and its legal system particularly the acceleration of the construction of its eco­ nomic legal system. Looking back to the history of China’s struggle with fiscal subsidies and taxes between enterprises and individuals, it is clear that distribu­ tion has become the principal avenue through which we can trace the construction of economic law. As far as the legislative aspects of economic law are concerned, despite the diverse legislative levels and types, distribution has remained the focus, whether it refers to rural or city reform; enterprise benefit or individual interest adjust­ ment and; individual interest distribution or financial interest allocation Given that there are so many laws and regulations in the field of economic law, only

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the typical ones are addressed discussed here. The first example is Provisions on a Number of Issues Concerning the Development of the Communal/Production Team’s Enterprises (trial draft),24 issued on July 3, 1979, by the state council, which not only involved the development of rural enterprises and industrial prob­ lem but also mentioned the adjustment of distribution relationships. Similarly, the Interim Provisions on Promoting the Union of Economy issued on July 1, 1980,25 by the state council (replaced shortly after by the Provisions on the Further Promotion of Lateral Economic Integration promulgated by the state council on March 23, 1986) stated the relationships of competition in economy law as well as the distribution relationships. In conclusion, adjustments to the distribution relationship was always a necessary part of the legislation despite its comprehen­ siveness during the early stage of the reform and “opening”. At the early stage of the reform and “opening”, both the distribution of individual and financial interests closely connected with each other but there were two difficult problems that required effective solution via economic legislation. Therefore, China issued interim provisions regarding the implementation of the fiscal management system of “dividing income and expenditure and the classified contract system” in 1980. The systems emphasized the division of financial income and expenditure between governments and demanded the full development of government initiative to fully exercise its power and undertake its financial management responsibility under the premise of consolidating the unified central leadership and plan and ensur­ ing the central government’s necessary cost. Similarly, the third session of the fifth National People’s Congress passed the “Individual Income Tax Law” on September 10, 1980, in an attempt to resolve the distribution problems of the government as well as the distribution problems between the nation and the individual (especially foreign individuals). For the same reasons, the state council issued “the Decision on Balancing the Fiscal Balance and the Strict Fiscal Management”, and regulations on government bonds in January 1981. These measures preceded the launching of the national debt tool which had not been used for years to balance the financial budget and solve the problem of fiscal distribution. In addition, the fourth session of the Fifth National People’s Congress passed the Foreign Enterprise Income Tax law on December 13, 1981, with the aim of further resolving the issue of interests distribu­ tion between the nation and foreign enterprises, which proved to have a positive influence on alleviating the country’s financial difficulties, promoting “opening” to the outside world, safeguarding the national financial interests, and ensuring the tax burden of various enterprises. With the deepening of reform and “opening”, especially the launching of urban reform, the distribution of interests between state-owned enterprises and the state became a prominent issue. Given that state-owned enterprises (which were called state-operated enterprises) compared with the foreign enterprises and individu­ als, was the main provider of the national finance income, it was necessary to straighten out the distribution relationships between the state and state-owned enterprises in order to effectively promote the reform. Therefore, China began to implement “changing profits into taxes” policies in the early 1980s. These policies had a profound economic and legal influence. From the legal aspect, the

Distribution-oriented rule of economic law 123 “changing profits into taxes” policy put the distribution relationships between the state and the state-owned enterprises into the orbit of legal adjustment making state-owned enterprises genuine corporate organizations. In the economic aspect, state-owned enterprises began to embark on the path of self-management and selffinancing. According to the Interim Method for the Second Step of Tax Reform of State-owned Enterprises approved and issued by the state council on September 18, 1984, and a series of interim regulations on taxation (draft), China gradually introduced product tax, value-added tax, salt tax, business tax, resource tax, city maintenance and construction tax, property tax, land use tax, vehicle and vessel use tax, state enterprise income tax, state enterprise regulation tax and other taxes thus making the tax law an important tool for allocating income or distributing wealth between the state and the citizens. Although having played an important role in promoting the reform and “open­ ing” of China in the late 1980s, this tax system, which constituted an important part of the economic law system, began to show its deficiencies after the estab­ lishment of the market economy system in 1992. Thus, China implemented the “tax reform” in 1994 to amend and supplement the above-mentioned taxation distribution that became the basic tax law system of China’s market economy. Although the tax system has been reformed almost every decade after the reform and “opening”, since 2004, there has been no large-scale tax reform as the ones in 1984 or 1994.26 This probably indicates that the rule that of the relevant system usually improves step by step rather than by leaps and bounds after the basic mar­ ket system is established. It’s well-known that the economic system has a considerable influence overthe relevant legal system and the economic base plays a decisive role in the develop­ ment of economic law. The development of China’s economic law should shift from the original comprehensive legislation to more specific legislation following the transition from a planned commodity economy system to the market economy system, a period during which China’s economic management also witnessed a corresponding shift from “controlled economy” to “modulated economy” (that is, from “unified control” to “modulation and regulation”). Meanwhile, the content of the entire legislation of economic law should reflect the fruits of reform and “opening”, that is to say, the main economic policies should be legalized. Given that distribution is crucial in tracing the course of reform and “opening”, it goes without saying that distribution should be crucial in the development of the entire economic law system. 5.4.2 The study of jurisprudence through the distribution line Distribution, as illustrated in various theories, should be a vital clue in economic law system construction and legal research given the importance of the distribu­ tion of individual interest and national finance distribution in the construction of and research in economic law. As mentioned above, the planned economy and the people’s lack of legal awareness jointly led to the sufficient laws at the beginning of the reform and

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“opening”, during which the legislation was usually concentrated on traditional fields including criminal law and criminal procedure law. Legislation on economy law, for its part, was usually was closely connected to national sovereignty, as the tax law. Meanwhile, the state council became the main legislative body as it was authorized by the National People’s Congress (NPC) which passed regulations and issued documents considered to be important legislative resources because of China’s reform was ambiguous and the legislative capacity of the National People’s Congress was weak.27 In addition, the basic theory of economic law had not been not fully established. For example, many different opinions were put forward regarding the object of economic law because academia was unaware of its functions, objectives and object. As a result, there was confusion regarding the delimitations of civil and commercial law, economic law, etc. Including notably “the length and breadth unity theory” derived from the Soviet Union, suggesting that both vertical and horizontal economic relations should be adjusted by eco­ nomic law. In conclusion, the length and breadth unity theory and other relevant theories were reasonable to some extent, given the situation of the economy, poli­ tics, society and law at that time. With the development of marketization and the implementation of the planned commodity economy system, especially the promulgation of “general civil law” in 1986, it began to be clear that longitudinal economic relations shall be adjusted by economic law and administrative law,28 leading to an increase in economic regula­ tions which were used to adjust the longitudinal relations appearing (“changing profits into taxes” and subsequent relevant tax laws or rules that were promul­ gated during this period). The deepening of reform and “opening” and the change of economic system have a great influence on both the contents of the economic law system and the­ ory. Meanwhile, many theoretical viewpoints in economic law changed in accord­ ance with the horizontal economic relationship adjusted by civil law. For instance, “management and collaboration theory”, a highly generalized development of the actual situation in economy and law, reflected not only “planned” economy, but also “commodity economy”, which was ultimately consistent with both the planned commodity economy system and economic law concerning the planned commodity economy. It is well known that a series of economic laws compatible with the market economy began to emerge only after China clearly put forward the goal of the market economy in 1992. The issuing of several important department laws in the name of market regulation laws in 1993 (including “Law of the People’s Republic of China on Countering Unfair Competition”, “Law of the PRC on the Protection of the Rights and Interests of Consumers”, etc.), the fiscal and taxation laws in 1994 (especially a large number of the interim regulations on tax) and the finan­ cial legal system in 1995 (such as “Law of the People’s Republic of China On the People’s Bank of China”, “Law of the People’s Republic of China On the Commercial Bank”), marked the establishment of an economic law system. These, in turn, promoted not only the issuing of the fiscal and tax law, financial law, the competition law and other related department laws29 but also the development of

Distribution-oriented rule of economic law 125 economic law theory. In fact, there were already some theoretical discussions in the field of economic law concerning the market economy from the end of 1992 to the beginning of 1993. These discussions flourished in 1994 and constituted a new theory about the “economic laws” because they were sound consensus-based theories on the market economic system (Jiangping Xiao 2002).30 The new theory enabled people to agree at that time because it reflected the common economic and legal principles in the market economy, and, when compared to the past, it showed no fundamental differences in basic hypothesis, regulating object, subject charac­ teristics, system, as well as specific theory such as subject, behaviour and responsi­ bility. Thus, a stable economic system plays an important role in forming a stable economic law system and reaching a basic consensus on economic law theory. Overall, the economic system, economic policy, economic law system and the theory of economic law of China are influenced by the ideas of that period which include regulars, liberalism and moderate regularism at different times. These are clearly perceptible in the legislation especially in the purpose, princi­ ples and economic law regulations, legal research including the understanding of functions, objects, characteristics and systems of economic law in different historical periods. For example, it is not hard to find that economic law is mod­ ern law which is capable of effectively resolving the problems of modern soci­ ety based on its function of undertaking macroeconomic regulation and market regulation. Economic law is the law to boost development, to solve develop­ ment problems to which the modern state generally pays attention. Economic law is the “law of policy”, which prominently reflects the policies of the gov­ ernment, and has the characteristics of macro regulation and market regulation and modulation.31 China’s reform and “opening” shows that the change of production rela­ tion, especially of the distribution relationship, promoted the change of the eco­ nomic system, and then led to the change of the law, during which economic law emerged and developed. Rapidly or slowly, the thoughts, ideas, opinions and theories of economic law also changed. And economic, social, political and other development or the development of the legal system and theory have profoundly affected the institutional construction and legal research of economic law. At last, it is clear that distribution is undoubtedly one of the important factors as well as an important clue of economic law system construction and legal research on the ground that the institutional change, thoughts change and theory change, are affected by the combination of a variety of factors in the field of economic law. 5.4.3 Conclusion Based on the discussion in this chapter, it could be concluded that China’s reform and “opening” began with distribution and deepened through adjustments to rela­ tions with individual interest distribution acting as the basic motivation of the reform and “opening” and national finance distribution as the direct motivation of reform and “opening”. These not only drove and deepened the reform and “open­ ing” but also promoted the development of the economic law of China.

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From the distribution perspective, China’s reform and “opening” has experi­ enced a shift “from focusing on product allocation to rights allocation” during the course of which dividing and configuring power and rights have been the focus of all kinds of subjects, and hence an important problem, or even the core problem, of economic law construction and research. Distribution has become an important factor in the development of China’s economic law and economic jurisprudence. China’s reform and “opening” has gone from “decentralization of the power and transfer of profits” to developing the market, moderating centralization and conducting macroeconomic control and market regulation. During this period, the “centralization-separation-centralization” process of power is positively cor­ related with the performance of state functions and the exercise of authority where changes along the process are reflected in changes in the national financial alloca­ tion. Changes in the data of fiscal revenue since China’s reform and “opening”, which appears as the “U-shaped curve”, are precisely consistent with the path of “centralization-separation-centralization” in power control. Many extended stud­ ies carried out using the “U-shaped curve”, particularly reveal the inherent con­ nection between the allocation and national economic function, economic system, economic policy, economic law system and economic law theory. The distribution will be concretely reflected in various economic policies, especially in fiscal and taxation policies which can directly affect distribution. The economic policies of China are directly related to the economic functions and economic system reform of the country, hence the reflection of the development path in the form of the “U-shaped curve”. Simultaneously, Economic law was the legalization of economic policy. Its development and related theory also appeared as U-curves. The path of economic law was consistent with the change of alloca­ tion, economic institutions and policy. Based on the aforementioned consistency, it could be concluded that “two types of distribution” and the fiscal and taxation policies related to distribution, effectively reveal the core of institutional construc­ tion and legal research of economic law from different angles. The economic law system and the theory of economic law are closely and internally related, and distribution is an important connection to the system and theories of economic law. To understand the development path of the economic law system and its existing problems is to understand the key points, difficulties and problems of economic law theory and research, which helps to better pro­ mote the theory development and system construction of economic law and trans­ forms economic law to modern law effectively promoting economic and social development. In conclusion, because of its close connection with both national and indi­ vidual interests, distribution is the life wire that runs through both China’s eco­ nomic law system and economic law theory, with great value for the reform and “opening”, for the transformation of national economic functions, for the formulation of economic policy and the formation of an economic law system. Distribution is not only a sustainable task of the construction of the economic law system but also a constantly changing field which deserves attention and significant input.

Distribution-oriented rule of economic law 127

Notes 1 There is no general consensus regarding when economic law begun in China. Some researchers believe that the translation and analysis of foreign literatures on economic law theory marked the start of economic law study in China. Generally speaking, the majority of Chinese researchers tend to regard the year of 1978 as the actual starting point. 2 Every ten years, review articles are published summarizing the previous decade. For example. Hong Ma.(1989) .Commentary on the Debate of Fundamental Theoretical Problems in the Study of Economic Law. Caijing Yanjiu, 15(12), p. 55; the article result­ ing from the young scholars meeting in the late 1990s economic theory of a number of theoretical issues, published in “Chinese and foreign economic law” issue 3, page 90, 1998; Changqi Li. (2009). Three Decades of China’s Economic Law: Progress, Issues and Future. Jurist 116(5), p. 25, among others. 3 As early as the 18th to 19th century, Morales and Desaami put forward the “distribu­ tion law or economic law” in their books Natural Law and Public Code, respectively. In addition, German’s “wartime control law” during World War I and the United States “crisis countermeasures” in the 1930s are, in fact, directly related to distribution. In the early period of the market economy of China, some scholars viewed the law and regulation related to distribution as parallel to and having equal importance with the law of macro-adjustment method. See Changqi Li (1995). Economic Law – the basic legal form of national intervention. Cheng Du: Sichuan People’s Publishing House, pp. 403–405. 4 Decentralization and interest concession, separation of powers and establishment of the modern enterprise system are commonly regarded as important stages in the reform of state-owned enterprises. All of the three stages are, in fact, directly related to the reform of the distribution system, especially the adjustment to the distribution relation between the state and the enterprises. 5 Fan He. (1998). Legislation for market economy: financial problems of modern China. Beijing: Today’s China Publishing Co., pp. 34–39. 6 Hua Guofeng is commonly recognized as the earliest to come up with the analysis. See, Guofeng Hua, Unite in the fight to build a powerful socialist modern state – the govern­ ment work report at the Fifth National People’s Congress, February 26, 1978. 7 These are the basic conflicts in the field of economic law by which every departmental law, such as the taxation law, has to be adjusted and conflicts have to be constantly resolved. 8 Janos Kornai, an academician and economist at the Hungarian Academy of Science, has undertaken in-depth study on shortage, see Janos Kornai. (1986). Economics of Shortage, translated by Xiaoguang Zhang, Zhenning Li, Weiping Huang. Beijing: Economic Science Press; Janos Kornai. (1986). Growth, Shortage and Efficiency: A Macrodynamic Model of the Socialist Economy, translated by Zhiyuan Cui, Mingjin Qian. Cheng Du: Sichuan People’s Press. 9 The famous American economist and statistician Simon Smith Kuznets noted the Inverted U Curve Hypothesis in income gaps which states that in countries experi­ encing economic growth, income inequality first increases and then decreases. See Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), pp. 1–28. The Nobel Prize winner Lewis came to the same conclusion in his study on dual economic structure. Kuznets maintains that law, political decisions, and technical advances all play important roles in improving income inequality. 10 According to statistics of the China Financial Yearbooks, the ratio of fiscal revenue against GDP was 12.9%, which is the lowest point since 1978. Right before 1993, China started to adopt a market economy system, and the country amended the Constitution Law to highlighting that, “the country implements the socialist market economy system and the state strengthens economic legislation and improves macro control”. Under

128 11

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the pressure of the low ratio of fiscal revenue against GDP and the negative impact it brought, the country carried out large scale tax reforms in 1994. The government used to categorize its functions into four groups: economic adjust­ ment, market regulation, social administration and public services. Economic adjust­ ment and market regulation correspond to macro control and market regulation in economic laws. Musgrave believes that Wagner’s prediction in 1893 was proved to be correct and that increasing role of the public sector had become the decisive feature of the western world. See James M. Buchanan and Richard A. Musgrave. (2000). Public Finance and Public Choice: Two Contrasting Visions of the State, translated by Chengzhao Lei. Beijing: China Finance and Economic Press. The “big history” approach by Renyu Huang emphasizes the induction and synthesis of historical issues in different periods and is more appropriate for the general study of issues that involve a wider time and space range. See Renyu Huang. (1997). Chinese Big History, Beijing: Sanlian Book Store. See Shouwen Zhang. (2002). Periodic Change of Macro Control Law. Peking University Law Journal, 14(5), pp. 695–705. The Central Committee of the Communist Party of China (CPC) issued the central “No.1 Document” concerning agriculture, rural areas and farmers for five consecu­ tive years from 1982 to 1986, having made specific arrangements for rural reform and agricultural development. Also due to the importance of the issue of “agriculture, rural areas and farmers “, the Central Committee issued five consecutive “No.1 Documents” from 2004 to 2008. In addition, in October 1984, the Third Plenary Session of the Twelfth Party Central Committee approved the Resolution on Reform of the Economic System. And the meeting systematically brought forward and illustrated a series of major theoretical and practical problems with regard to the economic system reform, and broke through the traditional concept that put the planned economy in conflict with the commodity economy. It also reasserted that the socialist economy in our country is a planned commodity economy based on public ownership. The concept of controlled economy here is not necessarily the same as pure con­ trolled economy or controlled economics. Influenced by various factors such as Keynesian theory, Japanese theory and wartime state in the 1930s, many scholars (including MA Yinchu) studied the problems of controlled economy. However, in recent years, some scholars have emphasized that controlled economy and planned economy are very close as both reflect the control of the state over many aspects, such as prices and trade. But controlled economy is still different from purely planned economy given that it is framed around the concept of a mixed economy system. See Xiangcai Zhong. (2008). China’s Unified Economic Thoughts in the 1930s and 1940s. Historical Review, (2), p. 33. During the 2008 financial crisis, China also launched a proactive fiscal policy directly based on the successful experience of ten years ago. The policy-oriented characteristics is summed up by many scholars as an important feature of economic law. In particular, the feature is related to the basic attributes of economic law, i.e. economic and regulatory. It is the direct embodiment of modernity that is an essential characteristic of economic law. The “North Paradox” focuses on the financial allocation of the state, while the reverse inference is more concerned with the distribution of individual interests, which can also be considered as two aspects of the same problem. Historically, the development of the UK and the Netherlands has been faster than that of France and Spain in the past two centuries, which is the result of the differences in institutional arrangements for the distribution of individual interests. See Coase, Allchian & North. (1994). The Property Rights and Change of Institution: a Collection of Translation of Works of the Property Rights School and New Institutionalism School, Translated by Shouying Liu, Shang

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Hai: Shanghai Joint Publishing Company LTD & Shanghai People’s Publishing House, p.331. The term “ratchet effects” was originally used to study Soviet Union-style planned economy. Under the planned economy system, the annual production quota for enter­ prises is based on production in the previous year. Thus, good performance does not lead to good consequences (therefore, wise managers tend to hide the capacity of production to deal with planning authorities). The term “ratchet effect” is used to describe the tendency where the expectation from above increases with the improve­ ment of past performance. The concept of ratchet effect was presented by economist James S. Duisenberg. This theory emphasizes that consumers tend to easily increase their consumption with the increase of income, but do not reduce consumption when income declines. Therefore, the reduction of the level of assumption is irreversible. Chinese ancient politician Siam Gang once said, “It is easy when one’s living condition improves from economical to luxurious; conversely, that becomes hard”. This saying has the same meaning with the term. There still exist many elements that do not conform to the principle of fairness, for the current Enterprise Income Tax Law still differentiates enterprises and imposes differ­ ent rules on them. See Shouwen Zhang. (2008). The Integration and Limitations of the Corporate Income Tax Law. Taxation Research, (2), pp. 50–53. The shift from appropriation to loan had a huge effect on enterprises. In the planned economy period, when the supplementary capital of state-owned enterprises was appro­ priated directly from the state finance, the profits of the enterprises were all collected by the state finance too. In the early 1980s, having aimed at improving the efficiency of usage of state capital, the state changed the original approach from direct appropria­ tion to provide loans to the enterprise through banks. Subsequently, in the process of state-owned enterprises (SOEs) reform, the state successively introduced policies that transfer the nature of funds from loans (shifted from appropriation) to the enterprises to the capital of such state-owned enterprises. The shift from appropriation to loan involves the adjustment to the distribution relations between the state and enterprises, and also involves the reform of the financial system. Through these reforms, the state no longer undertakes unlimited responsibilities, and the enterprises began to indepen­ dently assume their responsibility. The first session of the Eighth National People’s Congress on 29 March 1993 passed the Amendments to the Constitution of the People’s Republic of China: Article 15 of the constitution originally stipulated that “the state implements planned economy based on socialist public ownership. The state ensures the balanced development of the national economy through the comprehensive balance of economic plans and the aux­ iliary role of market regulation”. Those provisions currently read as follows: “The state implements a socialist market economy. And the state strengthens economic legislation and improves macroeconomic regulation and control”. These modifications are of great importance to both the legal construction and research of economic law. It was replaced by the Township Enterprise Law promulgated by the Standing Committee of the National People’s Congress on October 29, 1996 and the Regulations on Collectively-owned Enterprises of Rural Areas promulgated by the state council on June 3, 1990. The provision emphasizes that economic integration can help to attract material and financial resources of local governments and enterprises to the urgent needs of national construction. It would facilitate the horizontal connection according to economic laws, breaking the territorial and departmental partition and blockage. According to the prin­ ciple of professional cooperation, it may help to reorganize the industry to avoid the small squeezing the resources of the big, and to avoid repeat construction and blind production. The two provisions aiming to promote economic integration are both related to fiscal and tax issues, which are directly related to distribution.

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26 The 2004 Tax Reform was mainly marked by the transformation of value-added tax in the northeast and the reform was far less spectacular than the previous two tax reforms. If we accept the claim that the year 2004 rushed in the new tax reform, it could be con­ sidered as the start of a new “structural tax cut”. Since then, the structural tax cut has been continuous and promoted to further optimize the overall tax structure. 27 The Standing Committee of the National People’s Congress (NPC) and the NPC in 1984 and 1985 respectively made two decisions regarding the authorization of legisla­ tive power. This made the legislative authority of the state council to expand signifi­ cantly. It contributed to solve the problem of insufficient legislation at the beginning of the reform and “opening”. However, without imposing a time limit on the authorized legislation, it could end up having a negative impact. But if there is no time limit of the authorized legislation, it would have a negative impact. At present, its negative effects are becoming increasingly obvious. 28 As Wang Hanbin has pointed out, economic law or administrative law serves to adjust economic relations or administrative relations, which reflect on the way the govern­ ment manages the economy, the relations between government and enterprises and the relations of internal enterprises. These relations are not economic relations between equal subjects and are, generally, not regulated by civil law. See Hanbin Wang. (1986). An Illustration to the General Civil Law of the People’s Republic of China (draft). [online] Available at: http://www.npc.gov.cn/zgrdw/huiyi/lfzt/swmsgxflsyf/2010-08/1 8/content_1588304.htm [Accessed 20 Apr. 2019]. 29 These three departments are the fastest growing in recent years and they have been intensely researched by scholars. This is related to the needs of market economy devel­ opment and the completeness of legal construction in these areas. 30 In the early 1980s, the theory of economic law was discussed profoundly. Numerous scholars in multiple areas of law participated in the discussions that gave birth to Chinese economic law theory. See in the compilation: “China Economic Law Theory”, the 1987 edition of the law press, and a number of other research papers. Since 1994, these views have been called “new theories” in academic circles of Chinese economic jurisprudence where some of the representative views of economic law have emerged. See Jiangping Xiao. (2002). History of China Economic Law Theory. Beijing: People’s Court Press. 31 The modernity and nature behind the policy of economic law can be seen in Shouwen Zhang. (2004). The Reconstruction of Economic Law Theory. Beijing: The People’s Press, pp. 227–237. In addition, economic law plays a particularly important role in promoting development, so economic jurisprudence and social jurisprudence belong to the emerging law branch, which is an important part of development law. See Shouwen Zhang. (2005). The Development Law Science and Development of Law Science. Law Science Magazine, (3), pp. 3–7.

6

Beyond the distribution crisis Theoretical extension

In the previous chapter, we discussed distribution problems/crises and the theo­ retical and practical issues faced by the regulation of economic law in the previ­ ous chapters. We take a step further in this chapter to introduce a crisis response theory and to extend economic law theories from various perspectives. First, financial crisis analysis, as a typical distribution crisis, helps not only to understand distribution problems but also to promote the development of economic law theories. To this end, this chapter will analyze the distribution crisis, which will form the basis for the distribution crisis theory, from an economic law perspective. Second, the many problems brought about by economic crisis and the responses thereto have provided an important direction for the development of the rule of law as well as a considerable volume of materials for legal studies, which has provided important support for the theoretical development of economic law. As a result, this chapter will explore the crisis response theory in the field of economic law as an important part of the distribution crisis theory. Third, risk theory is of specific importance to crisis response theory. Considering that distribution risk is closely related to distribution crisis, the study on risk theory can help control distribution risk and prevent distribution crisis. Thus, this chapter will separately discuss risk theory and contemplate it as an important part of the distribution crisis theory. Finally, distribution risk or distribution crisis occurs in the process of economic and social development. All crises are “developing crises” and should be addressed by development. Strengthening economic regulation and improving the rule of law in the economy can prevent and resolve the distributional risk and distributional crisis in development. Therefore, it is necessary to systematically study the issues of distribution, crisis, rule of law and development from the perspective of juris­ prudence. To this end, this chapter will further study the crisis response theory from the perspective of “development law” and explore the rule of law issue in distribution and development, thus further expanding the distribution crisis theory.

6.1 Theoretical analysis of distribution crisis The global financial crisis of 2008 has attracted worldwide attention because of its profound and extensive influence.1 The occurrence, expansion and resolution

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of the “distribution crises” such as financial crisis, needs to be analyzed from the economic law perspective because it involves various issues in banking law, fis­ cal law, competition law and other departments of economic law. To this end, this section analyzes the occurrence, expansion and response of financial crises using economic law theory and demonstrates the value of economic law regulation in solving financial crises. 6.1.1 The occurrence of distribution crisis: an economic law perspective What causes distribution crises, for instance, financial crises? What economic and legal measures should governments take to prevent the occurrence of such crises, and what values do should such measures reflect? Many have given their insights on these questions (Deming Chen et al. 2014).2 The economic law theo­ ries explored below may supply the answers. 6.1.1.1 The “two failures” cause distribution crises The emergence, survival and development of economic law are motivated by the continuous need to address market failures and government failures. The “two failures” are a precise indication of reality and have become an important ana­ lytical framework in economic law theory. Distribution problems and distribution crises are important manifestations of the “two failures” and are the basic prob­ lems that economic law must focus on (Shouwen Zhang 2012).3 The distribution crisis is inextricably linked to market failure. Taking the 2008 financial crisis as an example, as the various financial institutions and general market players aimed to maximize profits, they engaged in a large num­ ber of financial innovations and transactions (especially transactions in relation to financial derivatives). In their pursuit of maximum profitability, they tended to neglect social costs and systemic risks and acted blindly under a “curtain of ignorance”. However, people were not ignorant of the blindness and harmful­ ness of the behaviour of market players, they believed that markets could solve problems before crises occur and that markets allocated resources efficiently, so the government emphasized deregulation and developed a laissez-faire atti­ tude. Market failure caused by information bias, external effects and govern­ ment failure caused by the lack of government supervision, led to the financial crisis.4 It can be seen that the financial crisis stemmed from “two failures”. To solve the problem of “two failures”, attention must be paid to the contradiction between individuals’ profit and social welfare. This contradiction, as a basic contradiction in economic law, is very prominent in financial crisis. Market mechanism and profit-driven activities may lead to market failure in the financial market or even in the entire economy, increasing financial risks which can evolve into a crisis. To this end, social welfare needs to be viewed from several perspectives – public goods supply, social costs, financial security and stability and economic security and stability.

Beyond the distribution crisis 133 6.1.1.2 Crises highlight the importance of economic law regulation Financial crises call for economic law regulation. One of the goals of economic law is to solve market and government failures by continuously coordinating the contradictions between individual profit and social welfare, which to a consider­ able extent, can prevent financial crises. China has attached importance to and strengthened the regulation of economic law since 1993. It has formulated and implemented many important banking and financial laws and regulations and has strengthened implementation and enforcement.5 These actions prevented China from being impacted by the 1997 Asian financial crisis, as well as by the 2008 financial crisis. In addition, the regulation of economic law has not only helped to prevent the occurrence of a financial crisis but has helped to effectively withhold and resolve them. The adjustment of the financial regulation law and the financial supervision law can help solve many problems arising from financial crises. Meanwhile, adjustments in fiscal law, tax law, industrial regulation law, price law, investment planning law and many other laws help further solve the financial crisis and the numerous related problems. Whether it is to prevent the financial crisis or solve it, economic law regulation plays a significant role. The occurrence of a global financial crisis has reminded people of the government’s crucial role in crisis response,6 as well as the impor­ tance of economic law. From a technique perspective, whether it is to prevent a financial crisis or to solve it, it is necessary to carry out macroeconomic control and market regu­ lation according to law. On the one hand, financial regulation calls for various macroeconomic regulations and control, including fiscal and taxation regulation, industrial regulation and price regulation, etc. On the other hand, it is necessary to strengthen market regulation, especially supervision and coordination of the relationship between financial innovation and financial supervision7 with a view to achieving moderate innovation and appropriate supervision. 6.1.1.3 Crisis and the value of economic law The value of economic law includes its intrinsic utility and external value. Financial crises further highlight the important value of economic law. First, the occurrence of a financial crisis underscores that the intrinsic value of economic law (namely macro-control and market regulation) is not fully uti­ lized in some countries. In fact, the countries with severe financial crises are those with limited financial regulation and supervision, those that depend, to a large extent, on the power of the markets and those that underestimate govern­ ment’s role. In these countries, significant emphasis is placed on deregulation or non-intervention in the financial sector (Kevin Dowd & Mervyn K. Lewis 2000).8 From the occurrence of financial crises, people have realized that all countries should pay attention to the important value of economic law in ensur­ ing the stability of the overall economic order and promoting stable economic growth.

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Second, the occurrence of financial crises has also reminded people of the limi­ tations of traditional laws. The sound operation and coordinated development of a country’s economy are not possible without coordination between traditional laws and economic law, which help to prevent and mitigate financial crises. Similar to the reconstruction of macroeconomic theory in economics, jurisprudence should also consider the reconstruction of incomplete legal theories that are not expan­ sive enough in scope to accommodate emerging economic law theories and which are ineffective in guiding the development and implementation of the rule of law and related practices in emerging economic law theories. Only by affirming and emphasizing the important value of economic law in the contemporary legal sys­ tem can we better promote the construction of the legal system and improve the rule of law. Third, the occurrence of a financial crisis also reminds people of the external values of economic law. Generally, the external values of law are the objectives that people wish to achieve through legal adjustment. These objectives, which also apply to economic law regulation, include fairness, efficiency, security, order and justice. If economic law regulation can solve the problem of individual profit and social welfare and take into account efficiency and fairness, then the market failure problem will largely be solved and financial crises less likely to occur; if economic law regulation can solve the problems of market order and economic security, especially the financial order and security, it will help to prevent and resolve financial crises.9 It can be concluded that economic law regulation is of significant value in the prevention of a financial crisis and the response thereto. This is even more so given that regulation protects the interests of financial institutions and other mar­ ket entities, as well as social and public interests by taking into account individual efficiency and overall fairness, coordinating individual profit and social welfare. These actions contribute to the formation of legal order, ensure financial security and overall economic security as part of achieving the goal of economic law – which is to promote stable economic and social development. It should be emphasized that China must learn from the lessons of previous financial crises and regulate its financial market. In particular, it should regulate illegal fundraising and usury activities, transactions in the real estate and securi­ ties markets; and address problems in financial derivatives and asset securitization so as to ensure a sound financial market, reduce financial risks and social costs, and ensure financial security and overall economic security. Nowadays, the eco­ nomic ties of countries in the world have improved due to globalization, which has also raised the stakes of financial order and security. This means the more difficult it is to maintain financial order and financial security, the more necessary it is to strengthen economic law regulation.    of financial crises from the economic law perspective 6.1.2  Expansion The expansion of financial crises means, on the one hand, geographical expansion (i.e. expansion from one country or region to other relevant countries or regions),

Beyond the distribution crisis 135 and on the other hand, expansion in different economic types or industries (i.e. from the virtual economy to the real economy, and from the financial sector to other industries). The expansion of financial crises can be analyzed through the dual structure theory of economic law. 6.1.2.1 Expansion of financial crisis under the dual structure The “dual structure” theory of economic law emphasizes that due to objective dif­ ferences,10 there are a large number of dual structures in the economy which directly lead to dual structures in institutions, thereby highlighting the need for an integrated systems solution. From an economic point of view, there are multiple dual struc­ tures including the domestic economy versus foreign economy, internal economy versus external economy and real economy versus virtual economy. The expansion of financial crises is directly related to the above dual structures in the economy. For example, in the dual structure of “domestic economy versus foreign econ­ omy”, financial crises can expand from one country to another, reflecting the close relationship between the domestic and foreign economies in the context of glo­ balization. For this reason, the adjustment of a country’s economic law must focus on the internal and external economic relations, using legal macro-control and market regulation tools to prevent and resolve related risks or crises. It requires a comprehensive consideration of domestic economic law and international eco­ nomic law to solve the international financial crisis in an integrated manner. In the dual structure of the “real economy versus virtual economy”, financial crises can spread from the virtual economy to the real economy – a phenomenon that has had considerable impact on the Chinese economy. Overall, the Chinese financial system has not been greatly affected as China’s financial regulation and financial regulatory legal system has become increasingly sound and effective. However, the real economy has been significantly affected due to its high foreign dependence. Because of this, China needs to focus on solving problems in the real economy through economic law and other relevant laws, including adjusting the industrial structure, promoting economic structure optimization, supporting the development of small and micro enterprises and solving problems such as price fluctuation, currency instability and international revenues. Grasping the main contradictions and major aspects of the dual structure is very important for effec­ tively solving various problems arising from the expansion of the financial crisis. The dual structure of “internal economy versus external economy” is also worthy of attention. Usually, attention is paid to the external economy due to trading activities among independent market entities, while less attention is paid to the internal economy dominated by numerous affiliated companies. In fact, the occurrence and expansion of financial crises are often directly linked to the internal economy. When a key part of the affiliated group goes wrong, the whole group may suffer as a result of the chain reaction. In concrete terms, the bankruptcy of the major investment banks in the United States resulted in the collapse of the entire financial system.11 Problems arising in the internal economy need to be solved through economic laws and regulations. The internal

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and external integration of the economic law system can help prevent the occur­ rence and expansion of financial crises, and the various distribution problems arising as a result. 6.1.2.2 Further thoughts on the expansion of financial crises The financial crisis expansion reflects the complexity and intersections of the eco­ nomic system. The more economic freedom a market enjoys, the more exposed it is to the outside world; the more dependent it is to the outside world, the higher the possibility to be impacted by a financial crisis and the faster the financial crisis can expand. Therefore, effective regulation of economic law and other relevant laws is required to address the issue of freedom and regulation, to achieve mod­ est openness, to make better use of the two markets and to solve complex prob­ lems arising from multiple dual structures.12 Otherwise, there may be distribution problems caused by economic downturns, massive bankruptcies, etc. and further political and legal crises. The occurrence and expansion of financial crises are directly related to the acceptance of neoliberal economic theories in many countries, and the widespread adoption of policies and establishment of institutions that place too much empha­ sis on deregulation and market mechanisms. This can be roughly verified in the country where the financial crisis originated and the countries that were consid­ erably affected by the financial crisis. From an economic law perspective, the regulation of economic activities and the behaviour of market participants should take into account “dialectical governance”. One of the important characteristics of economic law is to put in place regulations combining positive encouragement/ promotion with negative restriction/prohibition as well as the government macrocontrol and resource allocation by the markets to effectively solve the problem of the “two failures”.13 In order to avoid major financial risks or financial crises, both financial regulations through central bank law and financial supervision by other economic laws such as securities law are needed. In terms of “dialectical governance”, economic law incorporates the Chinese philosophies of Confucianism and Taoism. It not only pays attention to grasping two aspects of contradiction, emphasizing dialectic or “two divisions”, but also highlighting governance in a moderate and effective manner based on the recogni­ tion of the main, as well as other major areas of contradiction. The government should emphasize the principle of “administering a big country like cooking a small dish” and “not to toss” in macro-control and market regulation. Based on these concepts, it can be argued that the study of the financial crisis helps to fur­ ther the understanding of economic law philosophy.14 6.1.3   Responses to financial crises: from an economic law perspective How to deal with a financial crisis or an economic crisis that has occurred and is worsening is a major practical issue that all countries across the world must

Beyond the distribution crisis 137 consider. From the perspective of economic law, in addition to the specific coun­ termeasures, it is also necessary to have a clear understanding of the basic princi­ ples for responding to crises, and specify legal obligations and responsibilities, in particular government’s obligations and responsibilities. 6.1.3.1 The basic principles for responding to crises The basic principles of economic law, namely the “legal” principle, the “moder­ ate” principle and the “performance” principle,15 are applicable when in the event of a distribution crisis. First, according to the “legal” principle, all kinds of problems in a financial cri­ sis should be solved in a legal way. For example, despite the urgency of the situa­ tion after the crisis, the various countries with more advanced rule of law followed the statutory principle. The US government’s initial $700 billion bailout plan was reviewed by the congress, rather than ordered directly by the White House. This is just an example of the “legal” principle. In addition, the “legal” principle requires not only the legal allocation of rights of relevant entities, interests, duties and obligations but also allocation under the “legal procedures”. The “legal” principle includes both the legal procedure and the legal substance. The “legal procedure” requires that all emergent matters, irrespective of their urgent nature, should be dealt with in accordance with legal emergency procedures. On the other hand, non-emergency matters shall be addressed in accordance with general legal procedures. Only when all matters are handled in accordance with legal procedures can crisis management have a legal justification. This is a way the simultaneous occurrence of a “rule of law” crisis and a financial crisis can arise. China needs to ensure legitimacy when identifying and adopting various res­ cue plans. For example, China’s RMB four trillion investment plan, of which at least RMB 1.8 trillion comes from financial funds, should be approved by the Standing Committee of the National People’s Representative Meeting.16 In addi­ tion, it should be debated whether certain matters including VAT reformer con­ sumption tax adjustment should be subject to public hearing, and approved by the National People’s Representative Meeting or by the State Council.17 In fact, each regulation and control policy involving financial crisis is related to the distribu­ tion of interests of relevant entities, and we must conscientiously incorporate the “legal” principles. Second, financial crises should also be solved in accordance with the “moder­ ate” principle. The introduction or adjustment of any regulatory measure or legal system tends to involve the interests of different subjects and affect the choice of market entities, and therefore must be appropriate and moderate. Moreover, since crises equally give rise to opportunities, the adoption of various control measures should not be excessive. “Moderate” is very important and is necessary to prevent government control from going too far.18 To follow the “moderate” principle, it is necessary to identify the issues and respect rules without imposing additional burdens on various subjects. In particu­ lar, the application of control measures must be moderate – this includes not only

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the volume of tax reduction, favourable tax treatment, issuance of state debts, import and export scale, but also the adjustment of the export tax rebate rate, inter­ est rates, exchange rates and deposit reserve ratio, etc.19 Furthermore, economic and social sustainable development cannot be over­ looked in dealing with a crisis. Attention needs to be paid to the benign operation of the economy when GDP purchase increases. Similarly, attention should be paid to the quality and efficiency of economic development20 as well as to the optimi­ zation and adjustment structures during crisis resolution. Finally, the principle of “performance” should also be applied in dealing with crises. The principle of legality and moderation do not reject considerations for efficiency. Control and regulations based on the “legal” principle are an important guarantee for performance; while the “moderate” principle emphasizes the bal­ anced protection of various types of subject rights, it has a direct correlation with performance. In this sense, the three principles can be considered closely linked. According to the “performance” principle, the resolution of financial crises shall be subject to the assessment of performance and effects. Financial crises are, first and foremost, an economic issue which equally involves multiple other factors. The adoption of various types of control or regulation measures economic law must not only take into account economic performance and effects but also social and political performance and effects. Consequently, immediate performance against long-term performance and economic performance against social performance must be balanced in line with the “performance” principle. When a crisis breaks out, the focus tends to be on current interest with less consideration on long-term performance or general inter­ ests. Non-economic performances, such as social performance and environmental performance are equally important and closely related to long-term performance. 6.1.3.2 Liabilities in crisis response From a proactive viewpoint, the resolution of a financial crisis requires the promo­ tion of development at the same time as the reduction of adverse effects. It also requires the allocation of liabilities from a passive perspective. The clear alloca­ tion of obligations and liabilities and clear rules for punishment and compensa­ tion can contribute to preventing or reducing the adverse effects caused by the financial crisis. From a more passive perspective, it can be said that more emphasis is attrib­ uted to accountability meaning that attention is diverted from the allocation of liabilities including economic liabilities and non-economic liabilities, as well as government liabilities and market entity liabilities. For example, in the process of resolving financial crises, certain financial institutions and related market entities bear economic liabilities including punitive and compensatory liabilities. Such liabilities are necessary for the protection of the rights, the interests, the normal financial order of pertinent entities. Attention should also be paid to the forms of liabilities, including credit downgrading, qualification cancellation. The credit ratings of many highly rated

Beyond the distribution crisis 139 financial institutions were challenged during the 2008 financial crisis (Peixin Luo 2009).21 Downgrading the ratings of these financial institutions constitutes one way for them to bear financial liabilities. Qualification cancellation can be another form as this means the financial institutions are disqualified from carrying out certain financial businesses and activities. Compensation is as important as punitive liabilities. The credibility and liquid­ ity of many market entities were impacted during the financial crisis, and the compensation they can pay will be limited. The compensation process also tends to consider the priorities of different entities’ rights as well as comprehensive protection of interests, social welfare and private interests. The liabilities also include liabilities for the government. Given the significant public damage caused by financial crises, governments should endeavour to rescue the market that may greatly increase fiscal risks and trigger a fiscal crisis. Iceland was one of the gov­ ernments that experienced a fiscal crisis after the 2008 financial crisis.22 When the government uses financial funds to save the market, questions arise as to how to use taxes, whether taxpayers should pay for misconducts or even illegal activities of very few market entities and how the government should play a regulatory and supervisory role – a role that further complicates the liabilities issue. 6.1.3.3 Financial crisis and integrated regulation of economic law The system theory of economic law suggests that the coordination and integration of the various departments of economic law will help to better exploit the sys­ tem’s functions. To fundamentally solve financial crises, emphasis must be put on the integrated regulation of the various departments of economic law. In fact, the departments of economic law solve different macro-control problems and address market regulation from different angles, all of which contribute to the prevention and resolution of financial crises. The problems brought about by the financial crisis were multifaceted. They included significantly reduced demand, overcapacity, difficult business and unem­ ployment. These problems cannot be solved without the regulation of economic law. For example, industry law is required to adjust the industrial structure; price law to regulate all kinds of price behaviours; fiscal law to increase budget; tax law to apply favourable tax treatment and competition law to regulate anti-compet­ itive behaviours. The many laws reflect the realistic needs for solving financial crises and require integration of the various departments of economic law. It is no doubt that in the various departments of economic law, financial law provides the greatest contribution toward the resolution of financial crises. From an economic law perspective, financial law which includes central bank law, com­ mercial bank law, banking supervision law, securities law, insurance law and trust law, etc. have a direct and important role in solving financial crises.23 In addition, international financial coordination and the role of relevant international organi­ zations and international treaties cannot be underestimated. This is because they contribute to fundamentally solving international financial problems in the con­ text of globalization.

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Industrial law, investment law, price law and competition law can help main­ tain a relatively stable pricing and balanced international payments, all which could boost stable economic growth. Such laws need to be effectively coordinated to form a real legislative system and they should support each other in the integrated regula­ tion of economic law to jointly achieve the overall objectives. This way, financial crises and other forms of distributional crises can be better prevented and resolved. 6.1.4 Conclusion The problems brought about by financial crises are multi-faceted. This section ana­ lyzed the occurrence and scope of the financial crises and the responses thereto from an economic law theory perspective. It is not difficult to conclude that finan­ cial crises originate from “two failures”; economic law regulation can help achieve multiple values; the expansion of financial crises can be analyzed through the dual structures of domestic economy vs foreign economy, real economy vs virtual econ­ omy, internal economy versus external economy, which reveals the importance of “dialectical treatment”; the responses to financial crisis, should follow the “legal”, “moderate” and “performance” principles, focusing on the allocation of responsi­ bilities and liabilities between different entities; the integrated regulation of vari­ ous departments of economic law can help with the coordination of economic and social development, so as to fundamentally prevent and resolve financial crises. In the above discussion, we look at the issue mainly from an economic law theory perspective that reflects the explanatory power of economic law theory on major practical issues. It will be helpful if we can further explore the other theories from the perspective of economic law as well as other legal theories and other disciplines.

6.2 The theory of distribution crisis: from the perspective of economic law When the 2008 financial crisis was systematically resolved, every country began contemplating how to prevent and resolve new economic crises; how to promote economic recovery; how to effectively compete with each other on a new starting line; and how to strengthen relevant economic legal systems to achieve effective regulation. All the various important questions relate directly to economic law regulation. Therefore, it is very necessary to construct the theory of distribution crisis from the perspective of economic law theory.24 The theory of distributive crisis is an important part of the theory of distribu­ tion. Its construction needs to expand its research on international competition theory, risk theory, public economic crisis theory and situation change theory, etc. from the perspective of economic law. At the same time, it also needs to have an existing economic law and specifically via the exploration of its ontol­ ogy, occurrence and value theories. To this end, the following is a discussion of several theories that need to be expanded as a way of further expanding the scope of exploring economic law theory.

Beyond the distribution crisis 141 6.2.1 Beyond “international competition” The theoretical study of economic law must pay attention to the large number of complex games between various subjects.25 Traditional economic law theory focuses on the interactions between government and nationals. It forms a rela­ tively developed theory of competition law. However, the fact that games are equally important should not be ignored. In fact, in the era of economic globalization, most of the games among coun­ tries are played via domestic laws. International games are not only the research object of international law but also an important issue to be considered in eco­ nomic law theory. Attention must not be solely paid to the competition among market players and competition law, but also to the competing countries. At this juncture, it may be worthwhile introducing the theory of “competing countries”. In order to get out of the crisis as soon as possible, most countries have adopted various means to promote economic recovery. Therefore, there has been high fiscal, tax and currency competition among different countries. For example, in terms of fiscal competition, in order to cope with the economic crisis, many coun­ tries have expanded their fiscal expenditures, issued a large number of government bonds, increased government procurement and enhanced the scale of transfer pay­ ments as a way to increase consumption power, stimulate domestic demand, boost economic growth and increase international market demand. Accordingly, the expansionary fiscal policy and the related systems have become a common means for fiscal competition. With the gradual recovery of the economy, the negative impacts of fiscal competition gradually appear thereby soliciting comprehensive assessment and prudent supervision. In terms of tax competition, many countries implement large-scale “tax cuts” in order to reboot and recover the economy. As a matter of fact, tax competi­ tion has always been an important means for international competition. However, vicious tax competition often has an adverse impact on the interests of a coun­ try.26 Tax competition needs to be coordinated to prevent countries from dumping public goods by lowering the price to achieve short-term goals. The dumping of public goods fundamentally damages not only taxpayers’ interests but also gov­ ernment interests and the phenomenon severely affects international competition. In terms of financial competition, various types such as foreign exchange rate competition (where many countries devaluate their domestic currency) and cur­ rency competition (where some countries try to compete for currency dominance) are not uncommon. Meanwhile, many countries have reflected on the deficiencies in their financial regulation and reacted by strengthening regulation in interest rates, deposit reserve ratios and other financial aspects, in an effort to achieve moderate currency supply. Since financial competition and related financial regulation and supervision directly affect the level of development and quality of the real economy, the focus tends to shift to financial competition, in particular, “currency wars”,27 and believes that financial competition is essential for economic development. The various types of competition mentioned above lead to many problems. For example, fiscal competition focusing on expanding government expenditures may

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result in significant deficits which tend to bring about severe problems in the pub­ lic economy and lead to income crunch of related groups. Such a scenario has the tendency of triggering protests, strikes and further doubt in the legitimacy28 of the government and its implementation capability thereby exacerbating economic, social and political crises. In terms of international competition, there are many economic law issues worth studying. For example, international competition is directly related to the capabili­ ties of a nation or a country. This means several questions need to be answered. They include: how does a country turn its will into reality? Which international competition is considered legitimate competition, and which is unfair competi­ tion? Does reducing the exchange rate constitute a subsidy, and how does it relate to exports? Does it complement the adjustment of economic structure? Also, given the importance of the order for international competition, how do countries form competition rules and abide by relevant rules to prevent conflicts and even wars? One of the important goals of international competition is to promote or achieve stable growth of the domestic economy, which is consistent with the objectives of a country’s economic law. The maintenance of stability has a direct bearing on employment, population, environment, resources, energy, social security and many other issues, and relates to the coordination of economic goals and social goals in economic law, all of which need to be studied in depth from an economic law perspective. In summary, to build a theory of distribution crisis, we need to expand research on “international competition” theory. Countries can be considered as rational entities given that they each have political, economic and other interests. This means some of the theories and principles for market competition can be intro­ duced into the study of international competition. Thus, “international competi­ tion theory” should take into account not only basic problems such as the types and means of competition but also the objectives, means, order, liabilities, powers and other issues of international competition from an economic law perspective. 6.2.2 Beyond the risk theory The academic community should pay attention to general economic risk, analyze specific risk types, explore risk prevention measures in economic law and reveal the intrinsic relations between risks, crises and security and further refine the “risk theory” of economic law given the intrinsic relations between distribution risks and distribution crises and how imperative it is to prevent and resolve crises. The risk theory is separate since it is particularly important to analyze risk allocation issues. 6.2.3 Beyond the “public economic crisis” theory The division between private economy and public economy means economic cri­ ses can also be divided into two aspects, namely “private economic crisis” and “public economic crisis”. In the past, more attention has been paid to “private

Beyond the distribution crisis 143 economic crises”, the usual starting point of most economic crises. However, “private economic crises” may also lead to “public economic crises”, which, may, in turn, affect the resolution of the “private economic crises” or lead to a new “private economic crises”. For example, since the 2008 financial crisis, many countries have adopted pub­ lic economic policies to resolve private economic crises. The policies, including increases in government expenditure, issuance of national debts, tax reduction, expansion of transfer payments or increases in social security expenditures all constitute public economic means. However, economic means tend to substan­ tially increase fiscal deficit, which is the most direct cause of “public economic crisis”. Each country should take deficit increases and the resulting debt crises as seri­ ous issues.29 In order to reduce the deficit and to prevent the “public economic crisis”, EU member states tried to tighten government spending by strictly abiding by the Stability and Growth Pact. However, this affected their investment in the private economy resulting in weak economic growth in Greece, Spain and other countries. The debt crisis in these EU countries has caused widespread concern in countries around the world. The US is also plagued by the debt crisis, and many cities are on the verge of bankruptcy.30 With the emergence and aggravation of a “public economic crisis”, all countries are faced with questions including whether to raise taxes, issue addi­ tional currency and how to deal with inflation and other prominent issues each of which affects public economic security and needs to be addressed by applying the “public economic crisis” theory in economic law. In the past, economic law scholars paid more attention to the impact of the private economy on public economy, emphasizing the importance of the private economy as a base of the economy or the dependence of the public economy on the private economy. However, nowadays, the public economy has become so large that its impact on the private economy cannot be ignored. This is also an important economic base for a country’s macroeconomic regulation and control and market regulation. Given the important influence of the public economy on the private economy, legal regulations on the public economy should, in particular, strengthen legal control of government budgets31 – especially state investment and government procurement. In addition, both substantive laws and procedural laws must be clear and enforceable so as to better ensure the effective allocation of rights and powers and achieve comprehensive protection of the various legal interests. 6.2.4 Beyond “clausula rebus sic stantibus” Economic crises tend to have an important impact on the economic activities of private entities, as well as the economic plans of governments. Since it is difficult to foresee economic crises when parties carry out economic activities, the out­ break of a crisis can significantly change circumstances.

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Since changes in circumstances affect the economic activities of private enti­ ties, private laws including contract law have recognized the principle of “clau­ sula rebus sic stantibus”. Similarly, given its impact on government economic arrangements, public law should adopt similar principles. In view of the fact that the government’s economic arrangements are closely related to economic regula­ tion, it is necessary to further study the principle of “clausula rebus sic stantibus” in economic law. For example, as a significant change of circumstance, economic crises can bring many legal issues in fiscal and tax law. These include budgetary adjust­ ments, budget priority changes, tax changes and special government bond issu­ ance. In order to cope with economic crises, many countries use fiscal and taxation methods to rescue the market and extensively adopt measures such as expanding budgetary expenditures and reducing taxes thereby causing the deficit to surge and generating many unstable factors that affect sustained economic growth. The many fiscal and taxation issues relating to change of circumstances are worth studying. Economic crises, as a change of circumstances, turn balanced budgets into unbalanced budgets thereby soliciting the reallocation of funds. According to the relevant jurisprudence, a change of circumstance occurs after a budget is approved but before it is fully implemented; and a change of circumstances should be a significant change involving the adjustment of the budget of the cen­ tral government. A change of circumstance makes the original budget unfair or unenforceable. Economic crises make the budget obligations difficult to perform and change the basis for payers’ payment for taxes and fees. Under such circumstances, it is undoubtedly necessary to adjust the size and structure of the budget. This embod­ ies the spirit of “substance over form”, i.e. the essence of economic life is higher than the original budget balance. In short, as far as economic activities are involved, there may be problems with a change of circumstance. As an important public economic activity, fiscal and taxation activities are also affected when circumstances change. Therefore, the principle of “clausula rebus sic stantibus” should be extended beyond pri­ vate law to cover a wider general jurisprudence. The expansion of the scope of the “clausula rebus sic stantibus” principle in economic law needs to analyze jurisprudence on change of circumstance and explore whether it can be univer­ sally applied to the relevant fields of economic law. In addition, such an analysis should investigate whether there may be special issues in its application. This will contribute to the development of economic law theories and the improvement of specific legislation in economic law. 6.2.5 Existing economic law theories should be further developed The economic cycle has become the norm in economic operation. It is neces­ sary to further explore and improve existing economic law theories by develop­ ing a crisis theory. Because these theories closely relate to the normative and

Beyond the distribution crisis 145 operational theories of economic law, we will use the ontology, embryology and axiology of economic law as examples to briefly explore existing economic law and its impacts on the formation of a distribution crisis theory. First, from the ontology of economic law, the occurrence and spread of eco­ nomic crises have shown the limitations of market regulation and the necessity of government regulation. However, people have also seen limitations on the role of the government in such regulation. It is based on the perception of market failure and government failure, and the important role of law in solving the “two failures” that people are more aware of the importance of economic law. From an economic history perspective, market failure can lead to economic risks and economic imbalances, which may further lead to economic crisis. To this end, macroeconomic regulation and control and market regulation are required. This is also an important reason for strengthening economic regulation as a way of preventing a distribution crisis. If macro-control and market regula­ tion are illegal or if they violate the spirit of the rule of law, they will inevitably lead to more legal problems. Therefore, regulating government control and super­ vision activities is an important task and mission of economic law. Economic law also regulates government acts. One of the characteristics of economic law is its ability to resolve economic crises due to its economic and regulatory nature. In addition, economic develop­ ment, whether in the post-crisis era or at various other stages, requires economic law norms with encouragement and promotion functions that are consistent with most “promotion-type” economic laws.32 In practice, people often interpret mac­ roeconomic regulation as “tightening” and “repression”, especially in the real estate market and capital market regulation. In fact, regardless of whether the regulation of an industry or field falls into “macro-control” in its original sense,33 regulation should reflect its normative nature and emphasize “discrimination” given the two dimensions or aspects of regulation itself. Second, from the perspective of embryology, economic law originated from the economic crisis of the 1930s and developed with the emergence of macro-control law. Macro-control law was originally a law of crisis countermeasure. However, because of the evitability and frequent occurrence of the economic cycle, macrocontrol law has changed from an “extraordinary” crisis countermeasure law to a “normal” law that endeavours to ensure economic stability. The modern market economy is an important premise and basis for the emer­ gence and development of economic law. If risks in the market economy do not lead to economic imbalances, and the market mechanism is capable of resolving major economic operation problems on its own, there will be no necessity or possibility for the development of economic law. It is precisely the complicated economic life and the resulting cyclical economic crises (caused by uneven dis­ tribution) under the modern market economy that require higher levels of macro­ economic regulation and market control and therefore, economic law that differs from traditional sectoral laws. Third, from the perspective of axiology, economic law emphasizes the pro­ motion of stable economic growth as well as the prevention and resolution of

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economic crises. Given the intrinsic consistency between the objectives and func­ tions of economic law, we should pay attention to the design and effective imple­ mentation of economic law as a way of utilizing its risk mitigation functions to the maximum extent to solve economic imbalances and prevent severe economic crises. To this end, the three principles embodying the value of economic law, namely the “legal” principle, “moderate” principle and “performance” principle, should be strictly implemented. The “legal” principle requires that regulation and con­ trol should abide by the “legal” principle and to avoid violations.34 The “mod­ erate” principle requires macroeconomic regulation and market regulation to be appropriate and moderate; in particular, it requires a sound relationship between governments and markets and the respect of economic law. The “performance” principle requires the economic regulation system to be conducive for stable economic development and to prevent irrationality in the economy. The various regulatory methods of economic law should be used to adjust economic struc­ tures, promote scientific planning and development and achieve overall economic efficiency and benefits.35 In order to enhance the effectiveness of regulation and control, and to solve specific problems in crisis response, it is necessary to have a comprehensive and dynamic understanding of the “legal” principle and to reflect on the requirements of the three principles. In addition, the legal procedures for regulation and control, and the degree of regulation and control should be further studied in the distribu­ tion crisis theory. 6.2.6 Conclusions In the post-crisis era, all countries have paid great attention to strengthening eco­ nomic laws and regulations. At the same time, economic law theory should be extended and further studied. This is especially helpful in the construction of dis­ tributional crisis theory in economic law, as well as the perfection of economic law theory and system. In this section, we have briefly discussed several important theories that deserve significant attention in the study of economic law, including international competition theory, risk theory, public economic crisis theory, and change of cir­ cumstance theory. These theories all contribute to the normative and operational theory of economic law. We have also briefly discussed certain issues from the perspectives of ontology, embryology and axiology of economic law. The inte­ gration of such theories into distribution crisis theory improves the guiding effect of economic law theory in dealing with the crisis.

6.3 Risk theory and the prevention of distribution crisis The distribution crisis is directly related to the distribution risk. That means to better prevent distribution crises, it is necessary to conduct further research on

Beyond the distribution crisis 147 risk theory. Both the distribution crisis or general economic crisis and economic law regulation call for the study of risk theory. Risk dimension, as distribution dimension, is an important meridian that runs through theoretical research and the institutional construction of economic law.36 To study the risk theory related to distribution crisis, we need to pay attention to risk issues, analyze the special types of risks, explore risk prevention measures and the inherent relations between risk, crisis and security in economic law, and refine the “risk theory”. This will shed light on distribution risk as well as the relevant prevention and mitigation measures. 6.3.1 Risk issues in economic law Risk usually refers to certain uncertainties or the possibility of loss. Since risks are common and it is human nature to avoid harm, economics, sociology and many other disciplines have undertaken in-depth studies on the issue of risk.37 From an institutional economics perspective, one of the functions of laws and regula­ tions is to address the uncertainties brought about by risks. Solving risk problems and preventing and mitigating crises resulting from the accumulation of risks are important objectives of laws and regulations. Different legal systems need to face and solve different risk issues. For exam­ ple, civil and commercial laws should address transaction risks; administrative law, administrative risk; procedure law, litigation risk; and trial risk. The need to address risk issues has driven the formation and development of relevant legal systems. Economic risks and social risks faced by modern countries are increas­ ing, that explains why economic law and social law are required to prevent and resolve the risks. It is necessary to use economic law in view of the numerous “complexity” and “uncertainty” problems in economies. In fact, the various departments of economic law are addressing risks issues in their respective fields. For example, fiscal risks in fiscal law, financial risks in finan­ cial law, industrial risks in industrial law, price risks in price law, competitive risks in competition law and consumer risks in consumer protection laws. All these laws have a direct relationship with national interests and social welfare, and they affect overall economies as well as the legitimate rights and interests of related subjects. The academic community has analyzed the various types of risk issues men­ tioned above. For example, the fiscal risk of fiscal law is been found to directly relate to excessive budget expenditure, excessive debt burden, excessive tax bur­ den or insufficient taxation. This implies that it is necessary to effectively resolve the excessive deficit, excessive debt dependency and unfair tax burden issues while the resulting unsustainable tax collection requires strengthening the legal regulation of the budget law, the national debt law, and the tax law. The topic of financial risk has attracted the most interest in economic law. Considerable research in relation to credit and liquidity risk in banking law and the various types of risks in securities law and insurance law can be important risk theory indicators for the entire economic law. In short, risk issues are the subject of all kinds of law. The fact that economic law aims to prevent and control risks

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underlines the necessity to study the specific categories of risks, explore the com­ monality and particularity of various types of risk control measures and lay the foundation for refining the risk theory in economic law. 6.3.2 Types of risks in economic law Generally, there are different types of risks including natural risks, social risks, political risks, economic risks, moral risks, legal risks, property risks and personal risks. Such categorization of risk helps with the study of risk issues in economic law. However, it is necessary to further explore the types of risks in economic law by taking into account the particularity of economic law. The criteria for categorizing risks vary due to the commonality and diversity of risks. In terms of the entities involved, based on the dual structure of subjects in economic law, risks may be divided into regulators’ risks and regulatees’ risks. Risks faced by commercial banks, securities companies, insurance companies and other types of businesses are regulatees’ risks. Strengthening risk prevention and control for important market players that affect the national economy and people’s livelihood help to prevent greater market risks and to ensure overall economic security. Regulators’ risks are equally important. As an entity involved in the public economy, the government needs to maintain payment balance. In particular, to prevent fiscal risks and financial crises, the government needs to moderate the scale of transfer payments and government procurement, the scale of taxation and the issuance of bonds. The prevention of tax risks requires optimizing the tax design. The prevention of financial risks requires moderate currency issuance by the central bank, as well as moderate financial supervision. Preventing and con­ trolling the risk of regulators relies on the effective regulation of economic law. These two types of important risks in economic law also imply or correspond with the following types of risks: macro risks and micro risks, overall risks and individual risks and public risks and private risks. Regulators should pay special attention to macro risks, overall risks and public risks, while regulatees naturally focus on micro risks, individual risks and private risks. The emphasis of economic law on holism is consistent with its focus on macro, overall and public risks. When micro, individual and private risks attain a certain level, they may evolve into macroscopic, overall and public risks. Therefore, economic law must be spe­ cifically designed to address all kinds of risks and, with regard to supervision, emphasized by various special market regulation laws, it is crucial for economic law to pay attention to the most significant areas that affect the national economy and the livelihood of individuals. Associated with these risk types, from a behavioural perspective, the risks of regulators and regulatees may correspond with the division between regulation risks and countermeasure risks. Regulation risks usually involve systemic risks, while countermeasure risks are generally non-systematic risks with the tendency of evolving into systemic risks. They both need to be addressed in economic law and reflected in risk prevention systems.

Beyond the distribution crisis 149 6.3.3 Risk prevention systems in economic law The various risks mentioned above may damage public interests and affect the benign operation of the economy and society; therefore, economic law should set out risk prevention and control systems so as to guard against the accumulation, occurrence and expansion of risks and to ensure economic security. Many important laws in China have highlighted risks in their legislative pur­ poses. For example, the Law of People’s Bank of China stipulates that the People’s Bank of China shall formulate and implement monetary policies to prevent and resolve financial risks and maintain financial stability. The legislative purpose of the Banking Supervision and Administration Law is to strengthen supervision and management of the banking industry, standardize supervision and management behaviour, prevent and resolve banking risks, protect the legitimate rights and interests of depositors and other customers and promote the healthy development of the banking industry.38 Based on these objectives of prevention and control of financial risks, the Law of People’s Bank of China further stipulates that whenever banking institu­ tions experience payment difficulties that may lead to financial risks, in order to maintain financial stability, the People’s Bank of China, with the approval of the state council, has the power to inspect and supervise banking institutions.39 The Banking Supervision and Administration Law also stipulates many specific sys­ tems, including supervision, early warning and risk management, as well as inter­ nal control.40 Similarly, the Commercial Banking Law stipulates that banks follow the principles of security, liquidity and efficiency, and establish and improve their risk management and internal control systems. There are also a large number of risk prevention and control systems in the Securities Law and Insurance Law. In addition to the specific risk prevention and control systems,41 there are also many substantial risk prevention and control measures in the specific legislation of China’s economic law. These measures include the reserve fees in the Budget Law, deposit reserve in the Law on People’s Bank of China, important commod­ ity reserve as well as price monitoring and intervention in the Price Law.42 The important consideration for setting out these risk prevention and control provi­ sions is to get ready for risk prevention and mitigation. It can be seen that risk prevention and control are not uncommon in economic law. These systems play an important role in effectively reducing risks in various fields, preventing and resolving distribution crises arising from risk accumulation, and ensuring economic security. 6.3.4 Risk, crisis and security in economic law In the complex games of various subjects, there are a lot of uncertainties which tend to increase the risk of various entities. Economic and social imbalances caused by market failures are not only a result of risks but also a cause of further risks. In a high-risk social environment, it is crucial for economic law to continu­ ously reduce risks, prevent crises resulting from excessive risks and ensure eco­ nomic and social security.

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In terms of risk, crisis and security, the various institutional arrangements of economic law aim to prevent and control various risks, including distribution risks, during economic operation. Where risks accumulate and accelerate to eco­ nomic crises, safeguards provided in the economic law system can contribute to resolving such crises. Economic law is called “risk prevention and control law”, “crisis countermeasures law” or “security assurance law” because it prevents and controls risks, resolves crises and ensures economic and social security. As an emerging modern law, the fact that economic law can prevent and control risks and resolve crises is directly related to its regulatory objectives. Maintaining stable economic growth, ensuring economic security and promoting sound opera­ tion and coordinated development of the economy and society appear consistent with the purpose of economic law – though such a view has never been discussed from a risk, crisis and security perspective. The risk dimension is helpful for a comprehensive understanding of the purpose and value of economic law. In par­ ticular, it is necessary to analyze the specific systems in various fields of economic law from a risk, crisis and security perspective. As far as specific systems are concerned, there are multiple important issues that need to be resolved by economic law. These include fiscal risks, crises and security in fiscal law; tax risks, crises and security in tax law; financial risks, cri­ ses and security in financial law; industrial risks, crises and security in industries law; and competition risk, crises and security in competition law. The above risks, whether at the macro or overall level or at the micro or individual level, may accu­ mulate, evolve into crises and affect overall security. Some economic law systems have taken these risks, crises and security issues into account while ignoring other areas of importance. It is necessary to further clarify the direction and specific areas for future improvement. Take fiscal law, for example. Here, it is necessary to improve the rules for bal­ ancing and adjusting budgets and keeping a moderate deficit and debt size in order to standardize the budget, so as to standardize the process for budget review and execution, and issuance and recovery of the national debt. For tax law, as the fair­ ness of tax burdens affects tax risks in tax collection and taxpayers’ compliance risks, it is necessary to put in place reasonable and legal tax laws. For competition law, as enterprises’ competition risks, especially compliance risks (such as unfair competition and monopoly risks), are common, it is necessary to have clear and detailed systems for competition regulation. Furthermore, the breakout of finan­ cial crises indicates that there are many shortcomings in the coordination of the current financial law and other laws, which calls for improvement of the laws and regulations for financial risks prevention and control. Risk prevention and control laws and regulations should effectively define the rights and responsibilities of relevant subjects in risk prevention and control, stip­ ulate the obligations to assist or coordinate, establish an effective accountability system and related mechanisms for early warning, monitoring, control and miti­ gation of risks. On the other hand, systemic coordination needs to be enhanced to mitigate risks and to avoid a situation where financial crises are paid for by public finance (Shangxi Liu 2006).43 It is necessary to extract risk prevention and control

Beyond the distribution crisis 151 principles and refine risk theory in economic law based on the practice of relevant laws and regulations. 6.3.5   Refining risk theory Risk theory is a general theory which relates to risks in economic law practice. It is necessary and possible to define risk theory in economic law based on the above understanding of risk issues, types of risks, specific risk prevention and control rules and the relationship between risk, crises and security. Risk theory helps to explain the creation, purpose, value and means of eco­ nomic law and the specific institutional structure of economic law from a risk perspective. At the same time, the risk theory also helps to explain why economic law is considered as risk prevention law, crisis countermeasure law and security assurance law and it extends the understanding of crisis countermeasure law.44 The various risk issues can be solved, to a certain extent, if the risk theory in economic law can be explored to: (1) guide the construction of specific risk prevention and control rules, (2) determine the various risks and their causes and expansion routes when establishing specific rules and (3) decide relevant coun­ termeasures to risk. The various risks in economic law can theoretically be categorized into risks involving relevant subjects and their behaviours – be they be macro, holistic and public, microscopic or individual and private. These risks may cause or aggravate market and government failures, affect economic stability, have an impact on effective economic operation and even result in a systemic crisis. To this end, it is necessary to construct various types of risk prevention and control rules in eco­ nomic law, to prevent related risks and to resolve economic crises caused by the accumulation of risks with a view to ensuring economic security and achieving the overall adjustment objectives of economic law. Risk theory in economic law should at least include risk categorization, risk prevention and control rules, as well as norms for risk prevention and control. Risks categorization helps to come up with special types of risks in economic law, thus laying a foundation for the construction of special rules. Risk prevention and control rules help to reveal the particularity of the risk prevention and control mechanism in economic law. Social norms for risk prevention and control should include subjects, behaviours, rights, obligations and liabilities. The general risk theory involves theories in relation to the generation, nature, purpose, function, value and other aspects of economic law extracted from the risk dimension. In addition, risk theory is intrinsically linked to information theory. The infor­ mation society is also a risk society. In order to solve the risks brought about by information uncertainty, many information disclosure systems need to be estab­ lished in economic law to protect the right to information, including the right to information regarding taxpayers, investors, consumers and regulators. Such an information disclosure system plays an important role in preventing and mitigat­ ing risks. When studying the risk theory of economic law, we should also keep an eye on the study of information theory.45

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6.3.6 Conclusion Economic law can be analyzed from the risk dimension, whether in institutional construction or jurisprudence. Since risks directly affect the interest of relevant subjects, the risk dimension is the basic dimension for the study of not only eco­ nomic law, but also the issue of distribution. Risk issues, special risks in economic law, and risk prevention and control rules, as well as the relationship between risk, crisis and security, can help to extract the risk theory in economic law, analyze relevant issues in relation to distribution risk and distribution crises.

6.4 Distribution crisis theory in the jurisprudence of development law Distribution crises can also contribute to the construction of the jurisprudence of “development law”. The issue of distribution is one of the important topics for development economics, development sociology and development jurisprudence, given its importance in economic and social development. In order to prevent distribution risks, resolve distribution crises and effectively solve distribution problems, it is important to change traditional ideas into law, fully understand the value of development law and build distribution crisis theory in studying devel­ opment law. This requires that a distribution crisis be considered from an eco­ nomic and social development perspective with the aim of solving the economic and social imbalance. Since distribution crises are first and foremost an economic crisis, the distribution crisis theory in economic law is more fundamental and important. The distribution crisis in development law focuses on the relation­ ship between distribution crises and the rule of law, crisis and development. To this end, this section will examine distribution crises in discussions of the issues related to development law. 6.4.1 Why is development law important? The sayings that “development is the absolute principle” and that “development is the first priority” shows China’s emphasis on development.46 Development is both a goal and a means. Since the various problems faced by human beings and the resolutions needed are directly linked to development, disciplines such as development economics, development sociology and development political sci­ ence have been devoted to development issues.47 Previous legal studies do not appear to have fully explored the notion of devel­ opment issues as various disciplines in jurisprudence are based on the division of different legal departments (especially their subjects), rather than on the objec­ tives of laws. Taking into account the objectives of laws, there can be a discipline of “development law”, just like development economics, development sociology and development political science.48 Legal studies on development law will, from a legal perspective, contribute to thoroughly understanding the various issues – for example, modernization issues

Beyond the distribution crisis 153 and distribution crisis – which affect economic and social development. Traditional laws focus on the allocation of rights and obligations as well as the micro-level res­ olution of disputes but few have contemplated long-term development at the macro level. Modern laws should pay more attention to influencing the economy and society by promoting development via legal regulation. Economic law and social law can be largely categorized as “development law” giving the increasing concern for development, the significance of development as the objective of legal regula­ tion and the ubiquity of development problems in economic law and social law.49 The development of laws is inseparable from development law. Economic law is an important development law. Economic and social laws are departments of law, but development law is not. Rather, it is categorized based on its objec­ tives. Research on development law helps to better understand economic law and related research. 6.4.2 Impact of development or distribution outlook on development law Development jurisprudence focuses on development problems and aims to pro­ mote development. Special development jurisprudence focuses on economic and social development, and general development jurisprudence also focuses on political and cultural development. Although development jurisprudence is still evolving and given that economic and social development are the most important goals for every country, development jurisprudence also focuses on economic and social development. Special development jurisprudence focuses on the government’s role in devel­ opment while general development jurisprudence can also include other subjects’ roles. Limiting development jurisprudence from the macro- and long-term per­ spective meets the current needs better and is more important at the current stage. Development jurisprudence is directly connected with development outlook (including, more specifically, the outlook on distribution). A country or nation must have its own developmental ideology. If a country or a nation does not see development problems or does not take them seriously, it is unlikely to achieve substantial development. Where the outlook on development is unclear and incor­ rect, there are problems and it is impossible to form a reasonable system to pro­ mote development. Furthermore, there is the absence of a fair and reasonable distribution system. In certain historical periods of China, little attention was paid to development problems. Economic and social development was put aside in the days when poli­ tics was overly emphasized while distribution problems relating to development and relevant distribution rules were overlooked. Lessons from history attest to the fact that neglecting development and distribution problems lead to negative effects on the construction of relevant distribution systems and result in distribu­ tion risks and distribution crises. On the eve of China’s reform and “opening”, enormous distribution pressures and prominent distribution problems had had a serious impact on the development of the country. Therefore, reform and “open­ ing” began with the reform of distribution systems.

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Historically, human understanding of development issues has gradually deepened. Previous laws mainly focused on survival issues, especially personal rights and property rights,50 the protection of which is associated with distribu­ tion systems designed to effectively achieve such protection in relevant distribu­ tion systems. With the advancement of human society, there has been the gradual realization of the importance of development issues and development rights as an important human right (the Declaration of the Right to Development being a typical example). Therefore, the adjustment of the distribution systems must be consistent with the aim of protecting development rights. As far as a country is concerned, without development, there is no way out and it will fall behind in international competition. Many developing countries have advocated for their rights to economic development (Shouwen Zhang 2001)51 on the international stage, demanding the establishment of a truly equal new international economic order. At the same time, many countries have begun to advocate for open policies, to attract foreign investment through various means (such as “tax competition”), to strive to change the distribution pattern and distribution order and to promote the development of their economies and societies. In this process, all countries have formed their own approach to development, with varying implications on the establishment and development of the distribution system and development law. In fact, across different historical periods, countries have had very different outlooks on development, especially directly relating to distribution. Countries tend to shift from ignoring to emphasizing development and developed countries usually have more advanced outlooks on development than developing countries. Relatively speaking, at a given time and place, it is possible to compare differ­ ent outlooks on development and make a distinction between good and bad, cor­ rect and incorrect and advanced and backward. In fact, it is the difference in the outlooks and practices of development that result in differences in the levels of development and income distribution. As a result, it is very important to establish an appropriate outlook on development. The outlook on development often directly affects institutional development and thus affects human economic and social practices. From the perspective of institutional economics, a country’s policies and laws are rules and systems for human behaviour. A country or nation’s outlook on development often directly affects its internal and external systems52 of policies, laws, ethics, customs and of course distribution systems, which, in turn, affect people’s behaviour and practice. The differences in the level of development of individual countries are largely due to institutional differences, including the distribution systems. It is clear that the outlook on development has a direct impact on distribu­ tion systems and the theory of development law. This means that a correct and advanced outlook on development or distribution has a positive and huge impact on institutional development and legal jurisprudence. Since different countries or nations have commonalities in their outlooks on development or distribution, they also have similarities in development jurisprudence. On the other hand, due to the different levels of development, development tasks, development goals and devel­ opment paths in different countries, their institutional construction is naturally

Beyond the distribution crisis 155 unique with each country having its own characteristics in the specific distribution systems and development jurisprudence. Based on the above understanding, outlook on development has a direct impact on the emergence and development of economic law, and outlook on distribu­ tion affects the formation and change of the relevant distribution systems, and then influence economic law jurisprudence. Similarly, outlook on development is reflected in relevant legal theories – even though they manifest in different ways in these theories. Studies on the differences help to explain why outlook on development is reflected more in economic law theory, why development law has its own territory and characteristics and why research on development law can promote the development of the entire law. 6.4.3   Distribution problems under the review of different legal theories As mentioned earlier, outlooks on development and distribution have an important impact on the emergence and development of development jurisprudence. Multiple development-related systems, including the distribution system, are important institutional foundations for development jurisprudence while the understanding of researchers with regard to development issues constitutes the cognitive basis for development jurisprudence. It should be emphasized that the researcher’s own outlook on development or distribution cannot be ignored because it has a direct impact on the study of specific development jurisprudence.53 In order to carry out a general analysis, it is necessary to divide laws into tra­ ditional laws and modern laws. With the development of the modern economy and society, laws that focus on solving outstanding modern problems produced by modern society have been enacted, for example, economic laws and social laws can be classified into modern law. Laws that existed before modern law are categorized as traditional laws because they bear different economic, social and legal characteristics. Among the various legal theories, it is the modern law theory (in particular economic law) rather than the traditional law theory that directly focuses on the distribution or overall development problem. This helps to understand why the distribution theory, and more specifically, distribution crisis theory, should be studied in economic law and, especially, as part of the emerging development law. Traditional laws focus on specific people and things at a specific time and place, emphasizing the resolution of local problems, local disputes and local contradic­ tions. In other words, traditional laws focus on providing individualized solutions to micro-level problems. However, with economic and social development, over­ all and general problems that lie beyond the scope of traditional laws, also need to be resolved. Traditional jurisprudence focuses on subjective survival at a spe­ cific time and place, while modern jurisprudence or development jurisprudence emphasizes the issue of sentient beings There are aspirations of a higher level of development, even though survival remains fundamental. With the changes in the issues of concern in traditional and modern laws, the goals, structure and func­ tions of laws have continued to experience changes.

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Therefore, it is necessary to emphasize that laws have changed and are changing; so are the connotation and extension of laws. These changes are real although they may not have been perceived in certain legal professions. The direct result of the above changes helps update the legal systems and redrawing of the entire legal map. Both the development of laws and jurisprudence are mainly driven by prob­ lems. With rapid economic and social development, traditional legal theories are obviously insufficient to resolve the many complicated emerging issues. Therefore, modern law theories – including economic law theory – are relied upon to provide corresponding explanations. Traditional law theories can explain local and static problems, but they are ill-designed to provide explanations of holistic and dynamic development problems. Since economic law is faced with a series of “unbalanced dual structures”, it must solve the problem of imbalance in develop­ ment on the basis of realistic differences, achieve a general equilibrium on the whole, and ensure equality and fairness in distribution. This means economic law theory is more explanatory on overall and dynamic issues, especially complex distribution problems.54 It can be seen that different types of legal theories place different emphasis on distribution or development problems. Unlike modern legal theories, tradition legal theories focus less on distribution or development problems. The laws are significantly influenced by outlooks on distribution or development. Making a general distinction as above at a macro level helps to better understand the impact of outlooks on distribution or development and on development jurisprudence. It also explains why modern laws focus more on distribution problems, and why considerable importance is attached to the study of the distributing crisis theory in the field of development law. 6.4.4 Development jurisprudence should pay attention to the relationship between distribution and economic legal theory The core issue in development jurisprudence is how to use economic law and other legal systems to promote economic and social development. Therefore, spe­ cial attention should be paid to various issues – including the distribution prob­ lem – that affect development. On the other hand, given the prominent blockade effects of distribution crisis on the economy and society, it is necessary to study distribution crisis theory in development jurisprudence. Considering that eco­ nomic law regulation is the most important in solving the distribution problem and preventing distribution crises, the relationship between distribution and eco­ nomic law theory should be clarified when formulating distribution crisis theory in the field of development law. As mentioned earlier, as early as hundreds of years ago, Étienne-Gabriel Morelly and T. Dezamy proposed that “economic law is the [sic.] distribution law” thereby revealing the importance of economic law in solving distribution problems. In fact, distribution is closely related to various theories of economic law, including the embryology, ontology, axiology, normative, and operational theories.

Beyond the distribution crisis 157 The questions that need to be asked from an embryology perspective are the following: (1) why is economic law needed? (2) What are the economic context, social foundation and legal bases for economic law? Many people may think that the modern market economy, the highly detailed social division of labour includ­ ing the resulting market failures such as monopoly, external effects, public goods, information bias and unfair distribution have created the necessity for the govern­ ment to cure market failures. However, the main question that arises remains: how to cure government failures? The answer to this question can be found in economic law designed to remedy the shortages of traditional civil and commer­ cial laws. In fact, many norms are directly related to distribution, whether wartime control laws, crisis countermeasures laws, or the usual macro-control laws and market regulation laws. The solution to the distribution problem is an important driving force for the emergence and development of economic law. Therefore, in the formulation of the distribution crisis theory in development law, it is necessary to fully consider the theory of “two failures” and “two imbalances” as important theoretical bases. From the perspective of ontology, most of the academic community believes that economic law adjusts the relationship between macroeconomic regulation and control and market regulation. The adjustment of the above relationship is itself a process intended to distribute income, wealth, resources and rights, and it is directly related to distribution. The formation and development of the two major components of the economic law system – macro-control law and market regulation law – are inseparable from distribution. Whether it is macroeconomic regulation or market regulation, whether it relates to relationship adjustment or legal construction, the ultimate purpose is to solve distribution and development problems. The characteristics of economic law – economics – is directly related to economic policy, economic leverage and the pursuit of economic benefits. The legalization of economic policy or the legalization of economic leverage as a spe­ cific policy tool are processes of distribution and directly related to distribution. In fact, in order to effectively promote economic and social development, it is neces­ sary to organically combine positive incentive promotion measures and negative restriction prohibition measures to achieve the fair and effective distribution of income, resources and wealth, etc., and strive to solve the problem of distribu­ tion or redistribution in the process of development to prevent distribution crisis. Accordingly, in the formulation of distribution crisis theory, the regulatory meas­ ures provided by economic law should be taken as an important means to prevent distribution crisis. From the perspective of axiology, values such as efficiency, fairness and order pursued by economic law are directly related to the problem of distribution. In particular, value judgments regarding distribution efficiency, fairness and order directly affect the stable development of the economy and society. The legislature intended for economic law to achieve financial goals including price stability, adequate employment and payments balance, are all closely related to distribution. The purposes of economic law also include social goals such as social welfare and basic human rights. In addition, the highest goal of economic law adjustment is

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the benign operation and coordinated development of the economy and society (Shouwen Zhang 1994).55 If the problem of distribution is not solved and distribu­ tion risks and crises cannot be effectively prevented and resolved, all the purposes and goals cannot be achieved. Therefore, from the pursuit of value to the specific purposes of economic law, the distribution problem remains at the core. It can be said that “there is no good development without good distribution”, but the deter­ mination of “good” or “bad” here involves value judgment. When constructing the distribution crisis theory, there is the need to fully consider the relevant value objectives, to identify “bad” distribution that leads to distribution crises and to ensure that distribution leans toward “good” in the process of development. From a normative theory perspective, the behaviour, rights, obligations and liabilities of relevant subjects under economic law all relate to distribution and they form many specific distribution systems including a budget system, national debt system, fiscal transfer payment system and tax incentives system, etc. In fact, the specific systems of economic law – fiscal or taxation system, banking and financial system, planning system, competition system or consumer protection system – all involve the distribution of wealth, income, rights and interests. In the study of normative theory, attention should be paid to distribution problems. Accordingly, in the construction of distribution crisis theory, attention must be paid to the problems of various specific distribution systems which constitute the institutional roots of the distribution crisis. To effectively prevent and respond to the distribution crisis, the above-mentioned types of distribution systems must be constantly improved. At the same time, the theory of right-obligation structure, and responsibility and liability structure should be treated as an important part of the distribution crisis theory. In terms of operational theory, the entire economic law system operates to better address outstanding problems, including distribution problems, in eco­ nomic and social development. The operation of economic law in the broad sense includes every aspect, from economic law legislation to enforcement. It is neces­ sary to consider distribution from the very beginning of the legislative process. In fact, the reform of many distribution systems (such as public finance system, budget system, national treasury collection and payment system, transfer pay­ ment system, government procurement system and taxation systems, etc.) aims to promote distribution equity, to resolve distributional risks and distribution cri­ ses, and to promote economic and social development. These systems, which are aimed at promoting development, reflect the way legislators understand the issue of distribution. Generally, deciding which areas should be supported, incentiv­ ized, expanded or restricted by government is a process of “distributions” that is reflected in relevant legislation. The legislations involving distribution, when implemented or enforced, can play their role in adjusting the distribution rela­ tionship and promoting the development of the national economy and society. Therefore, when formulating the distribution crisis theory, it is necessary to pay full attention to the problems inherent in the operation of the distribution system, especially the problems in legislation and enforcement, and to analyze their likeli­ hood of triggering a distribution crisis.

Beyond the distribution crisis 159 The book is only a brief description of the relationship between distribution and economic law theory, which highlights the main concerns of a distribution crisis theory in the field of development law. As a matter of fact, distribution theory in the field of economic law provides important theoretical support for the study of distribution crisis theory in the field of development law. If social imbalances, social risks and social crises in the field of social law are incorporated into the future, and distribution problems are appraised from a social perspective, distribution theory and distribution crisis theory, in the field of development law, maybe further enriched and developed. In addition, since distribution and outlooks on distribution are related to vari­ ous parts of economic law theory and they run through the entire theory of eco­ nomic law, distribution in the field of economic law is crucial to the formulation of distribution crisis theory in the field of development law. To this end, it is necessary to emphasize the following factors. First, the multiple dual structures involved in economic law theory are directly related to distribution. For example, the “economy-institutional” dual structure, which includes the urban-rural dual structure, the east-west dual structure, and other contradictions, needs to be coordinated with a focus on the problem of dis­ tribution. Overall, attention needs to be paid to coordination because the eco­ nomic and social development of different regions and different fields tends to be reflected through the complex distribution problem. Economic law has per­ sistently been developed based on an outlook that emphasizes the “coordination” and “consideration” of the above-mentioned dual structures, the resolution of dis­ tribution problems, the prevention and diffusion of distribution risks and distribu­ tion crises and the realization of coordinated and sustainable development of the economy and society. This outlook is of importance to the prevention and resolu­ tion of distribution crises, and the construction of a distribution crisis theory in the field of development law. Second, as more knowledge has been gained regarding the market economy, it is necessary to distinguish between economic growth and economic devel­ opment. Adjusting economic law does not solely mean focusing on economic growth. Rather, economic development and the coordination of economic, social and environmental development all need to receive equal attention. Accordingly, it is necessary to solve the problem of efficiency and fairness in distribution, to ensure stable economic growth and to guarantee the quality of economic develop­ ment. The development of distributional crisis theory in the field of development law needs to emphasize the issue of efficiency and fairness, especially the fairness and justice of distribution. Third, economic law has outstanding modernity compared to all traditional sectoral laws. Economic law is a law that seeks to resolve economic problems arising from the functioning of modern market economies. The development of the modern market economy is consistent with the modernization process of various countries. In the process of modernization, what strategies need to be adopted? What needs to be done to exercise comparative advantage and late­ comer advantage? How can the effective allocation of resources through effective

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modulation be achieved? Finally, how can the coordination of economic, social, environmental, and other aspects be properly incorporated in institutional designs and practices? In the modernization process, it is also crucial for many countries to effectively solve distribution problems and to cross or bypass the “middleincome trap”. Economic law can effectively solve the multiple complicated distri­ bution and development problems of modern society. To develop the distribution crisis theory in the field of development law, the modernity of economic law, as well as relevant functions involved in solving various modern problems need to be fully understood. At the same time, a detailed analysis needs to be undertaken regarding the particularity of the distribution crisis in modern society in an effort to enable the distribution crisis to keep pace with changing times. The various problems in modern economic and social development are also the subject matter of development economics and development sociology.56 Development jurisprudence needs to focus on the problems of both the developed and developing countries while paying attention to the “coordination” of the two types of countries. During the development process, countries face unidentical problems as illustrated by the economic cycle arising from distribution problems. Economic law plays an important role in the counter-cycle. The cycle of economic law systems has a certain relevance to economic cycles, social cycles and political cycles (Shouwen Zhang 2002).57 Its important role in ironing our economic cycles based on the needs for economic development is irreplaceable by other laws. 6.4.5 Economic law, development law and the development of law Law and jurisprudence are changing. A right and advanced outlook on the develop­ ment, the combination of actual economic and social development, and the transfor­ mation of traditional legal concepts and legal structure are required for developing jurisprudence. In the process of reconstructing jurisprudence, it is necessary to further emphasize the important role played by development jurisprudence in pro­ moting the development of jurisprudence as a whole. The study of development law, therefore, enhances the transformation of the methodology and paradigm for jurisprudence and also triggers a series of innovations in specific theories and rules. For example, in the past, research on traditional law focused on specific per­ sonnel at a specific time and place while ignoring macroscopic development issues. Development law, represented by economic law, based on development, was dedicated to solving problems in development (including prominent distri­ bution issues). It not only focuses on Hayek’s so-called “judicial law” (Hayek 2000)58 but also on “on-judicial law”. Development jurisprudence focuses, over a longer time and wider space, on issues at a more macro-level involving unspeci­ fied subjects. Development jurisprudence has transcended the relevant disciplines that used to be divided based on specific sections of law theory and has even surpassed the division of domestic economic law and international economic law, thus forming a high-level discipline. “Homogeneity” or “no difference” is an important assumption for traditional civil law theory. It is the basis for civil relations in which civil law can adjust

Beyond the distribution crisis 161 equal subjects. However, there are huge differences in economic and social fields, from subjects to objects and from powers/rights to duties/obligations; there are also huge differences in the specific time and space dimensions of law enforcement. This is especially true in distribution. Therefore, from the per­ spectives of economic and social development, the combination of horizontal equity and vertical equity, and substantive justice, it is necessary to emphasize the notion of “difference”. Development law should pay more attention to “dif­ ferentiation” given that it is significantly influenced by public policies including economic policies and social policies (this is also an important feature of modern law)59 and considering the concept of “no policy without difference”. Emphasis should be put on substantive fairness, rather than on the mechanical application of the law in order to better solve the various problems (especially distribution problem) that constantly arise from the dynamic operation of the economy and society. Development jurisprudence is directly related to the overall development of law. In the past, it was argued that the direct influence of jurisprudence on eco­ nomic and social development is less than that of economics and other related disciplines. However, practice has shown that many studies in jurisprudence can also have a direct impact on economic and social development. In particular, the understanding of relevant laws has become deeper and more comprehensive with the increasing importance of economic law and social law. With further research, it will become possible to refine fundamental issues of jurisprudence, or common problems of development in various disciplines. This way, a basic framework will be formed toward the development of jurisprudence. This will also help to promote the development of the economy, society and other fields. In particular, it will lead to better coordination and sustainable development in various fields as well as the achievement of higher goals. Developmental jurisprudence has long been in existence despite the absence of a name to describe it. Various problems in China’s economic and social devel­ opment, such as unfair distribution, agricultural problems, social security and macro-control issues are all challenges that could be studied under development jurisprudence. Further integration of research on the above issues from the per­ spective of development jurisprudence can effectively solve the development problems of the world’s largest developing country by promoting development more comprehensively and systematically. The solution for these problems, especially the resolution of related distribution problems, can promote the devel­ opment of jurisprudence more vigorously and may promote Chinese jurispru­ dence in the globe in the course of resolving the many development problems in China. 6.4.6 Conclusion As the largest developing country, China takes development as its top priority. Realizing the country’s prosperity is also an important issue that jurisprudence research should address. As the state attaches great importance to development

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problems, especially to distribution problems, research on these issues from the legal perspective is inevitably an important topic of sustainable research. This is an unparalleled opportunity to deepen the development of jurisprudence research and development as well as the construction of distribution theories in the field of law. There is still a lack of in-depth discussion on the basic issues of the develop­ ment jurisprudence and the discussion above is simply an effort to illustrate some particularities of development jurisprudence and to explore the potential of distri­ bution crisis theory in the field of development law. This is more so, taking into account the influence of outlook on development on development jurisprudence, the focus of different types of legal theories on distribution, and the association between economic law theory and distribution. Outlook on development and the related outlook on distribution affect the development of relevant legal rules and jurisprudence. A correct and advanced outlook on development and distribution plays a positive role in promoting insti­ tutional development and legal development. In solving, preventing and respond­ ing to distribution crisis, the impact of relevant value factors must be considered. At the same time, solutions should be provided to issues related to distribution, development and the rule of law under the guidance of a correct outlook on devel­ opment and distribution. It is also important to develop a theory of distributional crisis in the field of development law. Both economic and social law have developed based on common economic and social foundations. They have a positive effect on solving the “two imbal­ ances” brought about by the “two failures”. From the perspective of interdisci­ plinary studies, “development jurisprudence” – a new subject based on economic law and society law focusing on major problems in society and economy – may supplement traditional research and bring legal study into a new era. As far as the emerging development jurisprudence is concerned, there are still many prob­ lems for further study. The basic theoretical framework needs to be further devel­ oped in related disciplines. This means it can only be reasonably determined with changing traditional legal concepts in academic circles in order for the framework to be reasonably determined. The development of law is inseparable from development jurisprudence. The in-depth study of development jurisprudence can solve some theoretical problems in the development of modern law as well as solve problems that traditional law cannot effectively solve. In particular, development jurisprudence can prevent and respond to distribution risk and distribution crisis. Although there are still many problems with development jurisprudence itself, it needs to be promoted in the long run as a way of promoting the development of law. The study of development jurisprudence involves the four interrelated aspects that this book focuses on, namely distribution, crisis, rule of law and develop­ ment. In fact, this book not only puts forward some thoughts on the theory of distribution crises from an economic law perspective but also tries to integrate these four aspects from through the lens of development law. It is believed that with the increasing emphasis on distribution issues and distribution crises and

Beyond the distribution crisis 163 rule of economic law or economic regulation, development law will have a com­ paratively greater impact thereby fostering overall research in legal research.

Notes 1 The crisis is described as a “once in a hundred years” crisis. It is the largest crisis since the Great Depression of 1929, so at least, we can call it “once in eighties” crisis. Its impact is extensive and profound because it results from the superposition of multiple economic cycles. 2 See Deming Chen et al. (2014). Economic Crisis and Reconstruction of Rules. Bei Jing: The Commercial Press, pp. 52–63. 3 Shouwen Zhang. (2012). Economic Law. 2nd ed. Beijing: Renmin University of China Press, p. 9. 4 The excessive expansion of financial institutions, the lack of self-discipline in financial institutions and rating agencies, the misalignment of macroeconomic policies in cer­ tain countries, and the mismatch between financial regulatory capabilities and financial innovation are important reasons for the financial crisis. Among them, the first two aspects are related to market failure, while the last two are related to government fail­ ure. 5 In the spring of 1993, China amended the constitution to stipulate that “the state strengthens economic legislation and improves macroeconomic regulation and con­ trol”. Since then, in order to promote the development of the market economy, financial and banking legislation has been greatly strengthened since 1995, and a systematic central bank legal system and commercial banking law have been formed. 6 The United States and many countries in Europe have adopted large-scale rescue meas­ ures. Some measures (such as direct funds to financial institutions or purchase of stocks of certain financial institutions) are even considered as nationalization. Some people think this is the arrival of the “big government” era. 7 The relationship between financial innovation and financial supervision is a concrete manifestation of the relationship between market and government. Accordingly, the prevention and resolution of financial crises calls for adequate coordination of the rela­ tionship between savings and consumption and the relationship between virtual econ­ omy and real economy, all of which require a comprehensive adjustment of economic law. 8 The relaxation of financial regulation is closely related to financial innovation, tech­ nological progress, public interests, private interests, and political processes. See Kevin Dowd and Mervyn K. Lewis. (2000). Current Issues in Financial and Monetary Economics, translated by Yulu Chen, Bei Jing: China Tax Publishing House, pp. 153– 156. 9 After the 2008 financial crisis, China’s Supreme People’s Court issued various doc­ uments to strengthen the regulation of China’s financial market, ensure enterprises’ development in accordance with law, and fully safeguard social harmony and stabil­ ity. See Weidong Ji. (2009). Judicial Responsibility in the Economic Crisis, Caijing Magazine, 229(1). 10 The principle of differences is an important principle of economic law, and an impor­ tant basis for the theory of dual structures. It is precisely because of the differences that there are dual structures and make the theory of dual structures possible. 11 For example, after the bankruptcy of the Lehman Brothers and a few international insurance companies, a number of financial institutions went into turmoil. For more on the financial crisis, see Xingyun Peng and Jie Wu. (2009). From the Subprime Mortgage Crisis to the Evolution and Diffusion of the Global Financial Crisis. Economic Perspectives, (2), p. 52.

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12 Dynamic investigation should be conducted on whether the degree of freedom and openness are moderate and how to make appropriate adjustments. This will make it possible to better utilize both domestic and foreign markets and solve many problems arising from the internal and foreign economies. 13 Some are of the view that government has obvious advantages in correcting market failures. See Jeseph E. Stiglitz. (1998). The Economic Role of the State, translated by Bingwen Zheng. Beijing: China Materials Press, pp. 74–77. 14 As economic law is a relatively new area, sufficient research has not been undertaken in the area of economic law philosophy. However, as various branches of economic law become fully understood, the study of economic law philosophy should be reinforced to better promote the development of various branches of economic law. 15 See Shouwen Zhang. (2008). Economic Law. Beijing: Renmin University of China Press, pp. 63–65. 16 Increasing expenditures may be an appropriate measure. However, adjustment to the government’s budget should be approved by the legislature, rather than the executive meeting of the state council. 17 The change of VAT from production type to consumption type will resolve the financial crisis, but these adjustments should strictly follow the legal taxation or the legal reser­ vation principle. 18 The RMB four trillion investment plan has not only been criticized in terms of its being not “legal”, but in terms of its economic effects. The “three-phase superposi­ tion” including the resulting economic effects and economic structure adjustment, is an important manifestation of China’s economy entering the “new normal”. 19 After the financial crisis, China has adjusted for a number for times, the export tax rebate rate, interest rate and deposit reserve ratio to cope with the import-export bal­ ance, mitigate financial risks and stimulate domestic demand. There are also different views as to whether the above practices are appropriate. 20 In the post-crisis era, China paid more attention to the optimization of economic struc­ ture and the quality of economic development. GDP worship and assessment were greatly diluted, which is undoubtedly an important progress. See Jianwen Luo and Mingjun Deng. (2007). Ethical Analysis from GDP Worship to GNH Care. Studies in Ethics, 28(2), pp. 52–58. 21 The lack of self-discipline in financial institutions and rating agencies has led to distor­ tions in risk information and asset valuation, which are important reasons for the finan­ cial crisis. See Peixin Luo. (2009). Improvement of Legal Liability of Credit Rating Agencies in the Post-Financial Crisis Age. Law Science Magazine, (7), p. 5. 22 Some people believe that the bankruptcy crisis in Iceland was caused by the confronta­ tion between the dollar and the euro. If that is true, attention should be paid to interna­ tional financial competition and legal coordination. 23 The role of relevant financial regulation and control laws should not be ignored. For example, in response to the Great Depression of 1929–1933, the US Congress passed the Glass-Steagall Act in 1933 that restricted the business of banks. The restriction later evolved into the separation of banking, securities and insurance businesses. However, in November 1999, the US Congress passed the Financial Services Modernization Act which abolished the Glass-Steagall Act and weakened financial regulation. See Xiaomin Chen. (2000). The Banking Law in the United States. Law Press, pp. 54–56. The outbreak of the 2008 financial crisis made the strengthening of financial supervi­ sion necessary. Consequently, in June 2010, the US Congress passed the most rigorous Dodd-Frank Act. 24 There are many studies on economic law systems related to the economic crises, but the reflection on economic law theory in the post-crisis era is relatively lacking. The latter is very important to enrich and develop economic law theory. 25 For a detailed discussion of analysis framework of game behaviors, see Shouwen Zhang. (2004). Reconstruction of Economic Law Theory. Beijing: People’s Publishing

Beyond the distribution crisis 165 26

27 28

29

30 31

32 33

34

35

36 37

38 39 40

House, pp. 154–162; Shouwen Zhang. (2009). General Economic Law. Beijing: Renmin University of China Press, pp. 10–11. International tax competition has long attracted the attention of the international com­ munity. In order to avoid vicious tax competition, the EU and the OECD called for the establishment of a vicious tax criteria in 1997 and 1998 in order to minimize its adverse effects. The Tax Deduction and Employment Act passed by the US Congress at the end of 2017, is believed to have triggered a new international tax competition. For example, Hongbing Song’s Currency War and his other works on the same subject have attracted attention. Similar problems have arisen in many European countries. In order to fulfill the obli­ gations of international law to control deficits under the Stability and Growth Pact, a number of countries have experienced problems affecting economic stability and social harmony, especially in countries such as Greece. Two years after the 2008 financial crisis, the Chinese government’s deficit has increased sharply amounting to more than one trillion yuan. With the launch of other crises response measures and the deeper understanding of the deficit issue, China has tried and only partially succeeded to gradually reduce the deficit scale since 2011. Detroit officially filed for bankruptcy protection on July 18, 2013, making it the largest bankrupt city in US history. On November 7, 2014, US federal judge Steven Rhodes ruled on Detroit’s bankruptcy plan. Since 2004, China has been in the process of amending the Budget Law. On August 31, 2014, the National People’s Congress Standing Committee passed the decision to amend the Budget Law. One of the important objectives of the law is to strengthen legal control over budgetary expenditures. See Shouwen Zhang. (2009). On Promotion-Type Economic Law. Journal of Chongqing University (Social Science Edition), 14(6), pp. 103–106. The main task of macroeconomic regulation and control is to maintain the balance of economic aggregates, promote the coordination of major economic structures, miti­ gate the impact of economic cycle fluctuations, prevent regional and systemic risks and achieve sustained and healthy economic development. Therefore, preventing and defusing economic risks and economic crises is an important task of macroeconomic regulation and control. For example, the four trillion yuan government investment involves budget adjustment and should be approved by the Standing Committee of the National People’s Congress in accordance with the provisions of China’s Budget Law. However, this huge invest­ ment has never undergone a statutory approval process, and many people have already criticized it. Habermas focused on the effects of the late capitalist crisis in the political field, empha­ sizing the existence of a dual crisis of legitimacy and rationality in the political field. See Jürgen Habermas. (2000). Legitimation Crisis. Translated by Beicheng Liu. Shanghai: Shanghai People’s Publishing House, pp. 63–68. In terms of economic regulation, atten­ tion should also be paid to preventing challenges posed by rationality and legitimacy. The distribution dimension is of great significance to theoretical research and the insti­ tutional construction of economic law. The risk dimension is equally important. There are many research results in risk economics and risk sociology. Frank H. Knight. (2010). Risk, Uncertainty and Profit. Translated by Jia An. Beijing: Commercial Press; Ulrich Beck. (2004). Risk Society: Towards A New Modernity. Translated by Bowen He, Nanjing: Yilin Press. These studies have inspired the research on risk issues in economic law. See Article 2 of the Law on People’s Bank of China and Article 1 of the Banking Supervision and Administration Law. See Article 34 of the Law on People’s Bank of China. See Articles 13, 21, 23, 24, 27, 28, 29 and 38 of the Banking Supervision and Administration Law.

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41 See Articles 4, 59 and 64 of the Commercial Banking Law. 42 See Articles 27 to 32 of the Price Law. 43 See Shangxi Liu. (2006). Macro Financial Risks and Government Fiscal Responsibilities. Beijing: China Financial and Economic Publishing House, p.11. 44 The academic community has long referred to economic law as “crisis countermeasure law”. But it is relatively narrowly interpreted. By combining with the risk and security dimensions, it is possible to extend the understanding of crisis countermeasures. In fact, given its close relationship with risk prevention and control, economic law always contains crisis countermeasures. 45 In this sense, information is also an important dimension for economic law. Studies on information theory and rules in economic law can also benefit the study of information law. 46 The decision on reform in 2013 specifically stipulates: “we must comprehensively fur­ ther reforms, adhere to the strategic judgement that development remains the key to all the problems in China”. Both the comprehensive reforms and rule of law involve development. 47 These disciplines have substantial existing materials and can provide valuable refer­ ence for legal studies. 48 For the introduction of the concept of “development law”, see Shouwen Zhang. (2001). Basic Hypothesis of Economic Law. Modern Law Science, 23(6), pp. 44–53. 49 The economic and social functions of modern countries are of paramount importance. How to promote the benign operation and coordinated development of the economy and society through the study of development law is an important issue faced by government. 50 For example, civil law, criminal law and even constitutional law focus on basic rights such as personal rights and property rights which, to certain extent, are survival rights. Generally speaking, traditional law is more of “survival jurisprudence”, rather than a “development jurisprudence”. 51 See Shouwen Zhang. (2001). Basic Hypothesis of Economic Law. Modern Law Science, 23(6). 52 See Wolfgang Kaper and Manfred E. Streit. (2000). Institutional Economics: Social Order and Public Policy, translated by Chaohua Han. Bei Jing: Commercial Press, pp. 36–37; Aoki Masahiro. (2001).Comparative System Analysis. Translated by Li’an Zhou. Shanghai: Shanghai Far East Publishing House, p. 6. 53 For example, China used to unilaterally pursue GDP, but did not pay enough attention to social development and environmental protection. Some researchers are advocating for an alternative development pattern that may impact China’s outlook on develop­ ment. 54 See Shouwen Zhang. (2004). Reconstruction of Economic Law Theory. Beijing: People’s Publishing House, p. 23. 55 See Shouwen Zhang. (1994). On the Purposes of Economic Law. Peking University Law Journal, 31(1), pp. 31–34. 56 There are many topics in the fields of development economics and development soci­ ology. See Chongtai Tan. (1999). New Developments in Development Economics. Wuhan: Wuhan University Press; Tiankui Jing. (2000). Social Development and Social Development in China. Beijing: Learning Publisher. 57 See Shouwen Zhang.(2002).Of Periodic Evolvement of Macro-control Law. Peking University Law Journal, 14(6), pp. 695–705. 58 Hayek believes that the earliest political laws that legislators involved in fiscal laws that are different from general juridical laws. See Friedrich August von Hayek. (2000). Law, Legislation and Freedom (Vol. I). Beijing: Encyclopedia of China Publishing House, pp. 213–214. 59 See Shouwen Zhang. (2000). On the Modernity of Economic Law. Chinese Legal Science, pp. 56–64.

7

Conclusion

This book outlines the issues related to distribution crises, beginning with the theories of economic law. As the distribution crisis is caused by distribution prob­ lems, this book explores how to promote economic and social development by regulating economic laws in the framework of the rule of law. In particular, the book addresses four interrelated and consistent concepts namely: distribution, cri­ sis, rule of law, and development. The discussions of these issues not only contribute to theories and the system of economic law from the perspective of distribution but also provide an analy­ sis of the distribution problems and crises from the perspective of economic law theories. On this basis, this book briefly summarizes and explains some basic understandings – thus forming and further reflecting on the problems that remain to be solved.

7.1 Basic points 7.1.1 Summary of basic propositions Through the discussions in the previous chapters, a number of basic understand­ ings are formed and briefly summarized as follows. Issues of distribution are major issues that every country in the world must endeavour to resolve. The book provides cautions about distribution crises – the extreme manifestations of the distribution problem – and calls on all countries to pay attention and formulate responses. The global financial crisis and the overall economic crisis in 2008 once again showed that it is important for all countries to take distribution problems seriously and manage with them efficiently. Since the reform and opening of China, its economy has grown rapidly but uncoordinated, unbalanced, and unsustainable problems have also arisen in vari­ ous areas, especially in the area of distribution. Thus, countries need to ensure the successful management of distribution problems, especially those relating to wide income gaps and unfair and unbalanced distribution – while also striving to achieve social equality and justice. In addition, distribution problems place sig­ nificant stress on state finance and downgrade the livelihood of individuals. In a

168

Conclusion

word, the major issues that China continues to confront and needs to resolve are about preventing distribution risks and resolving distribution crises. To solve the distribution problems and prevent the distribution crises, it’s nec­ essary to constantly improve the national governance system and enhance the ability to govern. For instance, it is essential to safeguard the distribution order by advancing the rule of law, to prevent economic and social imbalances caused by unbalanced distribution, and to avoid the legalization crisis. It is by reinforcing the rule of law in the area of distribution that a sound and coordinated develop­ ment of the economy and society can stimulate progress in all sectors. When promoting the rule of law in the field of distribution, it is very crucial to strengthen economic laws and regulations. In practice, when resolving various distribution problems and preventing distribution crises, most countries mainly adopt two methods – policy and law. Economic law, with its special function in distribution and redistribution and its promotion of norms that have the ability to solve distribution problems, has been an important regulatory tool used by all countries to resolve distribution problems and prevent related crises. To solve general distribution problems or to prevent distribution crises, it is necessary to strengthen the national coordination of distribution relations and to optimize the law in distribution structure. Meanwhile, in optimizing the distribu­ tion structure, the general structure of the law itself is also optimized. In fact, the process of China’s reform and “opening” is, in a certain sense, a continuous process during which the distribution structure is optimized by constantly direct­ ing the focus of economic policies and economic legal systems towards “dis­ tribution”. In addition, the relevant laws and regulations of the economy have also been continuously improved due to the pressure and motivation to resolve distribution problems. Based on the basic understandings of the distribution problems and crises, as well as the elementary considerations on the rule of law and development in the area of distribution, it’s possible to refine the distribution category, construct an overall distribution theory, abstract the concrete distribution crisis theory, and combine it with the theory of distribution in social law to construct the distribu­ tion crisis theory in the field of development law. These theories help to resolve empirical problems in the field of distribution and to enrich theories related to law. 7.1.2 Basic views and conclusions further explained Those basic understandings have been drawn from the clues and arrangements of the book. As mentioned earlier, this book analyzes the distribution crisis through the lens of economic law theory which thus involves two closely connected themes – the distribution crisis and the theory of economic law. Firstly, the distribution crisis itself is the cause of, and also one of, the distri­ bution problems. Therefore, the book focuses on the distribution problem and further discusses how to solve all kinds of distribution problems based on their diversified causes some of which include the unbalanced distribution structure, the disparities in distribution, and the inequitable distribution. The book also

Conclusion

169

analyzes the necessity and feasibility of strengthening corresponding economic laws and regulations. In various sections, the book discusses relevant practices and theories in response to distribution crises. The book not only focuses on how to deal with and resolve the distribution crisis but also examine show to prevent its occurrence. For example, given that distribution crises ex-post, ex-ante preven­ tion could be significant compared to a more passive response. The discussion of the distribution crisis centres around the fiscal crisis and the financial crisis because of their great influence on the country and on the people. As a matter of fact, the effective prevention and resolution of the fiscal and finan­ cial crises have a direct impact on economic, political and social stability as well as on the livelihood of people and the peace and stability of countries. Secondly, this book mainly focuses on analyzing distribution problems, risks and crises from the perspective of economic law theory. At the same time, it explores the emergence and development of economic law theories from the perspective of distribution and analyzes the issues of distribution throughout all economic law theories and systems. This means the book equally reflects on theo­ retical issues of economic law with a view to resolving distribution problems and the distribution crises. In fact, economic laws and regulations are vital to distribution problems in that they help to prevent crises. This book attempts to further develop the theories of economic law, including theories pertaining to distribution structure optimization, distribution regulation, distribution crisis etc. by analyzing the influence of eco­ nomic law on distribution crises. In addition, studies on the theories of constitu­ tional distribution, national competition risk, and developing law, among others, are also worthy of attention. The perspective of distribution should not be overlooked when considering other branches of economic law. Studies on how to coordinate various aspects of distribution using economic laws, especially the macro regulation and market regulation that are beneficial to good distribution, may contribute to the effec­ tive resolution of problems while contributing to the development of theories of economic law.

7.2 Extension of the topics Based on the above fundamental understandings, this book attempts to observe and examine economic law theories and systems from the perspective of distri­ bution and to formulate a new understanding of economic law. To this end, the book begins with distribution issues but also explores the necessity, feasibility, rationality, and legitimacy of economic law regulation, as well as its possible problems and limitations. The analysis contributes to understanding the existence and development of economic law, the driving force and goals behind the changes in economic law systems, and the methods to develop economic law under the rule of law. The analysis also contributes to promoting the theory and system of construction as well as economic law research methods. Furthermore, it is neces­ sary to further reflect on the aforementioned understandings.

170

Conclusion

7.2.1 Promoting the theoretical development of economic law A perspective on distribution problems or crises reveals many links between the distribution crisis and the theory of economic law – a study of which contributes to the development of economic law theory. Here are some examples: Firstly, there are intrinsic links between distribution issues and the emergence of economic law. Market failure forecasts the emergence of economic law while the distribution problem is an important manifestation of distribution issues Although distribution problems have existed in varying degrees since ancient times, given the different proportions of various factors in the initial distribution, the distribu­ tion gap caused by the market economy has been widened and, in the modern era, more attention has been paid to unfair distribution, distribution imbalance, and economic imbalances. All these problems may lead to general disequilibrium and even create economic crises. As a matter of fact, economic crises are merely a synonym for the distribution crisis. Thus, the economic law, as a crisis counter­ measure law or a “countercyclical” law, must play an important role in resolving distribution problems and preventing and coping with the distribution crises. Secondly, distribution crisis management is affiliated with the values of eco­ nomic law. It is almost impossible to shield value judgments from the relevant research. For example, ensuring fair distribution and realizing distribution justice are important values to be pursued through economic laws and regulations. In order to secure steady growth, and prevent and resolve economic crises, it’s nec­ essary to solve the distribution problems and ease the tension between individual profitability and social welfare which require the balance between efficiency and equality. After all, only by coordinating these value goals can one avoid promi­ nent distribution problems and prevent the distribution crisis. Thirdly, distribution crises affect the construction of distribution theory of the economic law. Even though it is generally acknowledged that “economic law is also distribution law”, study of the latter has nevertheless been long neglected. To construct a distribution theory in economic law, it is necessary, on the one hand, to review all previous research on distribution problems, especially on distribution crises, and to refine important distribution principles and distribution categories. On the other hand, it is necessary to pay more attention to the particularities of distribution crises in the fields of economic law and social law so as to construct distribution crisis theory in economic law. Both of these approaches contribute to the multi-dimensional expansion and comprehensive explanatory power of the distribution issues and crises of economic law theory. Last but not least, there are interactions between distribution crisesand eco­ nomic law regulation – particularly regarding whether macro- or micro-changes in the economic law system have an immediate impact on distribution. The legiti­ macy of the system and the rule of law’s influencein economic law, especially the legal basis for economic law system changes, the delegation of the legisla­ tive power, and the protection of individuals’ rights are of equal prominence. Therefore, economic law-makers should follow the principle of legality in order to realize long-term peace and stability through economic law.

Conclusion

171

In short, through the lens of distribution, economic law can be regarded as both the “economic law of distribution” and the “distribution law of the economy”. This means economic law should dedicate itself to making distribution more eco­ nomical, rational, efficient, and fair by handling the links between production, exchange, consumption, and distribution. In addition to distribution, other factors that affect economic law should never be ignored. 7.2.2 Emphasis on the structural analysis methods Although a variety of research methods have been covered in the previous discus­ sions, it’s necessary to emphasize the method of structural analysis given that dis­ tribution issues themselves are structural issues. Structural analysis applies to the hierarchical structure of various types of entities or to the revenue and expenditure structure of state finance, macro distribution structures, and the structure of rights and interests in a specific distribution system. For this reason, it is necessary to pay attention to the structural imbalance existing in the distribution system when solving the distribution problem. In the entire theoretical study of economic law, structure analysis occupies the central stage. This also highlights the growing importance between the structure and function.

7.3 Limitations and problems for further exploration The issues are nuanced given the complexity of the distribution system. This study, even with its multi-dimensions and given the fact that it is a synthesis of various theories and research methods, still has its limitations. This book focuses on the analysis of distribution crises from the perspective of economic law theory, but exhaustive research will still span beyond our discussion. In addition, though economic law comprises norms from several legal branches, all of which affect the distributional problems to varying degrees, this book was not intended to investigate each of them and could not estimate all the relevant theories. It is, nonetheless, relevant to scrutinize the shortcomings of this book. For example, there have been conflicting opinions about whether the existence of uneven distribution or a distribution gap can increase economic growth. There has been continuous argument about if economic laws and regulations can resolve distribution problems in an all-round way as well as effectively preventing and overcoming distribution crises; and if so, to what extent. Apart from the debates surrounding the effects or limitations of economic laws and regulations on distribution issues, there is still a need for in-depth discussion of the theories of distribution, on specific distribution crises in economic law, and on distribution crises in the development of jurisprudence. The theoretical construction of distribution and the effectiveness of distribu­ tion regulation are far from complete and they require further fine-tuning. This book merely outlines the framework of distribution crises – the rule of law – development thread, beginning with theories of economic law and exploring the

172

Conclusion

distribution crisis, the relevance of economic law and regulation, and the neces­ sity and legitimacy of regulation. The book further connects the framework with economic and social development as well as the development of politics and law. Those interested in the application of specific economic laws and regulations in distribution may wish to refer to other works by the same author.

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Index

Page numbers in bold denote tables, in italic denote figures analysis: policy 10; structural 10, 71, 171; systematic 10, 78n12 Beck, Ulrich 1, 11n1 capital 3, 6, 40, 44, 50n47, 50n48, 57, 59–62, 75–76, 80n25, 87, 90–91, 98–99, 102n11, 103n19, 129n22, 145, 165n35 capitalism 11n2, 12n11 China’s: economy 16, 109, 164n18; reform 5, 71–72, 74, 77, 84, 102n4, 107–108, 113, 117, 119, 124–126, 153, 168 consumer 3, 21, 23, 60, 97, 129n20, 147, 151, 158; rights 68–69 debts: burden 26, 147; contingent 26; direct 26; explicit 26; government 26; implicit 26, 48n29 development: coordinated 2, 4–5, 23, 37, 42, 58, 65–66, 77, 101, 134, 150, 158–159, 161, 166n49, 168; economic 4–7, 11n2, 19, 22, 32, 41, 52n67, 56–58, 61–62, 64, 72, 84–85, 88, 92, 99–100, 102n5, 102n7, 115, 120, 138, 141, 145– 146, 154, 159–160, 164n20, 165n33; effective 6, 20; law 9, 12n17, 13n21, 85, 102n6, 130n31, 131, 152–157, 159–163, 166n48, 166n49, 168; national 3, 37; regional 65, 67, 69, 74; social 1, 3, 8–9, 12n17, 15, 17, 22, 24–25, 41, 55, 57, 59, 71–77, 84–85, 100–101, 102n6, 102n7, 126, 131, 134, 140, 152–153, 155–161, 166n53, 157, 172; sustainable 24, 138, 159, 161 Dezamy, Theodore 156 distribution: crisis 1–2, 4–5, 8–10, 25, 41, 131–132, 137, 140, 142, 145–147,

152–153, 155–160, 162, 167–170, 172; differences 8, 14, 37–46, 53n79, 103n21; imbalance 4, 9, 12n12, 63, 74, 83–84, 93, 95–96, 99, 102n2, 170; income 1, 4, 9, 21–23, 28, 37–39, 41, 44–45, 48n20, 59–64, 70, 76–77, 79n14, 79n15, 79n16, 79n24, 80n36, 81n36, 87, 92, 98–99, 103n15, 104n30, 119, 154; interest 6, 8, 18, 57, 108–109, 119, 121, 125; issues 1–5, 8–10, 11n8, 14, 18, 23, 38, 42, 46, 52n72, 54–55, 58, 60, 64, 71–72, 75, 78, 85, 92, 94– 95, 99, 105, 107–108, 110, 131, 160, 162, 167, 169–171; -orientation 105, 107; power 14, 83, 85, 88; pressure 5, 7, 9, 14–17, 20, 22, 47n8, 54, 71, 105, 153; problems 2–5, 7–10, 11n1, 12n13, 12n19, 15, 71–72, 74, 76–78, 78n9, 79n18, 81n42, 81n45, 83–85, 87–89, 91–93, 95, 99–101, 102n3, 104n35, 122, 131–132, 136, 152–153, 155–162, 167–171; relationships 54–60, 63–64, 71, 75, 78n4, 78n13, 82n51, 83, 86, 97, 106, 109, 116, 119, 122–123, 125, 158; revenue 58, 83–84, 86–89, 91, 93, 97, 99–101, 103n17, 104n29, 104n32, 107, 114; risks 2, 4–5, 7–8, 14, 16, 19, 25, 37–38, 41–43, 46, 54–55, 57–58, 60, 62–63, 72, 78, 83, 102n2, 131, 142, 146–147, 150, 152–153, 158–159, 162, 168; structures 1, 4, 6–10, 16, 20, 38, 42, 54, 58, 60–61, 63–71, 78, 80n36, 81n36, 83–101, 102n5, 102n12, 103n19, 104n25, 105, 168–169, 171; systems 2, 10, 14, 40–42, 51n59, 56–63, 68–70, 79n15, 79n24, 83–93, 96–97, 100–101, 102n10, 103n15,

Index 103n19, 127n4, 153–155, 158, 171; theory 3, 7, 56, 83, 93, 95–96, 100– 101, 103n25, 104n25, 155, 159, 162, 168, 170; unfair 4, 8–9, 12n18, 14, 20, 44–46, 53n77, 60, 63, 66, 84, 88–90, 92–93, 96, 99–100, 103n21, 104n37, 157, 161, 170 dual: adjustment 8–9, 64, 66–67, 69–71, 95; pressure 15–25, 46n1; regulation 54, 64 economic: law subjects 15, 20, 22; systems 24, 68, 76, 90, 106, 114, 117–118, 121, 123–126, 128n15, 136 effective adjustment 38, 58, 65, 71, 84, 92 European Union (EU) 1, 25, 36, 48n26, 143, 165n26 financial: pressure 7, 14, 16, 18–19, 22, 25–26, 46n6, 47n11, 48n23, 109, 119; regulation 3, 69, 133, 135–136, 141, 163n4, 163n8, 164n23 financial crisis 5–6, 14, 22, 25–33, 36–37, 48n23, 48n24, 48n29, 49n32, 70, 88, 109, 118, 131–140, 148, 150, 163n4, 163n7, 163n11, 164n17, 164n19, 164n21, 169; of 2008 1, 4, 11n3, 11n4, 25–26, 52n71, 57–58, 78n10, 79n14, 128, 131–132–133, 139–140, 143, 163n9, 164n23, 165n29; global 1, 25–26, 57–58, 78n10, 131, 133, 167 fiscal: crisis 1, 5–7, 25–36, 48n24, 48n27, 139, 169; expenditure 21, 23, 26–27, 31, 34–35, 45, 47n17, 62, 114–115, 141; power 21, 27, 32–34, 36, 119; pressure 8, 16–26, 48n23, 55; revenue 16, 18–23, 27–29, 31, 38, 41, 44, 46n5, 47n7, 47n8, 70, 86, 89, 96, 99, 107, 112–115, 112, 113, 119, 121, 126, 127n10, 128n10; risk 8, 22, 26–33, 35–37, 105, 139, 147–148, 150 German Anti-unfair Competition Law 3 Gini coefficient 1, 37–39, 39, 39, 41, 44, 52n65, 88, 103n13 Great Depression 3–6, 12n20, 53n78, 163n1, 164n23 Gross Domestic Product (GDP) 16, 18, 20, 25–26, 41, 46n5, 47n17, 96, 102n5, 112–115, 112, 113, 119, 127n10, 128n10, 138, 164n20, 166n53 Hayek, Friedrich 101n1, 160, 166n58 Hicks, John R. 18, 48n23, 109

187

imbalance: economic 1, 12n20, 15, 17, 46, 145–146, 149, 152, 168, 170; social 12n20, 15, 46, 149, 152, 159, 168; structure 65, 71, 83, 89, 93, 96, 99, 171; see also distribution Interstate Trade Law 3 Inverted U Hypothesis 28, 49n40; see also U curve jurisprudence 28, 85, 95, 118, 121, 123, 126, 130n30, 130n31, 131, 134, 144, 152–156, 160–162, 166n50, 171 Kuznets, Simon S. 28, 49n41, 80n26, 92, 103n24, 112, 127n9 Laffer, Arthur 47n20, 95; Curve 23, 47n20, 94 law: financial 19, 22–23, 45, 73, 75, 107, 118, 124, 133, 139, 147, 150; fiscal 19, 43–45, 56, 62, 70, 73, 75, 85, 90, 97, 99, 103n21, 132–133, 139, 147, 150, 166n58; tax 23, 31–33, 36, 42–44, 50n44, 50n51, 56, 62–63, 70, 73, 75, 81n50, 85, 96–99, 102n9, 103n22, 120, 123–124, 133, 139, 144, 147, 150 legal: adjustment 28, 71, 80n27, 83, 85–86, 89–91, 97, 123, 134; regulations 1–2, 4–8, 14–15, 25, 42, 64, 99, 143, 147, 153; systems 3, 7, 14–15, 18–19, 24, 36, 46, 59, 76, 83, 86, 89, 92, 95, 97, 101, 102n6, 110, 121, 123–125, 134–135, 137, 140, 147, 156, 163n5, 168 legislation: centralized 75, 77; current 30, 66; decentralized 75, 77; economic 3, 25, 115, 118, 122, 127n10, 129n23, 163n5; specific 27, 35, 73, 123, 144, 149 Lewis, W. A. 40, 80n26, 127n9 livelihood/living pressure 7, 14, 16–18, 20–25, 37, 55, 63 market: economy 6, 18–19, 26, 29, 41, 59–60, 76–77, 88, 90, 99, 109, 111–115, 117–118, 120–121, 123–125, 127n3, 127n10, 129n23, 130n29, 145, 157, 159, 163n5, 170; regulation 3, 21, 56, 74, 111, 115–118, 124–126, 128n11, 129n23, 133, 135–136, 139, 143, 145–146, 148, 157, 169 Morelly, Étienne-Gabriel 5, 12n14, 156 motivation 9, 15–16, 18, 24, 102n4, 106–109, 119, 125, 168 Musgrave, Richard A. 27, 115, 128n12

188

Index

national: coordination 54–60, 63, 78n3, 168; debt 3, 26, 66, 122, 143, 147, 150, 158; economy 6, 14–17, 22, 25, 57, 67, 76, 84, 129n23, 148, 158 National Development and Reform Commission 30, 79n15, 79n21, 79n24 National People’s Congress (NPC) 34, 47n7, 50n47, 79n19, 80n33, 122, 124, 127n6, 129n23, 129n24, 130n27, 165n31, 165n34 New Deal 5 North, Douglass C. 18, 32, 48n23, 50n52, 80n35, 109, 119, 128n19 “opening” 8–9, 19–20, 26, 37, 42, 48n22, 59, 71–72, 75, 81n50, 82n50, 84, 90, 106–111, 113–114, 116–120, 122–126, 130n27, 153, 168 Opinions on Deepening the Reform of the Income Distribution System 59–62, 79n15 positive encouragement 46, 66, 71–72, 136 promoting norms 8, 71–78 prosperity 15, 32, 36, 41, 60, 75, 84, 88, 161 public economy 6, 9, 16–17, 22, 24, 27, 29, 33, 37, 49n33, 89, 92, 140, 142–144, 146, 148 risk society 1, 151 Roosevelt, Franklin D. 5

rule of law 2–3, 5–9, 15, 19, 24, 26–27, 33, 35–37, 56, 64, 67, 70–71, 78, 83, 85, 101, 105–107, 117, 131, 134, 137, 145, 152, 162, 166n46, 167–171 Schumpeter, Joseph Alois 18, 48n23, 109 structural optimization 59, 62, 84, 93, 96, 100 system theory 55, 58, 63, 93, 95, 100, 139 tax burden 41, 44, 52n70, 52n75, 62, 95–97, 104n28, 104n34, 119–120, 122, 147, 150 taxpayers 21, 29, 31, 35, 63, 104n28, 104n32, 139, 141, 150–151 treasury bonds 26, 29–34, 49n33, 49n43, 50n46 U curve 86, 110–117, 119, 126; inverted 28–29, 86, 92, 103n24, 127n9 United States (US) 1, 11n4, 25, 36, 40, 52n71, 53n78, 102n5, 104n27, 127n3, 135, 137, 143, 163n6, 165n30; Congress 48n25, 104n27, 164n23, 165n26 US Sherman Antitrust Law 3 Wagner’s Law 35, 51n58, 113, 115, 128n12 wealth 1, 4–6, 11n1, 11n5, 11n9, 27, 37–38, 41–44, 51n61, 51n62, 52n71, 56, 74, 84–85, 87, 92, 94–95, 102n10, 102n12, 103n12, 111, 123, 157–158 workers 21, 42–43, 61–62, 88

Distributive Institutions

The crisis of distribution is one of the longest standing and most complicated issues facing human society. Imbued with social, political, historic, and cultural elements, it varies significantly across different countries as a result of all these factors. As an emerging economy which transferred from a planned to a market economy, China has experienced large distribution gaps since it implemented the Reform and Opening-up Policy in the early 1980s, requiring stronger economic law to mitigate and regulate the crisis of distribution. In this second volume, the author analyzes crises of distribution from a theoretical perspective and proposes law and policy solutions. Believing that such crises are a collective result of systematic limitations, the author proposes a theoretical framework of “system–distribution–development” in order to resolve distribution problems and promote economic development. He argues that a crisis of distribution cannot be avoided without coordinated development of economic law and relevant constitutional, civil, and commercial law systems. In addition, it is necessary to differentiate the territories, industries, enterprises, and individuals that constitute such diverse systems. The book should be of keen interest to researchers and students of law, economics, and political science. Shouwen Zhang is a professor at Peking University Law School. His research interests include economic law, social law, information law, and more.

China Perspectives

The China Perspectives series focuses on translating and publishing works by leading Chinese scholars, writing about both global topics and Chinarelated themes. It covers humanities and social sciences, education, media and psychology, as well as many interdisciplinary themes. This is the first time any of these books have been published in English for international readers. The series aims to put forward a Chinese perspective, give insights into cutting-edge academic thinking in China, and inspire researchers globally. To submit proposals, please contact the Taylor & Francis Publisher for China Publishing Programme, Lian Sun ([email protected]). Titles in law currently include: Building the Rule of Law in China Procedure, Discourse and Hermeneutic Community Weidong Ji Deciphering Intellectual Property Law and its Conflict/Reconciliation with Competition Law Kongzhong Liu The Crisis of Distribution (Set: The Crisis of Distribution and the Regulation of Economic Law) Theoretical Analysis from Economic Law Shouwen Zhang Distributive Institutions (Set: The Crisis of Distribution and the Regulation of Economic Law) The View of Economic Law Shouwen Zhang For more information, please visit https://www.routledge.com/China-Perspect ives/book-series/CPH

Distributive Institutions

The View of Economic Law

Shouwen Zhang

This book is published with financial support from the Chinese Fund for the Humanities and Social Sciences. First published in English 2021 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an Informa business © 2021 Shouwen Zhang Translated by Xu Yan and Zhang Dong The right of Shouwen Zhang to be identified as the author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. English version by permission of Peking University Press. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record has been requested for this book ISBN: 978-0-367-67670-4 (hbk) ISBN: 978-1-003-13229-5 (ebk) Typeset in Times New Roman by Deanta Global Publishing Services, Chennai, India

Contents

List of tables Preface

vi

vii

1 Introduction

1

2 The consistency of key distribution systems

6

3 Unification and difference of distribution systems

49

4 The legal protection of distribution rights and interests

100

5 Legal response to distribution crises

149

6 Conclusion

178

Bibliography Index

181

194

Tables

2.1 The shift of the taxation law system and taxation administration 2.2 The approach, area, and entity of tax reduction

38 40

Preface

Problems concerning distribution are global. Unbalanced distribution caused by large distribution gaps and unequal distribution has existed in varying degrees throughout different historical periods around the world. These problems have been highly intertwined with elements of society, economy, politics, law, history, and culture. They have close links to issues like economic crises such as the Great Depression in the 1930s and the global financial crisis in 2008, as well as social crises such as the Ebola outbreak and the COVID-19 pandemic. Distribution problems induce distribution risks which, when accumulated and concentrated, will trigger distribution crises. In essence, every economic crisis is a distribution crisis. Unbalanced distribution causes an unbalanced economy over­ all, disturbing the proper functioning of the economic and social system. Thus, distribution problems must be addressed on an ongoing basis, and distribution risks must be mitigated in a timely manner to prevent severe distribution crises. Distribution problems are not limited to economic and social problems, and they affect those of politics and law as well. Legal measures are required to effi­ ciently solve these problems. Within the framework of the rule of law, many kinds of values should be balanced: efficiency, fairness, freedom, and order. Related rights and obligations should be reasonably distributed across multiple legal sys­ tems. The efficient enforcement of laws protects the interests of relevant entities and achieves distributive justice. Although differences exist among legal systems in different countries, these systems share common ground in their basic values, which form the common denominator for international and domestic governance in solving distribution problems. Comprehensive adjustments to numerous legal systems, especially those regarding economic law, are needed to solve distribution problems and guard against distribution risks. Economic law is mainly a concept in countries with civil law. Even so, in the common law system, economic law exists in other forms, such as fiscal law, tax law, financial law, and antitrust law. Although the names of these legal systems vary, in practice they all address distribution problems. Thus, solving distribution problems and defusing distribution crises should be regarded through the theoretical and systematic lens of economic law. Distribution crises should be effectively controlled and addressed by strengthening the regulation of economic law.

viii Preface China, the largest developing country in the world, is a transitioning country (or an “emerging economy”) that shifted from a planned economy to a market econ­ omy. Thus, China has a special distribution system: its planned economy period stressed “equalitarianism”. Its early period of reform and opening up emphasized “prioritizing efficiency with due consideration to fairness”. Afterwards, concepts such as “harmonious society” and “scientific development” were proposed, which show an evolution of the understanding of distribution. Needless to say, during its rapid economic development, China, like many other countries, had relatively large differences in the distribution ratios of factors such as labour, capital, and technology, as well as problems such as large distribution gaps and unfair distri­ bution, which are caused by many factors. For this, a policy system and a legal framework had to be established to solve these distribution problems. Of particular necessity was a synergy among legal systems ranging from constitutional law to economic law. In fact, the theme of solving distribution problems has run through the whole process of China's reform and opening-up. Thus, studying distribution can help shed light on the course of China’s reform and opening-up and the devel­ opment of the rule of law. It can also help us gain a comprehensive understanding of the problems in China’s economy, society, rule of law, and development. The successful solution of its distribution problems will determine whether China achieves its modernization goals, which is vital for China’s future. Therefore, it is essential that we study distribution problems to figure out how to guard against and mitigate distribution risks and crises through strengthening reg­ ulations over economic law. To do this, we need to analyze distribution problems and crises from the perspective of theories on economic law, and we must address the improvement of distribution systems through the lens of economic law. These problems inspired me to write Distribution Crisis and Economic Law Regulation, which was published by Peking University Press in 2014. In 2017, the book was included in the “Translating Chinese Books Project” supported by the National Social Science Fund of China. At the same time, the book was translated into English and published at the invitation of Routledge. During the translation process, I added new ideas to the book based on new theories and practices, and the book is presented in two volumes: The Crisis of Distribution: Theoretical Analysis from Economic Law and Distributive Institutions: The View of Economic Law. I believe readers from different backgrounds will now find it easier to grasp the ideas in these books from both theoretical and systematic perspectives. I would like to take the opportunity to extend my most sincere gratitude to the following individuals and institutions (in chronological order): First, I would like to thank the National Social Science Fund of China for including the book in the “Excellent Works in the Social Science Series” and for supporting the publishing efforts of Peking University Press. Second, I would like to thank Mrs Wang Jing, the editor at Peking University Press, for her detailed and efficient work in pub­ lishing the Chinese edition and in translating it into English. Third, I would like to thank the National Social Science Fund of China for including the book in the “Translating Chinese Books Project” and for supporting its translation. Fourth,

Preface ix I would like to thank Routledge and its staff members for their invitation and all their hard work and commitment. Last but not least, I would like to especially thank Dr Xu Yan and Dr Zhang Dong, the translators of the book, both gradu­ ates of economic law from the Peking University Law School, now teaching at China University of Political Science and Law. They devoted considerable energy to the translation of the book and demonstrated a high level of professionalism and English proficiency, which guaranteed the quality of this translation. Finally, many thanks to all the diligent “unsung heroes” whose names are not listed here! Distribution is an extremely complicated topic. Since economic and law sys­ tems vary greatly from country to country, each country has its specific prob­ lems, which further causes variation in terms of solutions and public opinion. Nevertheless, distribution problems, which have long been a focal point in his­ tory, are still significant today, and this calls for investigation by and discussion among colleagues in relevant fields across the world. I am humbly open to criti­ cism and opinions about this book. Shouwen Zhang Peking University Law School

1

Introduction

1.1 Issue and theoretical framework Distribution is a real issue that has huge significance, given that each and every state is striving to deal with it. Distribution risks, and sometimes even distribution crises, may occur if states fail to solve distribution problems. In fact, all kinds of economic crises are, in essence, distribution crises. Therefore, for the purpose of preventing and solving distribution risks and overcoming distribution crises, distribution problems need to be resolved. The solving of distribution problems is a systematic project which requires comprehensive measures including policy and law. Among the various legal instruments, constitutional law, civil and commercial law, and economic law are of huge importance with regard to solving distribution problems. Economic law, as a typical “distribution law”, consists of the state’s macro-control laws (includ­ ing financial laws, taxation laws, monetary laws, and industry laws) and market regulatory laws (including antitrust laws, anti-unfair competition laws, and con­ sumer protection laws), which are all indispensable in preventing and solving distribution risks as well as dealing with distribution crises. Therefore, it is neces­ sary to analyze the distribution system from the perspective of economic law in the discussion of how various institutions aim to resolve distribution problems. This is vital to the adequate establishment of distribution institutions of a state. The reality that distribution systems are dispersed in economic law requires that attention be paid to the relationship among various types of distribution systems in the analysis of distribution systems from an economic law perspective. This is to enable mutual coordination among these systems and the systematic protection of various distribution rights and interests during the process of distribution prob­ lems. Based on that, distribution risks would be prevented and resolved, distribu­ tion crises would be effectively resolved, and the development of various agents would be enhanced through the resolution of distribution problems. The above thinking may constitute an important framework for theoretical analysis – a framework of “system–distribution–development” that is more help­ ful in analyzing the distribution system from the perspective of economic law. First, from the perspective of the system, both economic and legal systems are key components to the overall social system. Even though the distribution

2

Introduction

problem is often considered an economic and legal problem, it is a social and political problem as well. This means its resolution needs to be a systematic pro­ ject. However, an analysis of the various distribution systems that aim to resolve distribution problems solely from the legal angle also constitutes a system, given that the priorities, types, and essence of such systems are substantially different. Because constitutional law, economic law, and civil and commercial law are all involved with distribution systems, it is crucial for there to be mutual coordination and mutual completion among these systems. As a system, the entire distribu­ tion institution can function well only when consistency and unity are achieved. Therefore, the consistent and coordinated development of constitutional law and economic law, as well as the internal distribution system within the two kinds of laws, are valuable topics that deserve our attention. Second, from a distribution perspective, it is important to underscore that of among the various sorts of distribution institutions, the distribution institution in economic law remains the most vital. Therefore, understanding the whole distribution system from the perspective of economic law becomes necessary. Meanwhile, due to the differences among distribution institutions within eco­ nomic law, the unity and difference of distribution institutions shall be addressed. In addition, from the perspective of economic law, the core issue of the distri­ bution institution is to provide legal protection of distribution rights. Distribution crises may occur if the distribution problem is not adequately resolved and distri­ bution rights are not effectively protected. Finally, from the perspective of development, the systematic resolution of dis­ tribution problems and comprehensive adjustments to the distribution system are both for the purpose of enhancing development.

1.2 Logical framework and basic contents The aforementioned theoretical framework based on “system–distribution–devel­ opment” could form the logical framework for this book. First, it views the distri­ bution system, among various legal systems, as one thing in the system of legal institutions that examines the relations between the systems of distribution in eco­ nomic law and other legal areas as well as the relations among various distribu­ tion systems in economic law. Second, based on such “relations”, it emphasizes the key factors that influence distribution systems in economic law in order to understand relevant elements that affect distribution systems in economic law. This makes it possible to comprehend the balance between the unity and diversity of these distribution systems, as well as the embedded legal values. Third, on the foundation of focusing on the realistic differences among agents and distribu­ tion systems, it further analyzes the protection of the distribution rights of differ­ ent objects implicated in the different distribution systems, thereby revealing the defects in formulating and implementing laws and regulations and approaches to resolving such defects. At last, it discusses the main functions of different distri­ bution systems in dealing with distribution issues and overcoming distribution crises. Such an analysis illustrates how distribution systems may facilitate the

Introduction 3 development process which remains crucial to the existence of the distribution systems. This outline is formed on the basis of the theoretical framework of “system– distribution–development”, from which a clue of “internal/external relation-dis­ tribution difference-distribution rights-crisis response” could be extracted. This is because from systematic analyses to the distribution system, the main focuses are the external and internal relations of distribution institutions in the area of economic law. The aim is to identify agent differences in terms of the reality and resolution of relevant and diversified distribution problems by balancing the unity and differences of distribution institutions as well as reflected legal values. Meanwhile, the divergence in distribution is the prerequisite and foundation for the legal protection of the distribution rights of relevant agents. Only through the protection of the distribution rights of relevant agents can distribution problems be settled and distribution risks be prevented and solved. This means distribu­ tion crises could be effectively resolved while various agents comprehensively develop. Based on such an outline, the contents of this book are made up of the follow­ ing sections: ·· A comprehensive and synthetic application of various distribution systems with a view to reaching a systematic solution to distribution problems through which the unity, compatibility, and relevant differences shall be addressed for the purpose of better enhancing the development of the economy and society. ·· An analysis of complicated distribution institutions where a multi-dimen­ sional approach from the perspective of economic law is required. This includes an analysis from different disciplines and types of laws, including economic law and constitutional law, as well as an analysis of relevant distri­ bution institutions within economic law. Therefore, from the systematic dimension of legal systems, the coordination of economic law and other legal institutions is important, especially the coordina­ tion of constitutional law and civil/commercial law through which the function to comprehensively adjust the distribution relations of different laws could be better exercised. Meanwhile, from the perspective of economic law, the unity and difference of norms of economic law should be addressed thereby realizing distribution justice, guaranteeing genuine fairness and resolving overall distribu­ tion problems. Besides, the construction of economic law institutions shall ensure the protection of distribution rights of relevant agents. This is an essential institu­ tional protection with regard to the resolution of distribution problems. Besides, if economic law and other laws are not adequately regulated and they cannot resolve distribution problems, then distribution crises may emerge. Regulating economic law may be useful in dealing with distribution crises but it is important to underscore the fact that regulations should be carefully applied given that multiple factors contribute to the occurrence and development of dis­ tribution crises. In particular, the legality of the regulations should be addressed.

4

Introduction

Even in the time of crisis, such regulations shall comply with the rule of law in economic areas.

1.3 The structure and main points of this book Based on the outline and the aims of the research, the basic structure of this book, aside from the introduction and conclusion, is the perspective of economic law which explores the distribution system, and in four chapters, attempts to resolve distribution problems. The first chapter proposes the issue of coordinated development between eco­ nomic law systems that aims to resolve distribution problems and constitutional, civil, commercial law systems that are related to distribution. The second chapter discusses the unity and differences between distribution systems that are within the territory of economic law, and it emphasizes that such systems should comply with relevant principles that govern the rule of law. The third chapter specifically ana­ lyzes the protection of distribution rights by distribution institutions in economic law and emphasizes that the continuous completion of the relevant distribution system is indispensable in solving multiple distribution problems. These chapters attempt to reveal existing, realistic issues concerning distribution and strive to complete the distribution system in economic law. The fourth chapter analyzes the existing problems of relevant distribution systems in dealing with distribution crises, revealing the importance and limitation of distribution systems in economic law when faced with a crisis and emphasizing the legality of distribution regulation. Through the exploration of these chapters, this book presents the following views. First, despite the importance of the distribution system in economic law, the resolution of distribution problems should take into consideration the impor­ tance of the distribution system in constitutional law and civil/commercial law. Therefore, in establishing and completing various distribution systems, attention should be paid not only to the consistency and coordinated development of eco­ nomic law and constitutional law but also to the coordination of economic law and civil/commercial law regulations. At the same time, the internal coordina­ tion of various distribution systems is worth noting for only through this can the functions of different distribution systems be effectively exercised, distribution problems better solved, and distribution risks and crises adequately prevented and resolved. In addition, when focusing on the coordination and unity of the distribution institutions, we should also admit that it is relevant to emphasize the unity of distribution institutions, given the unity of laws and regulations. However, there are differences among various agents that make it necessary to differentiate dis­ tribution institutions in various ways. Such differences may exist among different territories, industries, enterprises, and individuals at the same time. In reality, the trial legislation, the internal differences within one law (i.e. the Corporate Income Tax Law), along with the differences in the implementation of one system (i.e. the accumulative tax-paying system) tend to trigger a conflict between unity and

Introduction 5 difference and further affect the distribution of interests among relevant agents. Therefore, the issue of conflict should be correctly recognized and effectively dealt with. Also, it is necessary to resort to the distribution system embedded in various legal systems, including in economic law, to prevent different kinds of distribu­ tion problems, especially distribution risks resulting from distribution pressure, distribution divergence, and unfairness. Hence, the protection of the distribution rights of relevant agents, especially the distribution rights to economic develop­ ment, and distribution rights reflected in specific systems (i.e. the deduction rights in the value-added tax system and the right to income in the income tax system) should be strengthened with the knowledge that this is the only way to better pre­ vent and solve distribution crises. Lastly, if the distribution problems are not properly resolved, the emergence of distribution crises will become the reality. To deal with distribution crises, there is a need to take note of the indispensable function of the distribution sys­ tem within economic law (especially specific financial/taxation law) in resolving crises. At the same time, emphasis should be placed on the limitation and legality of relevant macro-control measures on distribution. Furthermore, the completion of the distribution theory and system should be enhanced during the process of dealing with crises. Another book of mine, The Crisis of Distribution: Theoretical Analysis from Economic Law is a sister treatise to this book. It focuses on the analysis of dis­ tribution problems, distribution risks, and relevant distribution crises from the perspective of economic law theory. The book, however, analyzes the solution to distribution problems and the distribution system aimed at solving distribution crises from the perspective of economic law. Reading these two books together may enable readers to better understand distribution problems and economic law solutions to distribution crisis in a systematic way. Also, it could help readers to better comprehend the theory and system of economic law from the perspective of distribution.

2

The consistency of key distribution systems

The strengthening of economic law regulation is necessary both to resolve distri­ bution problems and to prevent and resolve distribution crises. During the process of economic law regulation, the relationship between the distribution systems within economic law and other laws inevitably poses challenges. It is only by maintaining consistency in the various systems that disputes can be avoided and adjustments among the various distribution systems can be achieved. Among var­ ious distribution systems, constitutional law and economic law are the most domi­ nant. As a law to divide power, constitutional law is relevant to the distribution of important rights and powers as well as to specific distribution systems. While eco­ nomic law is the typical “distributional law” directly relevant to the distribution of income, wealth, and interests. The consistency of constitutional law and economic law, which are key sources of the distribution system, directly affects the protec­ tion of rights of relevant distribution agents and also the actual performance of the whole distribution system. For this purpose, this chapter emphasizes the consist­ ency and coordination of these two laws and further illustrates the importance of the consistency of key distribution systems based on different hierarchies and types. Besides, civil and commercial law are indispensable to the confining of property rights of relevant agents and are instrumental to the distribution system. Studying the coordination of economic law and civil and commercial law also contributes to resolving distribution problems and preventing distribution crises. For this purpose, this chapter will, taking taxation law among economic laws as an instance, explore how taxation and private law orders are coordinated and also study how different distribution systems are regulated in a coordinated manner. In addition, the coordination of different internal components is also extremely important, even for the same types of distribution systems. Therefore, this chapter discusses the coordination of internal systems, taking taxation law, which is very important for distribution, as an example.

2.1 The consistency of distribution systems in the legal system In the entire legal system, the hierarchy or legal effect of various distribution sys­ tems is different. For such systems, the internal consistency or coherence must be guaranteed so that a fair distribution is assured and distribution justice is achieved,

Consistency of key distribution systems 7 and distribution risks and crises are prevented and resolved. In different distribu­ tion systems of the hierarchical structure, the systems in constitutional law and economic law are most typical. The following section will illustrate the issue of consistency in distribution systems based on different hierarchical positions. 2.1.1 The internal consistency of the system from the economic nature of distribution The development of the market economy has benefited from the optimization of the economic system which has, in turn, been affected by the institutional arrange­ ment of constitutional law and economic law concerning power distribution. The consistency of the relationship between constitutional law and economic law profoundly affects the effective implementation and protection of institutional economic reform, the rational management for distribution relations, the solving of distribution problems, and the further promotion of economic development. Therefore, the relationship between constitutional law and economic law is not only a vital theoretical issue but also a key realistic issue that deserves our special attention. Researchers have often developed an important approach based on hierarchy and nature in their analysis to establish the connection and differences between constitutional law. This book follows the same approach to transfer the perspec­ tive and analyze the relationship of constitutional law and economic law from the “economic” latitude of distribution and to discuss the issue of consistency among distribution systems that belong to different hierarchies. In fact, though scholars have explored the economic nature of constitutional law and economic law, insuf­ ficient research has been undertaken to establish the internal links between the economic nature of these two laws as well as the connection and consistency of the economic nature of distribution systems in the domains of constitutional law and economic law. Thus, it is necessary to search for the similarities of distribu­ tion systems of constitutional law and economic law in the aspect of economic nature to deepen the study of the relationship between constitutional law and eco­ nomic law, and to exercise the joint power of adjustment in distribution area of constitutional law and economic law with a view to better solving distribution problems, preventing crises, and facilitating economic and social development and the rule of law. From existing research, we could see that by focusing on the “economic dimension of constitutional law” and “economic constitutional law”, the aca­ demia is increasingly associating “economic analysis to the constitutional law” while enhancing research in “economic constitutional norms” (Pingxue Zhou 1995).1 In addition, there has been the extension of such research to areas includ­ ing “constitutional law economics” (or constitutionalist economics) (Brennan and Buchanan 2004)2 and “economic constitutional law” (Yue Wu 2007)3 in states with different legal systems. The results generated from the above areas may con­ tribute to the discussion on the “economic dimension” of the distribution system in constitutional law, as well as the constitutional law issues of economic law with

8 Consistency of key distribution systems regard to distribution. The results can further promote the interaction and fusion of constitutional law and economic law and the construction of specific distribu­ tion systems. However, neither “constitutional economics” nor “economic constitutional law” could sufficiently reveal the internal relations between economic and social development of constitutional law and economic law concerning distribution sys­ tems, nor could they reveal the function to promote such developments, regard­ less of the perspectives they take (economic or legal). It is due to the fact that the objective or area is still concentrated on constitutional law.4 Therefore, it is neces­ sary to find the intersection of constitutional law and economic law and choose an appropriate entry point to initiate the analysis. The interrelation between economic law and constitutional law is reflected in various aspects, especially how they both originate and develop in distribu­ tion systems. This relationship is worthy of our attention and has been examined accordingly. If we take the link or basis of this interaction and integration as the perspective and breakthrough point, it is undoubtedly helpful to study the rela­ tionship among various distribution systems of constitutional law and economic law, as well as distribution systems within these two laws. An important intersection point between the distribution systems of consti­ tutional and economic law is that they are both economic. That is, the economy is the bond that exists between them, enables them to coexist, and serves as the foundation for them to interact. Also, both are directly linked to the adjustment to distribution relations. To analyze through an “economic” analysis of the relation­ ship between constitutional law and economic law would not only help us to com­ prehend the characteristics of modern constitutional laws and basic features of economic laws but also assist us to understand the reason for which constitutional law amendment by modern states is concentrated in the economic area, especially the economic distribution area. Meanwhile, such an analysis from the economic perspective would facilitate the discovery of institutional deficits of constitutional law and economic law systems, including deficits existing in distribution systems, thereby enabling us to better coordinate the relationship between these two laws and to achieve adjustment goals. Besides, the fact that the economic dimension has a profound influence on the source and development of both constitutional law and economic law plays a vital role in linking these two laws. Understanding both laws from an economic stand­ point would foster research in the theories underlying the origin and transforma­ tion of constitutional law and economic law; make it possible to better understand the importance of distribution issues and distribution systems; and explore the specific approach to complete the coordination and interaction system of con­ stitutional law and economic law to facilitate the consistency of the distribution system. Based on the above factors, the following parts attempt to illustrate that the dis­ tribution system of constitutional law and economic law has an economic dimen­ sion and that the economic dimensions of both constitutional law and economic law are internally consistent. The economic dimension is the common basis for

Consistency of key distribution systems 9 the existence of the close link and the effective interaction between constitutional law and economic law. It is solely through the facilitation of institutional interac­ tion and mutual consistency between constitutional law and economic law that the benign interaction between constitutional law and economic law be constructed, including the coordination in distribution systems within these two laws. It would be hugely beneficial to the effective resolution of distribution issues and to the development of the economy, society, and rule of law. 2.1.2 The economic dimension shared by constitutional law and economic law The discussion on the relationship between constitutional law and economic law is not rare in academia. From the perspective of economic analysis, the close link between constitutional law and economic law has resulted from the fact that both have far-reaching economic attributes. The economic dimension shared by these two laws is the bond and foundation for their connection and also reflects their similarities. Because of the economic dimension, distribution systems contained in constitutional law and economic law could affect each other and co-exist. In economic law research, most scholars agree that economic law has an important economic dimension and that constitutional law also has an economic dimension. However, currently, there is a lack of consensus as to the existence of “economic constitution”. Public choice schools, represented by US scholars such as Buchanan and Tullock, have already conducted in-depth research regard­ ing the economic dimension of constitutional law and they tend to explore the economic functions of constitutional law, the impact of constitutional law on the change of economy, the impact of the economy on constitutional law, etc. from the perspective of economics and they also promote economic studies such as “constitutional economics”, “economics of constitutionalism”, or “constitutional governmental economics” through economic analysis of constitutional law.5 Besides, the Freiburg School, represented by German scholars including Euchen and Böhm, has paid attention to “economic constitutional law” or “constitutional law with economic dimension”, through which they focus on constitutional norms related to the economic domain. In particular, they emphasize studying the state limitation to economic freedom and to the states’ power of intervention from a legal perspective, thereby carving the research area of “economic constitutional law” and promoting research in constitutional law as well as related economic law.6 The above research is based on the premise that the constitutional law is economic or there exists an “economic constitutional law”, regardless of differ­ ences in emphasis, on economics or law, or of their focus on ideal or regulation. Hence, the economic dimension of constitutional law has become a subject of extensive research. The attention of Chinese constitutional law research to the “political dimension”, “legal dimension”, or “normative dimension” seems to be excessive while, comparatively, there is less of a focus on the economic dimen­ sion. However, since the law is responsive, there will always be changes in the content of constitutional law that corresponds to different eras. Especially in

10

Consistency of key distribution systems

modern society, based on the demand of economic development, numerous eco­ nomic legislations and norms related to the economic system will be merged into constitutional law thereby increasing the relevance of the economic dimension of constitutional law. Therefore, considering the response to the demands of this era, and also the reflection of the economic function of the state with regard to constitutional law, the economic dimension of modern constitutional law continues to expand in a way that influences the formation of the economic law system and also makes the economic dimension of economic law more imposing. In fact, the economic dimensions of constitutional law and economic law are closely interrelated and share many common features. Specifically, their similarities are reflected in the following aspects. First, no matter the definition of constitutional law with regard to property rights, division of state power and civil rights, specifications by economic law to relevant stipulations of the constitutional law, and specific regulations to the “right-obligation structure” of various economic law agents, the overall aim is to settle disputes through fair and effective distribution thereby attempting to lower the cost of operating the economy, reducing conflicts, increasing efficiency, and finally, promoting the overall economic outcome. It can, therefore, be concluded that both constitutional law and economic law should protect and promote a more “economical” development of the national economy through effective right-obli­ gation configuration and make relevant distribution fairer and more reasonable. Second, in order to achieve these goals, constitutional law and economic law should both reflect the “laws of the economy”. For example, the stipulations con­ cerning the economic system and the influence of specific institutions of economic law to constitutional law are directly related to the legislators’ understanding and comprehension of the laws of the economy. In fact, the choice of economic institutions by a state is not only a political decision7. It is also affected by the understanding of laws of the economy and of the effective distribution system. Therefore, Article 15, Clause 1 of the Constitution of the People’s Republic of China (PRC) stipulates that “the State practices socialist market economy” – an economic system that reflects their understanding of economic law. Meanwhile, announcing the implementation of a market economic system means to explicitly admit the function of market institutions in resource allocation and in the basic distribution system. Also, in order to ensure the effective application of market institutions, and to promote fair distribution, the state must exercise macro-regu­ lation and control, and undertake market regulation in key areas where economic law plays a vital role. Article 15 Clause 2 of the Constitution of PRC stipulates that “the State strengthens economic legislation and improves macro-regulation and control”. This article and clause embody the “laws of economy” under market economy circumstances. China, as a huge country that has developed rapidly, requires the continuous completion and strengthening of macro-regulation and control. At the same time, the market economy requires fair competition and regulation against monopoly and unjust competition while maintaining a healthy market order.

Consistency of key distribution systems 11 Therefore, Article 15 Clause 3 of the Constitution of PRC stipulates that “the State prohibits in accordance with [the] law any organization or individual from disturbing the social and economic order”. Besides the “inter-state trade articles” of the US Constitution,8 the stipulation of the Russian Constitution concerning monopoly and unjust competition9 also reflects their understanding of economic law with regard to market regulation. The macro-regulation and control, as well as market regulation systems of various states mentioned above, contain significant distribution systems which have made economic systems an essential system in resolving distribution crises. Third, the above macro-regulation and control and market regulation require the effective division of power, a primary task of constitutional law. Neither the power of macro-regulation and control nor market regulation is different from tra­ ditional “political” power that has its own characteristics and is sometimes known as “the fourth type of power” (Yunliang Chen 2007).10 Because of the fact that they are important powers with an influence on the basic rights of citizens, the “distribution” at the constitutional level has to be done appropriately. For this purpose, the constitutional laws of many states try to make explicit stipulations on public finance, taxation, finance, industry adjustment powers that are related to macro-regulation and control, anti-monopoly, and anti-unfair competition powers that are related to market regulation. Such efforts generate constitutional norms with regard to economic institutions and constitute the basis for “institutional law” attributes of economic law. This is a vital internal relationship between con­ stitutional law and economic law. At last, the economic dimension of constitutional law and economic law is reflected not only through stipulations on basic power of macro-regulation and control and market regulation but also through the legalization of such “economic policies”. It should be understood that both macro-regulation and control and market control require legal measures to regulate and control, therefore the legali­ zation of regulatory measures including budget, taxation, national bond, currency, and monopoly constitute part of an expanding economic law system. Meanwhile, the purpose of exercising such legal economic measures is to protect the smooth functioning of the market order and the distribution order and to realize the over­ all benefit of the macro-economy. All these factors make the “economic dimen­ sion” of economic law more outstanding and further promote the development of constitutional law economic norms. In conclusion, as an economic law, constitutional law should respond to the economic demands of the time and with an obvious economic dimension vis­ ible via the following aspects: both of them should reflect the economic func­ tion as well as economic activities of the state. In addition, both should follow the laws of the economy and should define the economic power of the state as macro-regulation and control and market regulation. Furthermore, both eco­ nomic law and constitutional law should reflect the legalized economic measures to effectively solve distribution problems and facilitate the healthy functioning of the economy as a way of achieving overall economic benefit. Such similari­ ties shared by constitutional law and economic law constitute the foundation for

12

Consistency of key distribution systems

their interrelation and the bond that connects distribution systems that are part of the two laws. Based on the requirements of the economic dimension of constitutional law, the constitutional laws of different countries should help in the development of economies and systems while institutions which are laid out in the constitution and which fail to facilitate or even hinder development should be changed. Improving constitutional law economic norms is undoubtedly an important direction for the achievement of Pareto improvement. 2.1.3   The mutual influence of constitutional law and economic  law from the perspective of the economic dimension The relationship between constitutional law and economic law is reflected by the increasing importance of the economic dimension, and also by the fact that they mutually affect each other based on the economic dimension. For this pur­ pose, the following part will respectively discuss the important influence of constitutional law on economic law and the implementation/promoting effect of economic law on constitutional law from the perspective of the economic dimension. 2.1.3.1   The important influence of constitutional law on economic law The constitutional law economic norms of various states, or the economic norms of the constitutional law, mainly contain the structure for the division of power in the economic area of constitution law. This is especially true for stipulations regarding basic economic systems with regard to economic institutions, to the property right system, and distribution system, as well as to stipulations concern­ ing economic functions. The above norms viewed as typical “economic constitu­ tion” or “economic dimension of the constitution” have direct and vital effects on the economic law, which are discussed below. First, from the structure of the division of power in the economic domain, constitutional law, as the “general bylaw” of a state, implies the political and eco­ nomic existence of a state. From an economic perspective, the operation of any organization requires financial support. The state is obliged to exercise an increas­ ing number of functions which require a more robust financial basis. Therefore, constitutional law has to make huge amounts of stipulations concerning the economy to clearly divide the public economy and private economy, and identify the property rights and economic rights of different agents which all constitute “distribution issues” on the constitutional level. Therefore, at the constitutional level, the “binary structure of the property rights” for “state’s financial power” and “citizens’ property rights” will be formed. This is the basic structure for the division of economic power between state and citizens at the constitutional level. It is also the foundation for the extension of various systems of the economic law thereby constituting a tremendous influence on the formation of economic law systems (Yushi Gui 2005).11

Consistency of key distribution systems 13 Besides, with regard to the state-citizen property rights structure, the consti­ tutional law of one state has to directly stipulate or indirectly reflect its basic economic system. Irrespective of the differences from one state to another of the legislation style of such stipulations, the underlying inclusions are the general basic ownership system, the distribution system, and the economic institutions implicated. For example, in terms of the ownership system, constitutional law stipulates whether public or private ownership is applied. With regard to the vital land system, the constitution stipulates what land ownership system, i.e. public or private,12 is implemented by the state. As for the economic system, there will be stipulations as to whether the state applies a market economy or a planned economy. In terms of the specific distribution system, there will also be stipula­ tions as to whether the state applies a system of distribution based on labour or based on other factors. For the property protection rights, there are stipulations on how the state protects such rights, both private and public. The Constitution of PRC has comparatively explicit stipulations concerning all the above aspects. The stipulations concerning economic systems and the protection of economic freedom rights of market agents constitute the core content of “economic constitu­ tion”. Furthermore, the constitution stipulates that the formation and development of the economic law system have been built around the abovementioned systems, especially the protection of the distribution rights of market agents. In addition, the “economic function and power” of national institutions should also be formulated in constitutional norms. The function and power include fiscal power, budgetary power, taxation power, bond and currency-issuing power, and antimonopoly power, all of which fall within the realm of distribution. It is essen­ tial to identify the distribution of economic function and power that some states define as the distribution of income among different levels of government.13 For this reason, constitutional law makes stipulations not only from apolitical view but also from an economic or distributional aspect. To put it differently, consti­ tutional law is not only a political/legal scripture but also an economic scripture. For instance, the “no taxation without representation” spirit of the Magna Carta of the UK emphasizes the division of taxation power between parliament and the government. In essence, this refers to the allocation of function and power based on economic considerations given that they directly affect the distribution of interests of relevant agents. Constitutional law is the result of political conflict or competition among many parties and is also “the concentrated reflection of the economy”, directly linked to the economic interest of various agents. The famous scholar Beard especially emphasized that “the Constitution is basically an eco­ nomic scripture”14 based on the fact that the US Constitution allocates interests among different groups out of economic consideration. The economic functions and power, including fiscal power stipulated by the above constitutional laws, require special economic law stipulations. It can be concluded that the stipulations or distributions of the above economic functions and power by constitutional law have laid the foundation for the establishment of the economic law system. At last, the agent structure and relevant right structure established by consti­ tutional law have a significant influence on economic law. Based on the “agent

14

Consistency of key distribution systems

binary structure” between state and citizen, the core content of constitutional law consists of stipulations regarding the state governance structure and the civil right structure. From the division of power perspective, the right to distribute power and the structure between state and citizens, on the one hand, forms the basic rights of nationals or citizens as contained in the so-called civil right bills (or “right con­ stitution”). On the other hand, state power needs to be distributed among national institutions, both horizontally and longitudinally, because they are both crucial to state governance. Such contents form the constitutional stipulations that define the relevant function and power of national institutions (which contain relevant contents of “economic constitution”). The above agent structure and relevant rights structure set in constitutional law directly affect the theory and system establishment of economic law and could contribute to the understanding of the “binary structures” in economic theories including state intervention and economic freedom, state regulation, and market reaction. In addition, it provides an important analytical framework for us to study various issues of economic law. In general, if we view the influence of constitutional law on economic law from the economic dimension perspective, it is not difficult to see that the division and definition provided for in constitutional law regarding the state’s fiscal power and citizens’ property rights set up the necessary framework for “economic prop­ erty right” based on which one state needs the fiscal system and taxation system to influence the public and private economy (which constitute important foundations for many distributive activities), the financial system to support the effective func­ tioning of the economy, the bond system, the industry policies and the industry organization system to play increasingly useful roles, and all these above systems to solve the complicated distribution problems. The above framework is the con­ stitutional basis for fiscal, taxation, financial, industry, and competition systems, and it is also the basis for the entire economic law given that all systems outlined above are indispensable for the formation of an economic law system. Besides, the economic system established by constitutional law directly affects the choice of a state between public and private ownership, state-operated and private-operated systems, and state-owned and publicly owned land property sys­ tems. These choices are very basic and impose important restrictions and they directly affect the distribution of interests of relevant agents as well as an effect on the goals that economic law adjustments seek to achieve, i.e. the steady growth of the economy. Meanwhile, the economic and distributive systems set up via constitutional law are also vital to the systemic establishment of economic law. Without the market economy system stipulated in constitutional law, state macroregulation and control and market regulation would be unnecessary. Therefore, the income distribution of relevant agents would be affected. In fact, the incident that the “market economy” was written into the Constitution of PRC in 1993 has strongly promoted the overall development of economic law and has also facili­ tated the development of distribution systems in different areas. In addition, when discussing the influence of constitutional law in economic law, it is necessary to distinguish economic norms in constitutional law from

Consistency of key distribution systems 15 norms in economic law that are relevant to the constitutional law. This would reveal the connection and differences between constitutional law and economic law, and also illustrate that economic constitution research cannot substitute eco­ nomic law norms research. In particular, the independent existence of economic law should not be denied through the simple division of economic law norms to economic constitution law and economic administrative law.15 2.1.3.2   Economic law fulfils and promotes constitutional law The interaction between constitutional law and economic law is reflected by the profound influence on economic law by constitutional law, and also by the fact that the implementation and fulfilment of constitutional law need economic law which, in turn, promotes the development of constitutional law. The implementation of constitutional law in all states relies on ordinary laws. The economic norms in constitutional law, including norms concerning distri­ bution, need economic law for their implementation. Therefore, the rule of law construction in economic law directly affects the fulfilment of constitutional law. Without realistic implementation by economic law, economic constitutional law, including constitutional norms relating to distribution, would be hollow words that have no impact. Economic law and constitutional law would benefit each other in a mutual influential process. When implementing constitutional law, economic law may also propel the development of the constitutional law given that both of them are vital components for the whole legal system. A comparison with constitutional law leads to the conclusion that economic law and economic life are directly and closely related. Certain requirements brought out by the development of the econ­ omy and society, including the resolution of distribution problems and the preven­ tion of distribution crises, may initially be reflected in economic law. In addition, relevant economic law systems may be further formed, and such influence may further be transferred, directly or indirectly, to constitutional law thereby facilitat­ ing the development, by economic law, of constitutional law. The promotion of constitutional law by economic law is not just a contempo­ rary phenomenon. In fact, it was clearly visible in the era when economic law did not constitute a system yet. For instance, the emergence of taxation law norms was comparatively earlier and as an important distribution system, it was directly con­ nected to the protection of the basic property rights of citizens. The link between constitutional law and constitutional government is very close, therefore the pro­ motion of constitutional law is significant. The Magna Carta and the ensuing con­ stitutionalism and legislation were all connected to budget and taxation, areas where economic law should make specific stipulations. It is the realistic need to solve distribution issues, such as the distribution of the power of the budget and taxation, which continuously propels the diversification and development of constitutional law in different states. Also, during the reform and opening-up of China, the occurrence and maturity of the exploration and system transforma­ tion preceded specific stipulations on constitutional law. Some amendments to

16 Consistency of key distribution systems the Constitution obviously reflect the systematic transformation of economic law, especially the influence of the distribution system on the transformation of con­ stitutional law. With the further development of economic law, voices demand­ ing that vital legal principles such as “taxation according to the rule of law” and “currency according to the rule of law” shall be written into the constitution. If such principles would finally be included in constitutional law, it would become another instance proving that economic law propels the development of constitu­ tional law. In general, based on the economic dimension they share and on the common focus on distribution issues, the constitutional law and economic law mutually affect each other: on one hand, constitutional law, based on its fundamental status, could lay tremendous influence on economic law; while on the other hand, as the state economic function as well as the actual requirements of economic law rise in importance, especially pertaining to the need to resolve distribution problems and prevent distribution crisis, the principles and systems concerning distribution in economic law continue to be written into constitutional law thereby vigorously promoting the development of constitutional law. It is solely through a benign interaction and co-existence that the economy, society, and rule of law can be better facilitated. And the “consistency” issue of these two types of law must be solved first in order to achieve the benign interaction between constitutional law and economic law. 2.1.4 Exploring the “consistency” of constitutional law and economic law Based on the common economic dimension and a common focus on the issue of distribution, as well as the mutual influence resulting from the above two points, constitutional law and economic law should have an internal “consistency” with each other. First, from the common economic dimension, constitutional law and economic law are consistent in the following aspects: both of them guarantee the benign operation and the coordinated development of the economy; both comply to the laws of economy, mutually facilitate the resolution of distribution issues, and prevent distribution crises; and both promote the “economical” level of eco­ nomic operation. Meanwhile, they are consistent in that both of them empha­ size the legality and constitutionality of macro-regulation and control as well as market regulations. Second, based on their mutual influence and given that constitutional law has a direct and important influence on economic law, and that economic law tends to conform to constitutional law, it goes without saying that in terms of constitutionality, economic law should be consistent with consti­ tutional law. Also, the promotion of constitutional law by economic law while implementing constitutional law would achieve consistency by making consti­ tutional law more in line with actual needs and by making it more responsive to distribution problems. As outlined before, the economic norms (including norms concerning distribu­ tion) laid out in constitutional law are important reasons for economic law legisla­ tion and are vital for economic law system construction and theoretical research.

Consistency of key distribution systems 17 Meanwhile, because of the fact that “economic norms” in the constitutional law have a fundamental value for economic law, economic law should be consist­ ent with constitutional law. According to normal legal theories, stipulations in constitutional law, the fundamental and basic law, have “fundamental” mean­ ings, while economic law has to make the “fundamental norms” of constitutional law practice through a specific system arrangement during the implementation of constitutional law. Hence, the potential guarantee of the effective execution of constitutional norms. Emphasizing the consistency between constitutional law and economic law is extremely important with regard to enhancing their interaction and their continu­ ous development. Since the economic norms of constitutional law demand the actual implementation of economic law, while many basic systems of economic law need a constitutional basis, they may, therefore, target the same issue, stipu­ late relative principles, and more specific clauses respectively. For instance, in terms of protecting fair distribution, many states not only make stipulations about principles of constitutional law but also layout specific stipulations with regard to specific economic laws. Such speculations are highly consistent and concern areas including currency issuing, budget, taxation, and bond issuing. Though the political system, economic system, and historical tradition differ among states in countries like the US, Germany, and Russia, the various constitutions of these countries make such stipulations and specify such norms in specific economic law16 in a way that reflects the consistency of constitutional law and economic law. Of course, the status of constitutional law, as well as its influence in eco­ nomic law, are also factors that contribute to the abovementioned fact. Apart from emphasizing consistency between the constitutional law and eco­ nomic law based on norms, there is a need to solve the existing “inconsistency” issue. In practice, the inconsistency between constitutional law and economic law would bring enormous problems demanding quick “dynamic coordination” to constitutional law and economic law to keep their “dynamic consistency”. Looking back at history, we can see that since the economic law of China is closely linked to the reality of reform and opening-up and could quickly reflect the results of system reform. In contrast, we can see that constitutional law amend­ ment has been comparatively left behind. Therefore, during the reform process of the economic system, the phenomenon that constitutional law is inconsistent with economic law has emerged with the result that some types of specific economic legislation do not comply with the stipulations of constitutional law. For instance, some economic legislation reflecting the market-oriented reform spirit is contrary to the planned economy system prescribed in the constitution and this phenom­ enon has caused scholars to discuss and debate the issue of the “benign violation to the Constitution”.17 It is from the sole requirement of the rule of law through emphasis on the consistency between constitutional law and economic law, and through scientific design and quick improvement, that the issue of violation to constitutional law can be better prevented. China is still in the process of continuously deepening its reform and open­ ing-up. During this period, some vital institutions have not been completely

18

Consistency of key distribution systems

established. This directly affects the formation of relevant laws concerning such institutions. Currently, stipulations on “institutional law” are still weak and the stipulations on the duties and powers of many government agencies are lacking. Therefore, the authority has applied a “flexible” method (for example, the “Three Determination Program” and decisions made by the Standing Committee of the National People’s Congress) to determine them. Besides, some vital economic system reforms are undertaken by the State Council, for instance, the fiscal man­ agement system that deals with the tax division system, tax sharing, financial, and investment systems. These are important systems that are connected to distribu­ tion and they are managed by the State Council.18 The legislation concerning insti­ tutions has considerable lacunas resulting from the fact that institutional reforms are not completed and that interest groups are not willing to comply with strict legal restrictions based on their own interests. These factors seriously hinder the effective resolution of problems. Since the institution of the Constitution of 1982, China has emphasized the promotion of reform and opening-up and the development of a market economy under the framework of the rule of law. Based on the rule of law, all the abovementioned institutions and systems should, from a legislation standpoint, be rela­ tively stable and established. For after the declaration that the legal system has already formed,19 the stability and predictability of the law become important, and the bar for consistency between constitutional law and economic law is higher. It is necessary to examine whether there is violation of the Constitution in the area of economic law from the perspective of “consistency”, and whether the Constitution does not fit the requirement of actual economic activities. Through institutional interaction between constitutional law and economic law and their consistency within the framework of constitutional law, the following questions arise: Could the overall construction of a benign interaction between constitu­ tional law and economic law be established, and can the development of the econ­ omy, society, and the rule of law be better promoted? 2.1.5 Summary From the perspective of the distribution system, the relationship between con­ stitutional law and economic law is central to resolving distribution problems, distribution risks, and crises. This book discusses the “common dimension of the economy” of constitutional law and economic law and their common focus on distribution problems from an economic dimension perspective with the aim of revealing the foundation and link on which constitutional law and economic law build their close connections. In addition, it analyzes the influence of con­ stitutional law on economic law and the implementation and promotion by eco­ nomic law to constitutional law in order to illustrate their mutual influence. On this basis, it brings about the issue of “consistency” between constitutional law and economic law and emphasizes that the issue of “inconsistency” in practice should be addressed based on the requirement of the common economic dimen­ sion and consistency. Also, the benign interaction between constitutional law

Consistency of key distribution systems 19 and economic law should be built under the framework of constitutionalism. All these are vital to the development of the economy, society, and rule of law, espe­ cially to solving dominant distribution problems and the prevention of distribu­ tion crises. Determining the relationship between constitutional law and economic law is of huge theoretical value to the study of “economic constitution” or “constitu­ tional economy”, of “constitutional issues in economic law”, as well as distribu­ tion problems and distribution crisis. Meanwhile, it would be of great help to solve the issue of constitutional law violation in the domain of economic law during the practice of rule of law, or the issue of the incoherence between consti­ tutional law and economic law. The prior analysis from the perspective of the eco­ nomic dimension involves the consideration of basic goals of constitutional law and economic law adjustment, and the basic contradictions and issues that many countries currently face are incorporated, including obvious distribution problems (the contradiction between individual preference for profit and the public interests inevitably results to distribution problems. Various “market failure” issues are, in fact, involved with distribution problems). Therefore, this augurs well for the future development of the rule of law. With the increased acceptance of economic civilization and the rule of law, more issues in constitutional law concerning the economy (including the distribu­ tion issue on the constitutional level) can be settled through specific economic law. Also, many economic law issues (including relevant distribution issues) are fundamental constitutional issues and should be settled through the completion of constitutional law. Economic law is closely and directly linked to not only the actual economy, but also to constitutional law, and therefore could constitute the bridge that links constitutional law and actual economic activities. The economic dimension shared by constitutional law and economic law, their mutual influence, and their co-existence bring out a higher requirement for their consistency. This is of significant importance to assuring the consistency of constitutional and eco­ nomic law distribution systems respectively.

2.2 The coordinated development of different types of distribution systems In the legal system of a state, various types of distribution systems exist at differ­ ent levels and are distinct in nature. It is only through coordinated development that the distribution system can become improved. For instance, both constitu­ tional law and economic law contain a series of important distribution systems with different precedences or effectiveness. Or, both economic law and civil and commercial law contain many distribution systems which have different legal natures. However, coordinated development should be guaranteed regardless of the types of each distribution system. Based on this perspective, the following takes constitutional law and economic law as examples and illustrates the issue of coordinated development among distribution systems with different precedences. Then it uses economic law and civil and commercial law as examples to explain

20

Consistency of key distribution systems

the coordination and regulation issues of distribution systems with different legal nature. Based on the discussion on the consistency of constitutional law and economic law, it could be concluded that constitutional law and economic law should be coordinated and should develop coordinately with each other thereby ensuring a necessary requirement of the rule of law. If the development of constitutional law and economic law is not in conformity, the development of the rule of law then would be problematic, the resolution of distribution problems and the pre­ vention of distribution risks and crises would be difficult and, finally, a legal­ ity crisis would appear. Therefore, based on the consistency and conformity of constitutional law and economic law, it is necessary to discuss the coordinated development of constitutional law and economic law in view to illustrating the coordinated development of distribution systems with different precedences. 2.2.1 Explaining the focus on the coordinated development of constitutional law and economic law As the law to foster development, economic law deeply affects the fate of a coun­ try and the living conditions of the people. It is directly related to distribution pressure. The development of economic law, therefore, is not only related to the resolution of distribution problems and the development of the economy and soci­ ety, but also to the development of different sector laws as well as the overall construction of the rule of law. Thus, besides the “origination”, emphasis should be further placed on the “development” of economic law, especially the issue of coordinated development between distribution systems in economic law and constitutional law.20 Considering the fact that the development of economic law involves undertak­ ing structural adjustments and institutional changes in the legal system,21 as well as adjusting the overall distribution structure and institutional evolution from the perspective of structure-function analysis, there is no doubt that it is necessary to review the specific functions of each sector law in the legal system in order to facilitate the whole “coordinated development” of the legal system and to promote the optimization of distribution structure. In fact, though the areas and approaches of adjustment vary in various sector laws, all the laws have their own roles and should not be neglected. Hence the construction of the rule of law in China should not only be rule-of-law-oriented but it should also emphasize systematic thinking through which the coordinated development of different elements of the legal system, especially relevant to distribution systems, can be achieved. Research toward the development of the entire economic law or distribution or the distribution system within economic law could be conducted from many different angles. Among these, it is extremely important to examine the relation­ ship between economic law and other sector laws and analyze the interrelations between the distribution systems in different sector laws in order to promote the coordinated development of economic law and other sector laws. In the past, aca­ demia focused more on analyzing the relationship between economic law and one

Consistency of key distribution systems 21 specific sector law, whereas a “triangle-relationship” comprehensive investiga­ tive research approach should be adopted for various factors including politics, economy, society, and culture. For example, based on the government-market relationship which is of fundamental importance in economic law (Shouwen Zhang 2014),22 it is necessary to investigate the “triangle-relationship” among economic law, civil and commercial law, and administrative law. It is through this “triangle-relationship” that the relations among important distribution sys­ tems can be directly discerned. Whether the research target is the binary relationship or “triangle-relation­ ship”, the promotion of the coordinated development between economic law and relevant sector laws should be considered. The coordinated development of dis­ tribution systems in different sectors should also be encouraged. After all, the “historical background” and “multi-foundation” of the origin of each sector law or distribution system are different and so are different missions and functions. Yet, continuous development is required under the contemporary context. Meanwhile, each sector law or distribution system is often faced with many common or related issues. Economic law and constitutional law play a vital role in contemporary eco­ nomic and social development as well as in the correlated political and legal development process, especially with regard to the resolution of distribution problems. Distribution systems within these laws, which have various prec­ edences, are fundamental to solving distribution issues. Therefore, the “coor­ dinated development” of economic law and constitutional law is vital, and correspondingly, the distribution systems in these two sector laws should also develop coordinately. Considering that each sector law should develop “coordinately” with other sec­ tor laws, and the development of constitutional law and economic law is exceed­ ingly significant, the following part is based on the perspective of the relationship between economic law and constitutional law, analyzes economic law and the constitutional foundation for the distribution system that is contained in economic law, and, at the same time, discusses the promotion of constitutional law by the development of economic law. This is to highlight the necessity to develop eco­ nomic law and to explain why different states choose to develop economic law and to solve distribution problems through the strengthening of economic law regulation. Based on this, this book further discusses the coordination problems of economic law and constitutional law in development, focusing on the approach to achieve coordinated development between them and to better solve the distribu­ tion problems. 2.2.2 The constitutional foundation for the development of economic law The development of economic law has a solid constitutional foundation. Currently, many states are developing economic law and substantially promoting the stipula­ tion and implementation of economic law not because they necessarily share the same preference for legislation but because economic law plays a predominant

22

Consistency of key distribution systems

role in facilitating the development of the economy and society, especially with regard to solving distribution problems. The development of economic law there­ fore reflects the requirement of constitutional norms and contributes to the fulfil­ ment of legal system functions. The development of economic law is a reflection of constitutional norms. Under the current circumstance where many states are increasing economic norms which constitute an “economic constitution”,23 if economic stipulations and implementation are absent, large amounts of constitutional provisions will not be implemented and this could result in the “invalidity of the Constitution”. This would be against the stipulations and spirit of the constitution, and would severely affect the whole practical functions of the legal system triggering many other issues such as distribution imbalance. According to the legal precedency theory, constitutional law is the founda­ tion of other laws and the development of economic law should comply with the constitutional law requirements.24 In the literal context, the majority of economyrelated clauses in the constitutional law of many countries are directly related to economic law. These economic constitutional norms involve many basic eco­ nomic institutions including the economic institutions, the ownership system, and the distribution system which all form the “economic constitution” of these coun­ tries and which all lay the constitutional foundation that is vital for the develop­ ment of economic law. For example, Article 15 of the Constitution of PRC is an article that has a fundamental influence on the development of economic law.25 In the current con­ stitution, all three clauses of Article 15 are directly related to economic law, with fundamental meaning, which not only lay the foundation for the economic system and reveal the necessity for the origination and development of economic law, but also establish the adjustment area, basic structure, or system for economic law. Specifically: Clause 1 stipulates that “the State practices socialist market econ­ omy”.26 This was the first time in the history of China to adopt a market econ­ omy system in its Constitution. It has been of tremendous significance toward the development of economic law because the modern market economy is the premise and foundation for the origin and development of economic law. Besides, once a market economy system is practised, macro-regulation and control and market regulation require to be strengthened, and that requires macro-regulation and control laws as well as market regulation laws – both of which are economic laws. Without a market economy system, the regulation and control of the market economy would not exist. Therefore, the existence of modern economic law is not necessary. In addition, as long as the market economy system exists, the cor­ responding distribution system is indispensable. This includes the fiscal distribu­ tion of the state and the profit distribution of enterprises which require protection by economic law. Thus, stipulations regarding the market economy system are directly related to the origination and development of economic law as well as the foundation or necessity of the existence of economic law. Though not all states choose to explicitly incorporate the market economy system in their constitu­ tions,27 as long as a market economy system is practised, economic law would

Consistency of key distribution systems 23 be developed through which the distribution system in economic law would be improved. Clause 2, which stipulates that “the State strengthens economic legislation, and improves macro-regulation and control”,28 is directly related to Clause 1. As long as the market economy system is adopted, the state has to strengthen economic legislation, especially economic law legislation. Meanwhile, it is only by strength­ ening economic legislation that macro-regulation and control can be improved. In the Chinese economic legislation, laws relating to macro-regulation and control are the most significant. These relate to the characteristics of China as a “huge nation” and to the fact that the duration during which China has implemented a market economy system is relatively short. Through the increasing application of the rule of law, the stipulation and implementation of laws of macro-regulation and control are required if the state intends to “improve macro-regulation and control” through “strengthening economic legislation”. Besides, the formation of the whole social distribution structure is directly linked to macro-regulation and control whereas macro-regulation and control, itself, is an important method to promote the fairness of distribution and to solve distribution imbalance. For the issue of macro-regulation and control, though some states may not directly stipulate relevant contents in their constitutions, the interpretation of the consti­ tution involves a large number of identical issues. For instance, the Commerce Clause in the US Constitution is considered to be related to the federal power in issues of macro-regulation and control. From the era of Marshall to the present, the Supreme Court of the US has made many important verdicts which not only confirm the federal power to regulate and control trade but also to expand that power through interpretation (Qianfan Zhang 2001)29 which involves the distribu­ tion and balance of the interests of relevant agents. Clause 3, which stipulates that “the state prohibits in accordance with law any organizations or individuals from disturbing the social and economic order”, is important for the protection, by the constitution, of the healthy development of a market economy. In the market economy system, the effective regulation of the market economy order in accordance with the law is vital to the protection of the relevant distribution order and the overall social and economic order. For such purposes, the legislation and implementation of market regulation law must be strengthened. German scholar Böhm views economic constitutional law as the public choice or the whole decision on the order of civil economic life. For him, this is also the reflection of the common emphasis on an economic or market order by constitutional law. In fact, it is for the protection of the social and eco­ nomic order emphasized by constitutional law that forms the requirement for the strengthening of market regulation or supervision, as well as specific power and law of market regulation. Therefore, the three clauses of Article 15 of the Constitution of PRC empha­ size the economic system basis for economic law and the adjustment sphere of economic law (namely, macro-regulation and control and market regulation), and explicitly spell out the dichotomy system and target field of economic law. They also reveal the constitutional basis for the promotion of economic law and lay the

24

Consistency of key distribution systems

vital constitutional framework for the system construction of economic law and the study of economic law. The above part takes the provisions of the Constitution of PRC as an exam­ ple to illustrate the constitutional basis for the development of economic law and the requirement of constitutional law toward the development of economic law. In fact, with the development of constitutional law in different states, eco­ nomic norms are increasing especially norms pertaining to provisions in the fis­ cal, taxation, finance, and competition fields, confirming the framework for the dichotomous structure between state and citizens, government and market, central government and local government, etc., and specifying the distribution boundary of relevant agents in power, income, right, etc. Thus, it provides a significant constitutional basis for the development of economic law and the corresponding distribution system.30 Certainly, the constitutional foundation of economic law is not only reflected by the explicit provisions of constitutional law. The ideals and values embodied in constitutional law, including equality, liberty, fairness, effectiveness, justice, security, etc., are also indications for it.31 Therefore, though some states do not make explicit provisions in relevant articles of their constitutional law, the ideal, value, and overall design of constitutional laws could also lay the foundation for the development of economic law. Correspondingly, the arrangement system to fulfil distribution justice and fairness in economic law is connected with the ide­ als and values of fairness and justice emphasized in constitutional law. To solve distribution problems and prevent distribution imbalance and crises through eco­ nomic law regulations, there is an intrinsic requirement of constitutional law and an effort to promote the implementation of constitutional law. 2.2.3 Promotion of constitutional law development through the development of economic law The development of economic law would contribute to the fulfilment and improvement of constitutional law and further promote the development of con­ stitutional law. For instance, many “institutional laws” of economic law involve constitutional issues and during the process to solve institutional issues related to the constitution, there is the natural promotion of constitutional law. In particular, the institutional arrangement of fiscal policy, taxation, finance, industry, competi­ tion, foreign trade, etc., in economic law involves many distribution systems. This means the rule of law with regard to the abovementioned aspects would affect the development of constitutional law. From the history of the development of economic law in the early stage and for the purpose of enhancing market regulation, the US Congress promulgated the Interstate Commerce Act and the Sherman Anti-trust Act in 1887 and 1890 respectively and further established independent regulatory institutions such as the Interstate Commerce Commission and Federal Commerce Commission, through which a set of special regulatory institutions and systems were estab­ lished. These appear as milestones with regard to the development of economic

Consistency of key distribution systems 25 law. The origination and development of the abovementioned economic law sys­ tem promote the change of relevant regulations and control systems, solve the distribution problems in relevant areas, form specific distribution systems, and promote the development of constitutional law. For example, the Interstate Commerce Act, according to the US Constitution, reflects the power of Congress to regulate and control the economy. Yet, with the development of trade and the emergence of various disputes, for the purpose of defining the scope of the federal power to regulate and control trade and com­ merce as well as the exercising of such power, the Supreme Court had been mak­ ing complicated interpretations for a long period of time. Through the process of interpretation, the power to regulate and control trade and commerce expanded, thereby promoting the development of economic law. Also, during the process of economic development, constitutional law itself is fulfilled and improved (Qianfan Zhang 2011).32 The contemporary economic law of China originated and developed from the transformation from a planned market system to a market economy system. The practice of a market economy system and the enhancement of macro-regulation and control gradually became consensus due to the reform and opening-up. There has also been the continuous improvement of a relevant distribution system. At the beginning of the reform and opening-up, China had already realized the defi­ cits of government’s direct management of the micro-economy, and had started to emphasize “macro-adjustment” which, in essence, constitutes “macro-regulation and control”.33 The system reform and practice of the economic law system in the fiscal sector, taxation, finance, and prices in the 1980s, especially “the decentrali­ zation of power and relinquishing the profits” and “loosening regulation”, deep­ ened the construction of a market-oriented system of reform (Shouwen Zhang 2009).34 The essence of such a process is that the state uses legalized economic measures to improve macro-regulation and control while completing various dis­ tribution systems and releasing distribution pressure. At that time, the abovemen­ tioned system reforms resolved distribution problems to a large extent, sharply increased the level of productive forces, and further promoted the origination and development of economic law. It propelled the final establishment of a market economy system and macro-regulation and control in the Constitution. “Macro-regulation and control” was written into the Constitution and has become an extremely important legal concept for the development of macroregulation and control in economic law. With the deepening, completion, and stabilization of the economic system reform, the vital results of the system trans­ formation in China, including the outcomes from completing the distribution sys­ tem, will not only be established in economic law but will also be reflected in future amendments of the Constitution, including the promotion from economic law to constitutional law. During the process of reform and opening-up in China, because of the fact that the National Congress as well as its Standing Committee had conducted too much “authorized legislation” which made “trial legislation pattern” popu­ lar (Shouwen Zhang 2013),35 many systems, including the taxation system with

26

Consistency of key distribution systems

regard to distribution, were “trialled” in advance in the domain of economic law. Sometimes there were issues of “benign violation against the Constitution” (which involved the consistency of economic law and constitutional law). Meanwhile, because the violation was “benign” and was reasonable economically, it promoted the amendment and improvement of constitutional law. It also led to the promo­ tion of constitutional law by economic law. The format for the promotion of constitutional law via economic law would naturally be different from state to state and in different epochs. Because the Constitution of PRC is comparatively concise and composed of abstract princi­ ples, the change in the “form” of the Constitution due to the development of sector laws would be less significant. In states where constitutional law stipulations are more specific and complicated, the promotion of the constitutional law by sector laws, such as economic law, would be more pronounced. The above part takes the market regulation laws of the US and the macroregulation and control laws of China as examples to illustrate how economic law fosters constitutional law, through which it is evident that both economic and con­ stitutional laws in different states at different eras have had dissimilar characteris­ tics. However, the consistency between economic law and constitutional law and the coordination of distribution systems embodied in economic and constitutional laws should be emphasized during the process of development, irrespective of the differences of systems. 2.2.4 Coordination between economic law and constitutional law in the development process Based on the initial conclusion, it is worth noting that economic law and con­ stitutional law interact with each other. On the one hand, the development of economic law is based on constitutional law given the fact that both stipulation and constitutional law implementation are required to establish economic law. On the other hand, the development of economic law may contribute to the completion and fulfilment of constitutional law, and would further promote the development of constitutional law. Therefore, the mutual interaction between constitutional law and economic law in the development process should be considered, especially from an economic and normative dimension perspec­ tive, to enhance their consistency and coordination and to realize “coordinated development”. As mentioned above, the “economic dimension” shared by constitutional law and economic law (Shouwen Zhang 2009)36 is the vital premise for the coordi­ nated development of the distribution systems embodied in economic law and constitutional law. With increasing economic norms in constitutional law, the “economic dimension” of constitutional law becomes increasingly predominant. The continuous fulfilment of the economic constitution, especially with regard to distribution issues, is a reflection of contemporary requirement and of the demand to develop. To implement the economic constitution, economic law, as well as the affiliated distribution systems, should be developed. If economic law cannot be

Consistency of key distribution systems 27 effectively developed, then constitutional law stipulations cannot be fulfilled and economic development may equally be substantially jeopardized. The normative dimension shared by constitutional law and economic law pro­ vides the foundation for the coordinated development of the distribution system within constitutional law and economic law. As a vital component of the legal sys­ tem, both constitutional law and economic law have the regulation function, shar­ ing norms in common.37 Besides, the norms of constitutional law and economic law, which have different hierarchies or orders of precedence, point to two dif­ ferent types of orders. Therefore, the distribution system in economic law cannot violate the distribution system in constitutional law which has higher precedence. On the contrary, they should be based on the distribution norms in constitutional law and keep consistency to it. It is worth noting that clarifying the precedency of different distribution systems is vital to their coordinated development. Based on the abovementioned economic and normative dimensions, it is worth noting the consistency between distribution systems within constitutional law and economic law. From the legal effect perspective, economic law norms should comply with constitutional law norms to avoid the risk of violation of constitu­ tional law. Meanwhile, from the perspective of the development of law, consti­ tutional law shall absorb the benefits of the development of economic law during its own development process and make appropriate adjustments to maintain con­ sistency between them. Only consistency on the basis of economic and norma­ tive dimensions can achieve coordinated development between constitutional and economic laws. The consistency or coordination between economic law and constitutional law should be examined judicially or non-judicially. The “judicial verdict” by the court through judicial review is one-dimensional and, during certain periods, the legislation concerning economic law norms may be considered a “violation against the constitution”.38 However, as the perception of the court deepens with regard to the function and control of the state, the interpretation of the constitu­ tional law also changes. For example, some specific economic law systems that had been considered as being inconsistent to constitutional law (i.e. the income tax system, which is also an important distribution system) had, for a long time, not been deemed as a “violation against the constitution”. Some states even inte­ grate the income tax system into the constitution to form a distribution system at the level of constitutional law.39 The changes of the judicial verdicts or constitu­ tional interpretations, as well as the development of relevant systems, reflect the mutual influence and adjustment between constitutional law and economic law. Besides, non-judicial agents such as scholars and the general public may provide “non-judicial verdicts” for the consistency or coordination between economic law and constitutional law. As legal awareness rises, especially people’s awareness of constitutional law, the attention to legality and constitutionality increases, thereby promoting constitutional law and economic law in the development process. On the one hand, based on the vital influence of macro-regulation and control and market regulation to the basic rights of citizens, including property rights and economic liberty rights, the compliance, stipulation, and implementation of an

28

Consistency of key distribution systems

economic law system to constitutional law is increasingly important. Therefore, economic law has to be consistent and coordinated with the provisions of consti­ tutional law. On the other hand, based on economic constitution requirements, the stipulation and implementation of macro-regulation and control law and market regulation law should be enhanced in order to limit the state’s power according to the law, and to protect economic development rights of market agents (Shouwen Zhang 2012),40 instead of being held captive by interest groups who intentionally hinder the development of economic law. Currently, comprehensive and profound reform is required in order to facilitate the development of China. Also, many insti­ tutional “bottlenecks”, such as the fiscal and taxation system and financial system, should be broken. Barriers that obstruct fair competition should be removed, and various distribution issues should be resolved. The solution to all these problems demands coordinated reform in various systems including the economy, politics, and society; the coordinated development of various distribution systems; and the common protection provided by economic law and constitutional law. When constitutional law develops simultaneously with economic law, on what­ ever level, norm, or value, distribution systems in all precedences must maintain their consistency in dynamic adjustment, otherwise many negative effects would emerge due to inconsistencies. The backwardness of the development of either constitutional law or economic law would bring negative effects on the solution to relevant distribution problems and to the overall construction of the rule of law. 2.2.5 Conclusion Economic law is “the law to promote the [sic] development”. The coordinated development between economic law and other sector laws, as well as the coopera­ tion among distribution systems of different types and precedency directly involve the “adjacency” of economic law in the legal system and the quality and effective­ ness of the development of economic law. Specifically, the coordinated develop­ ment of economic law and constitutional law affects a wide range of affairs and may contribute to the long-term development of distribution systems of different types. Therefore, investigating economic law becomes a necessity. In the previous part, the emphasis was on the constitutional basis for the devel­ opment of economic law and the promotion of the development of constitutional law by economic law. It is not difficult to conclude that economic law develop­ ment and improvement of the distribution system cannot be realized without the support and protection of constitutional law. Enhancing economic law regula­ tion and effectively solving distribution issues are both the prerogative of con­ stitutional norms and the need to exercise the constitutional law. Meanwhile, the development of economic law and the improvement of various distribution systems embodied in it would, to some extent, fulfil and complete constitutional law and foster the development of constitutional law. The above discussion may contribute to illustrating why various countries promote the development of eco­ nomic law, and why they promote the coordinated development of distribution systems in economic law and constitutional law. Based on the above discussion,

Consistency of key distribution systems 29 the interaction and coordination of economic law and constitutional law in devel­ opment should also be explored, especially by targeting and resolving questions of the inconsistency of different distribution systems through judicial verdict and non-judicial judgement and based on the common economic and normative dimensions shared by economic law and constitutional law. Such efforts may enhance the consistency and coordination between them as well as ensure their coordinated development. Maintaining the dynamic and coordinated development of the distribution sys­ tem in economic law and constitutional law may contribute to the rule of good laws and resolve the issue of (benign) violation against constitutional law in dis­ tribution systems. Also, it is vital for the benign development of the economy and the resolution of distribution issues to focus on the dynamic transformation of various distribution systems and institutional adjustments and to substantially enhance judicial review. The economic law area involves a considerable number of constitutional law issues, and the economic constitutional law area also involves a consider­ able number of economic law issues. Both of these, along with distribution issues in these two areas, require further research. It is increasingly important to focus on the relationship between economic law and constitutional law and to promote the coordinated development of distribution systems of different types. Correspondingly, future economic law research should not only focus on research results generated from interdisciplinary research such as “constitutional econom­ ics”, but also on interdisciplinary economic law research, constitutional law, and other legal disciplines. This would significantly contribute to the prosperity of law research, the development of the rule of law, and the resolution of distribution issues.

2.3 Mutual completion among distribution systems of different natures In the area of distribution, both public and private laws have a profound influence, especially economic law and civil and commercial law, which a have a more profound influence on the distribution of interests of various agents. Therefore, except for research on the consistency and coordination between distribution sys­ tems and the nature of public law such as constitutional law and economic law, attention should also be paid to the coordination and mutual completion of eco­ nomic law and civil and commercial law – two types of important distribution systems with different natures. Considering the fact that both economic law and civil and commercial law involve distribution systems, and that both are concerned with the nature of pub­ lic law and private law at the same time, the following part intends to discuss the coordination between the transformation of taxation law system and the private law order generated from the adjustment of the civil and commercial law taking taxation, which with regard to economic law has a tremendous influence on dis­ tribution, further revealing the coordination and mutual completion between the

30

Consistency of key distribution systems

distribution systems from the perspectives of economic law and civil and com­ mercial law. As it is well known, the transformation of taxation law has continued to attract attention due to the fact that it directly affects the distribution of interests of rel­ evant agents. Far-reaching reforms, both in ancient and contemporary times, in China or in foreign countries are directly or indirectly implicated in this. At the same time, private law and order are deeply affected thereby making the issue of conflict and coordination between taxation law transformation and private law order a vital issue worthy of continuous research. Taxation law transformation and ordinary private law adjustment both involve the establishment and protection of property rights. They are directly linked to the distribution issue and are likely to invoke conflicts. Meanwhile, during the Chinese constitutional amendment process, though the protection of property rights has been discussed, such discussion has been mainly from the perspec­ tive of taxation law or constitutional law. There are still many issues that are worthy of studying from the perspective of the coordination between public law and order and private law and order, through which the necessity and the impor­ tant approach to strengthen the coordination between economic law and civil and commercial law in solving distribution issues could be found. 2.3.1  The    inevitability of conflict and the necessity for coordination The adjustment of taxation law mutually influences private law and order gener­ ated from the adjustment of private law. As a law with higher precedence, taxation law is based on the adjustment of private law. For instance, the goods tax depends on the circulation of goods, while the circulation of goods is regulated primarily by private law. Income tax depends on the confirmation of income, while the confirmation of income is primarily regulated by private law. It is also true for the property tax area. Thus, it can be concluded that private law adjustment estab­ lishes the goods, income, and properties that are associated with “object” char­ acteristics (Shouwen Zhang 2012),41 and also establishes the amount and sphere of such “objects”, though the “objects” established by private law adjustment are only “potential” objects of taxation. The real object of taxation, as well as its sphere and amount, ultimately need to be determined by the stipulations for the taxation elements in taxation law. Hence, the taxation law would profoundly affect the final distribution. In fact, the “objects” established by private law42 do not strictly correspond to the object of taxation stipulated in taxation law, because taxation law adjust­ ment in any state makes compromises which account for the difference between private law adjustment and taxation law adjustment. Taxation law cannot, at least in form, affect the final ownership of the “object” established by private law if it is not an object of taxation. On the contrary, if the “object” established by private law is also the object of taxation, then taxation law adjustment may directly affect its final destiny. In this sense, the private law and order generated from private law adjustment often may not be the stable “final situation”. At least for the final

Consistency of key distribution systems 31 ownership of the “object”, taxation law adjustment may still affect it (causing, to some extent, a change in quantity). This reflects the role played by law in participating in the distribution and redistribution of social products. Therefore, though adjustments by private law and the resulting private law order are the basis for adjustments by taxation law, adjustments by taxation law, as a “higher law”, would still have a vital influence on the final formation and stabilization of pri­ vate law order. The interaction between such two factors will seem increasingly important with the development of the market economy. The issue of the ownership and extent of completion of “material” adjusted by private law would normally be deemed as the issue of property rights as well as the protection of it. How the property right is protected would directly affect relevant private law orders. While the adjustment by taxation law is seen as a “violation” against individual property rights and therefore formulating the con­ flict between the adjustment of taxation law and private law between taxation law order and private law order. Such conflicts are directly linked to the target that taxation law and private law intend to protect and to the mechanism of them; thus the emergence of these conflicts are inevitable.43 Since the adjustment by private law involves the formation of wealth and the determination of the ownership of private property rights, while the adjustment by taxation law may “deny” or “reduce” the confirmation of private property right, therefore private law is generally deemed to emphasize the protection of private property rights, while taxation law may constitute the “violation” against private property rights. Private law and taxation law conflict with each other on the pro­ tection of private property right in terms of legal adjustment, which reflects the conflict between state and citizen, government and market, and public power and private right. If such conflicts cannot be effectively resolved, the steady develop­ ment of the economy and society could be hampered, and many aspects of pub­ lic and civil life could be negatively affected. It may even affect the rise or fall of a state (Douglass North 1994).44 For this reason, they have to be coordinated effectively. Normally, the necessity to coordinate arose from the perspective of the impor­ tance of steady and harmonious legal order for the steady development of econ­ omy and society. Historically, only those countries that can effectively protect private property rights while providing public goods could fully develop econom­ ically and socially and could gain advantageous positions in international com­ petition. From the perspective of the law, taxation law and private law, with their respective functions, are both vital secondary systems to the whole legal system, and they cannot effectively exercise their functions without the effective integra­ tion of the legal system. For this purpose, the legal system needs to be internally coordinated to eliminate the conflict between taxation law and private law, and the conflict between taxation law, private law, and other laws. As an open system, each secondary system of the legal system needs to make adjustments regarding the development of the economy and society. Because of the fact that taxation law is more easily affected by public policies, including eco­ nomic and social policy, the change of some regulatory norms is more frequent

32

Consistency of key distribution systems

(Shouwen Zhang 2001).45 Therefore, it would inevitably affect private law and order. The questions that require further discussion are whether it is plausible to coordinate the conflict between the said change of taxation law and private law order, and if plausible, what would be the basis for such coordination? 2.3.2 Reason for the separation of “two kinds of right” and possibility for coordination In the past, people focused on the separation of “two kinds of right”, that is, the separation of ownership and the right to operate. Yet the separation we men­ tion here refers to another type of “separation of right”, which has existed for a long time but has not received sufficient attention. Here we are referring to “the separation of private property rights and public property rights” or, in the narrow sense, if we understand property rights as private property rights, the separation of “property rights and fiscal power”. The reason for the separation is that the satisfaction of human desire is con­ sidered justice and it is directly related to the distribution of interests between state and citizens. From the perspective of basic human rights, basic human needs should be satisfied through relevant channels. To satisfy individual desires by individual objects requires private law to determine private property rights. Likewise, to satisfy the desire of the public by public objects requires public law to determine and protect public property rights. Each type of desire and object corresponds to two different types of rights, which are a reflection of the separa­ tion between private property right and public property right.46 In the era when a family owned the whole state, the space for the existence of such “separation”, in the modern sense, was absent, and the property of the royal family was not separated from the public treasury. Also, emperors or kings could impose taxation arbitrarily to meet their own needs, meaning that the private prop­ erty rights of the public naturally could not be protected steadily. The establish­ ment of principles such as legitimate budget and taxation according to law, which reflect the spirit of modern rule of law, is consistent with the separation and legiti­ mization of these rights and makes fiscal and taxation law an important system for the protection of these rights. According to past research, there exists a divergence in the perception of the nature of property right regarding whether property rights include only the right to objects and claims to debt, or they include rights other than those. Still, when talking about the protection of property rights, people tend to emphasize private property rights. From the perspective of private law, it is indeed important and necessary, yet from the perspective beyond private and public law and from the overall satisfaction of human desires, it is not sufficient to only focus on pri­ vate property rights. The protection of public property rights is also indispensable given that without such protection, the provision of public goods may be severely affected, as evidence from history and reality have continuously indicated. It is generally believed that private law emphasizes the protection of pri­ vate property rights while public law, especially taxation law emphasizes the

Consistency of key distribution systems 33 protection of public property rights. Also, the formation of public property rights is based on private property rights and it results from the transfer of private prop­ erty. Therefore, the adjustment by taxation law and private law would necessarily bring conflict to the protection of private property rights. This is justifiable given that the separation of the two rights is related to the satisfaction of public and private desires, and corresponds to the provision of public and private goods. In addition, the correlating conflict between public law (especially taxation law) and private law may potentially be coordinated. In fact, the separation would first appear at the constitutional level. All the states need to specifically address the distribution of income or wealth and set or differentiate the property rights of citizens and the fiscal power of the state. This means that separation requires coordination during constitutional legislation and it forms a “balance”. For the division and configuration of “two types of rights”, coordination in constitutional law is primary while the relevant laws and regula­ tions should reflect such an arrangement and should constitute the foundation of the rule of law with regard to the separation and protection of these rights. The adjustment of both taxation law and private law cannot exist without such a foundation that provides institutional plausibility for the change of taxation law and coordination of private law order. From the perspective of the entire system of the rule of law, taxation law and private law are both the specification of con­ stitutional law and they both protect public and private property rights despite the different emphasis on specific systems. Due to the fact that the two types of rights are separated and their protection justifiable, when the relevant provisions of taxa­ tion law and private law are inconsistent, coordination should be contemplated from the perspective of constitutional stipulations and a constitutional spirit based on the comprehensive protection of these rights. 2.3.3  External    effects of the change of taxation  law and institutional coordination Changes in taxation law are frequent and sometimes occur periodically. The influ­ ence of changes in taxation law on individual behaviour, private interests, and private law order is a kind of external effect of the change of taxation law. The negative external effects of the taxation law deserve further examination, for they directly involve the protection of private property rights and the stability of pri­ vate interests and private law order. Changes to taxation law in various countries from around the world are con­ ducted through the following ways: change of taxation elements including the taxation agent, specific tax denominations, tax rate, etc.; or the initiation and sus­ pension of specific denominations that are all specific reflections of changes in taxation law and directly affect private law order. For example, taxation system reforms in China in 1994 initiated new types of tax (consumer tax and land VAT), adjusted the target of some types of tax (VAT and business tax), and combined some types of tax (corporate income tax and individual income tax), all of which influenced existing private law orders.

34

Consistency of key distribution systems

As is widely known, private law order generated by adjusting private law needs to be relatively stable especially with regard to property rights. Only when the state law provides comprehensive and effective protection of the ownership right of citizens and forms stable private law order can the development of the economy and society be better promoted. North has explained this phenomenon in his study on constitutional economics where the impact of the protection of property rights to the rise and fall of nations in the history of economic develop­ ment is clearly presented. Therefore, the coordination with private law orders needs to be considered during the transformation process of taxation law to avoid the excessive interference and influence of the formation of a sturdy private law and order. The transformation of taxation law is continuously needed given the development of the economy and society. Focusing on the coordination between taxation law reform and private law order intends to emphasize that the transfor­ mation of taxation law shall consider the expectations of individuals and equally reduce its impact on individual economic activities. In areas where market adjust­ ment plays a dominant role, the “neutrality of taxation” should be advocated while in areas where macro-regulation and control plays a dominant role, it is important to reduce the burden of individuals. For this reason, the allocation of private prop­ erty rights and public property rights needs to be conducted effectively to enhance the fair distribution of social wealth. However, in real economic life, the conflict between private property rights and public property rights is an eternal issue which requires constant efforts. The relevant legislation in China has evolved from partially focusing on one certain type of power or right to focus on the coordinated protection of different types of powers and rights. For instance, the previous Law on Taxation Regulation focused on the interest of the public treasury or the obtention of public property. Therefore, stipulations on taxpayer obligations were plenty while stipulations on their rights were insufficient. In the 21st century, through the amendment to the law, the rights of taxpayers have been incorporated in many parts47 which pri­ marily deal with private property rights. It is undoubtedly evident that progress through greater efforts is still required in the achievement of effective coordina­ tion between the adjustment of taxation law and private law. Taxation law involves broad areas and could hugely influence private law order. Each reform on taxation law would generate shockwaves on private law order which was steady before. Also, the expectations, behaviour, and interest of individuals would be affected leading to the destabilization of the entire private law order. For instance, each reform of the export tax rebate system in China would directly affect the division and allocation of public property rights and pri­ vate property rights, and may even generate different influences on public prop­ erty rights in different layers (for example, the public property right of the central and local governments), as well as the private property rights of different agents (for example, the private property right of enterprises that export/do not export goods). From the legal perspective, one of the central issues is to protect the claim to taxpayer rebate, or in other words, how to balance private and public property rights and to coordinate the taxation law reform and private law order.

Consistency of key distribution systems 35 The external effects of taxation law reform on private law areas should be esti­ mated properly and corresponding systematic coordination should be undertaken in the form of specific arrangement in taxation law or private law. At the same time, coordination with constitutional law and other laws, especially the stipula­ tions on the allocation of power or right usually would be of tremendous value to taxation law reform which may bring instability to private law order. Because of the fact that the taxation law system is immense and involves broad areas, certain taxation law systems should be relatively stable, judging from the maintenance of the stability of private law order and effectively coordinating the protection of private and public property right. Taxation law is important to macro-regulation and control and to the allocation of resources, yet “governing a great nation is like cooking a small fish”, indicating that the reform to taxation law should be discrete. This is vital to maintain a stable private law order. Such efforts would constitute another form of “coordination” with private law order. Besides, the reason for reforming taxation law sometimes is that the adjust­ ment of private law is not sufficient to effectively protect public property right, nor could it comprehensively protect the private property right of various agents. Under such circumstances, private law reform is also needed to coordinate taxa­ tion law reform. The coordination of taxation law and private law at the institu­ tional level could be unidirectional or bidirectional and some higher-level legal theories or principles may act as the link for their coordination. For example, the principle of honesty is a vital principle that is applicable to both private law and taxation law and it serves as an important bridge that connects the two. In fact, to establish, develop, and terminate the economic relationship between individuals based on the principle of honesty constitutes a vital foundation on which the state may gain tax. Meanwhile, individuals should also act honestly and when they attempt to evade taxes through illegal activities, the state may also take action to regain such taxation through the confirmation of reality. Besides, when individu­ als try to abrogate taxation laws by abusing rights in private law, the state may deny the effectiveness of such rights in private law through taxation law and gain substantial taxation.48 In fact, active coordination in the domain of private law is significantly impor­ tant. For instance, civil law stipulates that civil acts that violate the law are null and void, so private transactions violating taxation law are naturally null and void. It is of the same importance to both stabilize private law order and protect public and private property rights. In this sense, even though emphasis has been placed on the protection of public and private property rights, taxation law, and private law, both laws have the important function to protect “two rights” and to compre­ hensively solve distribution problems which constitute a crucial foundation for coordination. 2.3.4 Conclusion From the basic principle of taxation law and private law adjustment, the coordi­ nation between changes in taxation law and private law order originating from

36

Consistency of key distribution systems

private law adjustment is required. Coordination is necessary to satisfy different human needs and enhance fair and effective distribution. Such coordination is directly linked to the separation of private and public property rights. For the external effects generated from the change of taxation law, especially the nega­ tive external effects to the private law order, special attention is required and a specific systematic arrangement is needed in addition to institutional coordination conducted respectively from the aspects of taxation law, private law, or other laws and regulations. Only through this can distribution problems be better solved and distribution crises prevented. The separation of public and private property rights has its internal ration­ ality, and both taxation law and private law have significant value in protect­ ing both and in establishing a benign distribution order. Therefore, resolving the negative effects of taxation law transformation to private law order through institutional coordination among taxation law, private law, and constitutional law is both necessary and plausible. However, these problems may appear occa­ sionally and they require constant efforts to solve. Solving these problems is a process to constantly regulate distribution activities using the law and consti­ tutes a process that requires the constant coordination of economic law and civil and commercial law.

2.4 Internal coordination among identical distribution systems Coordination among the abovementioned important distribution systems of different types (different precedences and different natures), including con­ stitutional law and economic law, and civil and commercial law, needs to be enhanced. Besides, coordination among distribution systems of the same type needs to be addressed particularly with regard to the target and legal basis of regulation. For instance, one of the important targets of Chinese taxation sys­ tem reform after 2008 has been “structural taxation reduction”. As an impor­ tant measure to reduce the burden of market agents and trigger energy in the market, the reduction of taxes should be reflected in various taxation law sys­ tems. Therefore, specific taxation law systems, as distribution systems of the same type, should remain consistent concerning their legal basis and their aim to reduce taxation. For this purpose, the following parts illustrate the issue of internal coordination among distribution systems of the same time, taking struc­ tural taxation reduction as an example. 2.4.1 Proposal for structural taxation reduction As an important measure to deal with the distribution crisis, taxation reduction is applied frequently and widely and would generate significantly influence relevant agents with regard to the distribution of income.49 After the 2008 financial crisis, China faced the problem of high costs while, at the same time, the people faced enormous pressure. The burden of enterprises was heavy and this affected their

Consistency of key distribution systems 37 growth and competitiveness (Shouwen Zhang 2012).50 Under such circumstance, it was necessary to adjust the economic structure, reduce the burden of the people, and activate the energy of the market thereby making “moderate taxation reduc­ tion” a consensus. To implement such reduction in taxation, China advocated for “structural taxation reduction” (Tifu An and Haiyong Wang 2004)51 which meant “to imple­ ment the taxation reduction of specific agents in specific areas in order to achieve specific purposes”. It was not overall taxation reduction but a moderate reduction that discriminated against different agents. The summarized description of the “structural taxation reduction” emphasizes the “specification” or “particulariza­ tion” of the reduction and does not pay attention to its “structural” characteristics. In fact, every taxation reduction involves the structure, for it relies on the current taxation law structure and affects the structural optimization of taxation law. If the unified target for taxation reduction could be maintained and relevant legal basis could be defended, the internal coordination among distribution systems in taxation law system would also be facilitated. In other words, the “structural taxation reduction” would bring “structural change” to taxation law and would promote a level of coordination among relevant taxation systems. At the same time, it would generate positive effects on economic, fiscal, taxation, and distri­ bution structures at the macro level. Therefore, it is indeed necessary to deeply investigate the “structural” issues resulting from “structural taxation reduction” (Tifu An 2012).52 “Structural taxation reduction” is not only an issue of policy or economy, rather it is much more a legal issue and it calls for the enhancement of internal coordi­ nation among different taxation law systems and the optimization of the taxation law structure based on a unified legal target and basis only through which a “good governance” under the structure of the rule of law could be realized(Brennan and Buchanan 2004).53 Though “structural taxation reduction” is an important measure in dealing with the crisis, when emphasizing the close connection between “structural taxation reduction” and the adjustment of fiscal income and spending structure, the taxa­ tion law structure and taxation law system, it could be concluded that China has implemented a “structural taxation reduction” since 2004. From the change of taxation law structure and the emphasis on the “particularity” of “structural taxa­ tion reduction”, such a conclusion is consistent with reality. Judging from the actual conditions, the specific approaches for “structural taxation reduction” mainly include: 1) the adjustment of overall taxation types through the abolition, suspension, and merging various taxes to change relevant taxation systems, and 2) the adjustment of elements of one specific tax type, i.e. the realization of taxation law system through the change of type, basis, and rate of taxation. These two specific approaches directly affect the coordination of taxa­ tion law systems because of the fact that they all involve shifting the taxation law system and they further affect the realization of the overall function of the taxation law system. These changes are discussed in the section that follows.

38

Consistency of key distribution systems

2.4.2 Coordination of the taxation law system from the perspective of overall taxation adjustment Based on the types of taxation, the Chinese taxation law system had long been composed of three types of norms, namely industrial and commercial taxation law, agricultural taxation law, and custom taxation law. The formation of such a structure is relevant to the taxation system where taxation, finance, and customs share the power to impose taxes (especially the power to levy and regulate the tax) and to the multiple standards (industry/commerce and agriculture; domestic and foreign) according to which taxation is divided. Yet, such standards and systems had significant problems. For instance, the identification of power was ambigu­ ous, the taxation law structure was unreasonable, and the taxation law system was inconsistent. Through the constant implementation of “structural taxation reduc­ tion” these problems, to a certain extent, were solved. For example, agricultural tax was domestic and in the system of “broad” agri­ cultural taxation, agricultural and husbandry taxes were already abolished. The existing agricultural taxes, namely occupation of cultivated land tax and deed tax, were levied by the taxation administration rather than fiscal administration54 and, by that token, “agricultural tax” was eliminated. Therefore, a more precise “binary” division to the taxation law system for “domestic taxation law” and “foreign taxation law” could be done. Through the “structural taxation reduc­ tion” and the adjustment to the levy of taxation, the taxation law system and the governing body in China became a “binary” structure and the relevant taxation law system and configuration of power to taxation became more coordinated (see Table 2.1). It was vital to abolish agriculture tax through “structural taxation reduction” for the transformation process of the Chinese taxation law system. As early as 2004, the central government announced that agriculture taxation would be abolished in two provinces, Heilongjiang and Jilin, and soon after, other provinces took the same measure. This situation made the Standing Committee of the National People’s Congress to formally pass the decision to rescind the Regulation on Agriculture Taxation. The decision became effective at the beginning of 2006.55 It is a significant step of the “structural taxation deduction” and it facilitated the adjustment and optimization of the taxation law structure, through which various specific taxation law systems may produce better results with the overall goal to solve three agricultural issues – agriculture, village, and farmers. Table 2.1 The shift of the taxation law system and taxation administration. Original structure of taxation law system

Current binary structure of taxation law system

Current binary structure of taxation administration

Industry and commerce taxation law Agriculture taxation law Custom taxation law

Domestic taxation law

Taxation administration

Foreign taxation law

Customs

Consistency of key distribution systems 39 Of course, under the unified goal of taxation reduction, it is not only agriculture taxation that has been abolished; the influential butcher tax and feast tax were also abolished. After the rescinding of Interim Regulation on Butcher Tax in 2006, the Interim Regulation on Feast Tax was also abolished in 2008. Economic and social factors, as well as considerations regarding the efficiency of taxation, jointly con­ tributed to the abolition of these taxes. For the specific agents that were involved in the abolished taxes, the effect of taxation reduction was obvious and could bet­ ter contribute to resolving distribution issues in relevant areas. Besides, with regard to the specific approach to “structural taxation reduction”, China once applied the method of “suspension” which consists of reducing tax through the suspension of certain taxes. For instance, the tax for guiding invest­ ments on fixed assets was “suspended” in 2000. Though the suspension of certain taxes increased the efficiency of taxation and fostered socio-economic develop­ ment in different phases, the stipulations of laws or administrative regulations did not provide any legal grounds for such measures and such decisions were based merely on “the permission of the State Council” or “the State Council decides”. Whether such sentences are with the same effect as “administrative regulation” remains to be determined given that it is a much stricter process to make admin­ istrative regulations. If a department or affiliated institution of the State Council could add a sentence such as “with the permission of the State Council” into a document, then such a document could be effective throughout the whole nation, which is both against the current rules and against the basic requirements of rule of law. According to the theory of the power of taxation, to commence and to abolish a tax are both important elements of the taxation legislation and they should be exercised as taxation legislation. Meanwhile, in accordance with current laws, the suspension of taxes should also abide by the laws. Even with the authorization of laws, the stipulations of administrative regulations are still required.56 Therefore, according to the requirements of current laws, regulations concerning the suspen­ sion of taxes should not be inferior to the level of administrative regulations. The suspension of a tax for guiding investment on fixed assets is problematic. Without the unification of the agent which exercises the power to suspend the tax, the inconsistency of the taxation law system permanently exists and the coordination among taxation law systems can only be enhanced through the strict implementa­ tion of statutory taxation. Apart from the aforementioned abolition or suspension of certain taxes, China also “merged” certain taxes. Merging was directly associated with abolishing and was achieved by abolishing relevant taxes and rescinding relevant taxation laws or regulations, aiming mainly at solving the inconsistency of the taxation law system generated from the parallel “two types of taxation laws” which discrimi­ nated between domestic and foreign agents. For instance, the current enterprise income tax originated from the merging of two types of income taxes that were respectively applied to domestic and foreign enterprises,57 Meanwhile, the current real property tax and vehicle and vessel tax also originated from the merging of two taxes applied to domestic and foreign agents. However, because of the fact that they maintain the name and relevant institution of the prior taxes, such change

40

Consistency of key distribution systems

is akin to merging through absorbing.58 The merging also directly influenced the structure of taxation law and is likely to increase the consistency of the taxation law system. Besides, although the extent of tax reduction generated from merg­ ing is not as sharp as “abolition” or “suspension”, it still produces the result of a tax reduction. After all, under the previous taxation system that discriminated domestic and foreign agents, the unification of taxation law and merging of taxes could reduce the number of tax types. Also, the adjustment followed the principle of “applying the lower rate when merging two taxes with different rates”, which essentially reduces the burden of relevant agents. For example, in terms of enter­ prise income tax, though originally the rate had been 33% for both domestic and foreign agents, the actual rate for domestic enterprises is higher than for foreign agents. Through the unification of taxation law and “merging” of taxes, the rate for domestic enterprises could reduce at least to 25%, or even lower for some enterprises. This is the tax reduction effect generated from the “merging” of taxes. The above three specific approaches correspond to different areas of tax reduc­ tion, and the agents that exercise the power to reduce taxes are different. An illus­ tration is provided in Table 2.2. The “abolition”, “suspension”, and “merging” are specific approaches to “structural tax reduction” in China and the respective effect to tax reduction is as the consequence. “Abolition” has the most significant effect because it directly cancels a tax in one specific area. “Suspension” is next because it indicates the temporary suspension of a tax, and not totally abolish it, within a certain period of time abolition. While “merging” means to abolish a tax while creating a new one.59 The tax reduction effect depends on the elements of the newly created tax. Since the general trend declines, it goes without saying that the actual rate would decline as well. Besides, when analyzing the tax reduction effect, it is important not only to consider a specific type of tax but also to determine whether to reduce the overall tax. For instance, the tax reduction measures through all the above-mentioned approaches contribute to the coordination of different taxation systems and would Table 2.2 The approach, area, and entity of tax reduction. Specific approach Area

Entity

Taxes abolished

Standing Committee of the National People’s Congress State Council State Council State Council Department of Finance, State Administration of Taxation, National Development and Reform Commission State Council National People’s Congress State Council

Taxes suspended

Taxes merged

2006: Agricultural Tax 2006: Butcher tax 2008: Feast tax 2013: Tax on investment in fixed assets 2000: Tax on investment in fixed assets (Abolished in 2013 by the State Council) 2007: Vehicle and vessel tax 2008: Enterprise income tax 2009: Real property tax

Consistency of key distribution systems 41 reveal the issue of “systematic duplicate taxation”. After all, the possibility of duplicate taxation for one specific entity would be tremendously increased when multiple taxes are simultaneously put forward. The abolishing and merging of taxes would reduce the number of tax, further reduce the “systematic duplicate taxation”, and finally decrease the overall tax burden. It is worth noting that the approaches to “structural tax reduction” are differ­ ent, so are the agents that exercise the power to reduce taxes. Mainly there are three types of agents, namely the National People’s Congress as well as its stand­ ing committee, the State Council, and the relevant departments, committees, and bureaus affiliated to the State Council. The abolition of taxes (including abolish­ ing through merging) is mainly conducted by the National People’s Congress as well as its standing committee and the State Council. As for the suspension of taxes, the legislative authority mainly rests with the State Council and its depart­ ments to reduce taxes. The difference is relevant to the degree of influence on the structure of taxation law. After all, “abolition” and “merging” are important and would directly affect the system and structure of taxation law and would generate greater influence, while “suspension” is a temporary measure which maintains the existence of the relevant tax and is therefore relatively less important.60 Does the State Council exercise the power to tax deduction too frequently? Do the affiliated, eligible departments/committees have the legality to sufficiently exercise such power? These questions are realistic issues worth our attention, for they would affect the coordination of the taxation law system to different extents, especially the coordination between the legislation of the National People’s Congress and the State Council, and the “taxation legislation” by the depart­ ments/committees of the State Council and the National People’s Congress/State Council. 2.4.3 Coordination of the taxation law system from the perspective of tax elements Coordination among taxation law systems is not only reflected through overall adjustment of types of tax but also through the adjustment of the item, rate, tax base, and incentives of one specific tax. Reducing taxes by adjusting tax incen­ tives is an approach that is commonly followed by the market and is familiar to the public. However, public attention is lessened with regard to the approach to tax reduction through adjusting the item, rate, and tax base. In fact, there have already been large quantities of institutional practices of tax reduction through the adjustment of tax items. Commonly, the adjustment of tax items would appear as the cancellation or change of certain tax items of the same type of tax. For instance, in the area of consumer tax, “vehicle tyre” was a taxable item which, since 2006, has been cancelled in order to establish the “structural tax reduction”. Besides, the adjustment of tax items sometimes appears as changes in multiple types of tax. For instance, since January 1, 2012, China has instituted an experimental project of “business tax to VAT” in Shanghai as a “structural tax reduction” which serves to transfer tax items of business tax into VAT, through

42

Consistency of key distribution systems

which relevant industries no longer bear the original tax burden that was rela­ tively higher and through which the purpose of “substantial tax reduction” could be achieved. All the above approaches to “structural tax reduction” are relevant to the coordination among taxation law systems. Specifically, “business tax to VAT” involves the coordination between the two most important goods tax sys­ tems which would produce a direct influence on the distribution of incomes of relevant market agents and between central and local governments. The adjustment of tax items within one type of tax would affect its “width” and while the width of taxation is limited, or the original tax item is cancelled or replaced by tax items with a lower rate, the effect of tax reduction would be produced. On the other hand, the adjustment of tax items across different types of taxes would maintain the width of taxation while affecting the distribution of income because of the influence of the rate, tax base, etc., of the other tax. Thus, it could be concluded that when a tax item is adjusted, the changes in the tax rate and base should also be analyzed, without which a comprehensive examination of the “tax reduction effect” is impossible. Normally, the adjustment of the tax rate directly affects the “depth” of tax. Lowering the rate could directly generate a tax reduction effect; therefore, reduc­ ing the tax rate is an important instrument for “structural tax reduction”. For example, the Law of Corporate Income Tax which came into effect in 2008 in China reduced the tax rate that was applicable to both domestic and foreign enter­ prises from 33% to 25% (special enterprises may enjoy lower rate).61 This action not only produced an obvious tax reduction rate but was also consistent with the worldwide trend of increasing the competitiveness of corporations through decreasing the tax burden of income tax. Besides, multiple amendments of the Law for Individual Income Tax have produced the lowest tax rate applicable to salary from 5% to 3% and greatly increased the deduction amount. Through such measures, the number of individual income taxpayers has decreased considerably meaning that there is a need to focus on the effects of tax reduction. Such adjust­ ments in income tax areas are relevant to the amount of direct tax and have a more direct effect on tax reduction. This contributes to the protection and improvement of the life of ordinary citizens and to the rising of working-class income, to the increasing of corporate competitiveness, and to the fulfilling of fair competition. In fact, similar tax rate adjustment measures are employed commonly and widely in every tax area and are not just limited to income tax. Apart from the adjustment to the tax item and tax rate, the adjustment to the tax base is also vital for tax reduction. For example, in the area of indirect tax, to deal with financial crises, to make VAT more “neutral”, to reduce and prevent dupli­ cate taxation, and to facilitate the shift from “productive VAT” to “consumptive VAT”, on January 1, 2009, China began to expand VAT deductions to decrease the tax base and to comprehensively promote the tax reduction in the domain of VAT. Also, in the area of direct tax, the approach China applied to improve the Law for Individual Income Tax is to constantly increase the standard of salary deduction to achieve the aim of tax reduction through lowering the tax base. All these changes require coordination under the common target of tax reduction.

Consistency of key distribution systems 43 2.4.4 Summary Structural tax reduction is a vital measure that would influence the income dis­ tribution of relevant agents and would have significant outcomes to the state and to the citizens. As an important distribution method, the implementation of struc­ tural tax reduction affects the change of the taxation law system and change of specific tax systems and enhances internal coordination within the taxation law systems under the unified goal of tax reduction. As an important distribution system, the internal coordination of taxation law systems is directly connected to achieving the overall goal of distribution. Therefore, it is necessary to maintain consistency and coordination between the goal and specific measures among different systems of the taxation law system. Therefore, during the process of implementing structural tax reduction measures, the maintaining/abolition of specific tax systems and the adjustment to relevant tax systems should be coordinated under the same goal. As is mentioned before, both overall tax type adjustments and partial change to specific tax types or tax elements are important approaches to “structural tax reduction”. The overall adjustment to tax types through “abolition”, “suspen­ sion”, “merging”, and adjustment to tax elements through name change, rates, and foundations of one specific type of tax is relevant to the comprehensive taxation law structure and to the internal structure of specific taxation laws, as well as to the coordination among different types of taxation law systems. As similar types of distribution systems, the various taxation law systems require a unified design of institution for their coordination. The steady and gradual completion of such systems is also needed for the better achievement of unified distribution goals and to provide a better solution to relevant issues in the area of distribution.

Notes 1 See Pingxue Zhou. (1995). Attention shall be Paid to the Research to the Economic Attributes of the Constitutional Law. Law Science, (12), pp. 16–17. 2 For the discussion on “Constitutional Economics”, see Brennan and Buchanan.(2004). Constitutional Economics, translated by Feng Keli, et al. Beijing: China Social Science Press, p. 2. preface by Feng Xingyuan. 3 Some scholars believe that the emphasis of constitutional economics is the influence on economic growth by different types of systems, while economic constitutional law, when focusing on the institutional protection of economic growth, pays more attention to the just position of fundamental individual human rights and freedoms in economic systems. See Yue Wu. (2007). An Introduction to Economic Constitutional Law: The Game between Economic Right and Power in China during Transformation, the Law Press, Preface,p. 4. 4 Though the concept of “economic constitution” originates from economic law research in Germany, Linke, the German scholar, still positions economic constitu­ tion as a constitutional norm. See Shiyi Zhao. (2001). Basic Questions on Economic Constitutionalism. Chinese Journal of Law, (4), pp. 32–41. 5 For efforts and results in this area, See Buchanan and Tullock. (2000). The Calculus of Consent: Logical Foundations of Constitutional Democracy, translated by Chen Guangjin, Beijing: China Social Science Press; Brennan and Buchanan (2004). Constitutional Economics, translated by Feng Keli, et al. Beijing: China Social Science Press.

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6 Famous economists such as Böhm and Rink emphasize the research on the relation­ ship between constitutional law and economic law. Along with economist Okun, they value the close interrelation between economic constitution and “order”, and empha­ size that economic constitution is the comprehensive choice to the order of civil eco­ nomic life. 7 In the opening words for the Economic Order, edited by Böhm and Okun, they empha­ sized that “the economic constitution should be understood as the comprehensive choice to the order of civil economic life”. Though such choice is definitely political, it is also directly related to the perception to objective economic regulations. 8 Article 1, Clause 8 of the US Constitution defines interstate trade, and emphasizes that Congress owns the legislative power to regulate interstate trade. Based on this clause, the US published a series of important economic legislations such as Interstate Commerce Act and Sherman Antitrust Act. 9 Article 23, Clause 2 of the Constitution of the Russian Federation stipulates that “the economic activity aimed at monopolization and unfair competition shall not be allowed”, which represents the constitutional basis for anti-monopolization and antiunfair competition legislation. 10 Some scholars call it “the power of the state to regulate” and believe that it belongs to the fourth form of power. See Yunliang Chen. (2007). State’s Regulatory Power: The Fourth Power. Modern Law Science, 29(6), pp.15–21. 11 Some scholars reckon that the ownership institution is the core to the fundamental eco­ nomic institution (i.e. market economy or planned economy institution) established by the constitution. See Yushi Gui (2005). Economic Institution in Chinese Constitutional Law. Wu Han: Wuhan University Press, pp. 20–21. 12 For example, Article 8 of the Constitution of the Russian Federation stipulates that “in the Russian Federation, recognition and equal protection shall be given to the private, state, municipal and other forms of ownership”, and Article 9 stipulates that “land and other natural resources may be in private, state, municipal and other forms of ownership”. 13 For example, the Constitution of the Federative Republic of Brazil (published on October 5, 1988) makes specific stipulations to the distribution of taxation income of different levels of government in Article 157 and 158 in Chapter 6. 14 This conclusion was made by famous American historian Charles A. Beard based on the economic analysis of the US Constitution, employing the economic historic per­ spective to interpret the US Constitution. See Charles A. Beard. (2011). An Economic Interpretation of the Constitution of the United States, translated by Xiqi He. Beijing: Commercial Press. 15 Academia has significant discourse concerning the issue of economic administrative law. For example, Rolf Stober. (2008). Allgemeines Wirtschaftsverwaltungsrecht: Grundlagen des Wirtschaftsverfassungs- und Wirtschaftsverwaltungsrechts, des Weltwirtschafts- und Binnenmarktrechts, translated by Libin Xie. Beijing: Commercial Press. However, in China, many scholars oppose the idea of equating economic law with economic administrative law. See Kepeng Xue. (2013). Investigation to the Origin of Economic Administrative Law Theory: Economic Administrative Law in the Context of Economic Law. Contemporary Law Review, (5), pp. 123–130. 16 For example, Article 71 of the Constitution of the Russian Federation stipulates that “the jurisdiction of the Russian Federation includes: …g. establishment of legal groups for a single market; financial, currency, credit, and customs regulation, money issue, the principles of pricing policy; h. federal economic services, including federal banks; federal budget, federal taxes and dues, federal funds of regional development”. These are all important areas in economic law. 17 For earlier discussion and dispute, see Tiechuan Hao. (1996).On Benign Violation against the Constitution.Chinese Journal of Law, (4), pp. 89–91; Zhiwei Tong. (1996). “Benign Violation against the Constitution” Should not be Recognized. Chinese Journal

Consistency of key distribution systems 45 18

19

20

21

22

23

24

25

26

27

28

of Law, (6), pp. 19–22. With the improvement of rule of law, various issues of violation against the constitution should be avoided, regardless of whether it is “benign” or not. See The Decision to Implement the Binary Taxation Fiscal Management Institution (1993); The Notice to Distribute the Reform Scheme of Income Tax Revenue Sharing (2001); The Decision concerning Financial Institution Reform (1993); The Decision concerning the Reform to Investment Institution (2004), etc. Though China announced that the socialist legal system, with Chinese characteristics having been established as early as January 2011, many legal systems concerning dis­ tribution are far from being complete, and the task for legislation in the field of distribu­ tion is still heavy. For the vertical development process of economic law, the scholars have already achieved certain results, i.e. Xinhe Cheng. (2008). Research to the 30-years Development of the Economic Law in China. Journal of Chongqing University (Social Science Edition), 14(4), pp. 104–108. Yet in general, deeper research is still required. The emergence and development of economic law change the fundamental structure of the legal system in various states, and generate essential influence to the protection of property rights, which is consistent with the institutional change theory of North. See Douglass North. (1994). Structure and Change in Economic History, translated by Yu Chen, Huaping Luo. Shanghai: SDX Joint Publishing Company, Shanghai People’s Press, p. 24. The relationship between the government and market has always been fundamental during the process of reform and opening-up, and it is important to the solution to dis­ tribution issues. See Shouwen Zhang. (2014). “Decision to Reform” and the Consensus for Economic Law. Law Review, 184(2), pp. 18–29; Shouwen Zhang. (2014). Legal Adjustment to the Relationship between the Government and Market. China Legal Science, (5), pp. 60–74. Economic constitution is the vital foundation for economic law. Famous economic law expert Böhm focused on “economic constitution” in a comparatively earlier time and promoted the research in “economic constitution” along with Okun. Buchanan initiated the research to constitution economics and paid attention to the issue of economic law institutions. Therefore, the close interrelationship among the previous institutions and theories should be noticed when studying the development of economic law. The theory of precedency emphasizes more on the hierarchy among constitutional law and other laws. Therefore, economic law should submit to the requirement of constitu­ tional law. See Dieter Grimms. (2010). Ursprung, Wandel und Zukunft der Verfassung, translated by Liu Gang. Beijing: China Law Press, p.14. This article is crucial to the development of the economic law institution and the economic law study. In terms of constitutional interpretation, its function should be emphasized so that it could provide important constitutional support to the institutional construction and legal discussion of economic law. The original stipulation is “the State implements planned economy on the basis of socialist public ownership”. Such tremendous change in the economic institution involves many important theoretical and institutional problems in constitutional law and economic law and directly affects the development of economic law. The difference in the conception to “economic Constitution” in Germany, see Hui Huang. (2009). The Application of Economic Institution Clauses in the Constitution: The Dispute Concerning German Economic Constitution. Peking University Law Journal, 21(4), pp. 559–573. The original stipulation is “the State guarantees the coordinated development of civil economic in proportion, through combining the comprehensive balance of economic planning and the assistive function of market adjustment”. There exist similarities between the original and new stipulations with regard to the issue of comprehensive balance and coordinated development.

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29 See Qianfan Zhang. (2001). Regulation and Control to Interstate Trades by the Federal Government of USA. Journal of Nalnjing University (Philosophy, Humanities and Social Sciences), 38(2), pp. 141–150. 30 The stipulations concerning the economy or economic law in the constitutions of rel­ evant states are numerous, for example, the stipulations to fiscal institutions in Basic Law for the Federal Republic of Germany, stipulations to macro regulation and control institutions including budget, taxation, and monetary institutions in The Constitution of the Bolivarian Republic of Venezuela. 31 For instance, Article 151 of the Weimar Constitution stipulated that “the economy must be regulated according to the principles of justice with the goal of assuring humane living conditions for everyone. Within these boundaries the economic liberty of the individual is guaranteed”. Article 217 of the Constitution of the Dominican Republic stipulates that “the economic regime is oriented towards the search for human develop­ ment. It is based on economic growth, redistribution of wealth, social justice, equity, social, and territorial cohesion and environmental sustainability”. These stipulations reflect the value and spirit of constitutional law. 32 See Qianfan Zhang. (2011). US Federal Constitution. Beijing: China Law Press, pp. 98–100. 33 The Decision concerning Economic Institution Reform passed by the Central Committee of CPC in October 1984 brought forward the “macro-regulation and control”, having emphasized that through comprehensive employment to economic leverage including price, taxation, and loan, the total amount of supply and demand of the society should be adjusted, and the industry structure and allocation of productive forces should be regulated. It roughly equals the later definition of “macro regulation and control”. 34 See Shouwen Zhang. (2009). The Meridian that Runs through the Research of Economic Law in China: From the Perspective of Distribution. Tribune of Political Science and Law, 27(6), pp. 122–135. 35 See Shouwen Zhang. (2013). The “Experiment Mode” of Taxation Legislation in China: Taking VAT Legislation Experiment as Example. Law Science, (4), pp. 61–68. 36 See Shouwen Zhang. (2009). General Introduction to Economic Law. Beijing: Renmin University Press, p. 48, 59. 37 The function of constitutional law to regulate could be understood as the function to regulate or restrict, which is not entirely the same to the regulation function of economic law. See H. Th J. F. van Maarseveen. (2007). Written Constitutions: A Computerized Comparative Study, translated by Chen Yunsheng. Peking University Press, p. 315. 38 For example, the US once announced in 1895 that the imposition of income taxation was against the Constitution (and the imposition of income tax was resumed till 1913), and that the National Industrial Recovery Act was against the Constitution in 1935. 39 The US does not deem the income tax institution as violation against the Constitution. In the constitutional laws of Germany, Brazil, etc., specific stipulations concerning income tax institution are made, and stipulations regarding macro regulation, con­ trol systems, and market regulation systems, including finance and taxation, are also included. 40 See Shouwen Zhang. (2012). Economic Law: Thinking on the Right to Economic Development. Modern Law Science, 27(2), pp. 3–9. 41 Commodity, income, and property as wealth in dynamic or static form is normally the object of taxation. See Shouwen Zhang. (2012). Principles of Taxation Law, 6th ed. Peking University Press, pp. 54–55. 42 The “objects” being discussed in a broader sense, from the perspective of normal legal research (especially the taxation law research). The “objects” in the context of private law are also not limited to “objects” in the sense of property law. 43 This issue could also be investigated from the perspective of “the paradox of Douglass North”. North once believed that the existence of the state is the key to economic growth, and also the source of recession. The state should define and protect prop­

Consistency of key distribution systems 47

44 45 46

47 48

49

50 51

52 53 54 55

56 57

58

erty rights, and meanwhile increase its income, and such two aims are intrinsically contradictory with each other. In fact, the contradiction in “the paradox of Douglass North” is consistent with the contradiction between taxation law and private law, which would contribute to illustrating the necessity of conflict between taxation law and private law. See Douglass North. (1994). Structure and Change in Economic History, translated by Chen Yu. Shanghai: SDX Joint Publishing Company, Shanghai People’s Press, pp. 166–177. See Shouwen Zhang. (2001). The Universal Applicability of Taxation Law and its Limitations. Peking University Law Journal, 13(5), pp. 554–566. Adam Smith once pointed out that political economics has two goals: to make the state prosperous and to make the people wealthy. See Adam Smith (2003). The Nature and Causes of the Wealth of Nations, translated by Guo Dali and Wang Yanan. Beijing: Commercial Press, p. 1. To make the state prosperous, the public property right should be established. While in order to make the people wealthy, the private property right should be protected. Therefore, the separation of the two rights is justified. The State Administration of Taxation organized and published the Announcement Concerning the Right and Obligation of Taxpayers in November 2009, and the number of the rights concerning taxpayers is 14. Article 42 of German Taxation Law makes specific stipulations concerning activities aiming at avoiding tax, emphasizing that substantial taxation shall be imposed on tax­ payers who abuse their rights. It is widely acknowledged as a typical illustration to the principle of substantial taxation. When the 2008 financial crisis occurred, states such as the US, Germany, UK, Japan, and Australia began to institute the tax reduction. The Emergency Economic Stabilization Act of 2008 and the Energy Improvement and Extension Act of 2008 had a huge influ­ ence as they involved over hundreds of billions of dollars. Tax reduction is directly relevant to the right to economic development of mar­ ket agents. See Shouwen Zhang. (2012). Economic Law: Thinking on the Right to Economic Development. Modern Law Science, 34(2), pp. 4–10. “Structural tax reduction” is a vital tool to solve economic and social problems and should become a strategic choice. See Tifu An and Haiyong Wang. (2004). Structural Tax Reduction: Choice for Taxation Policy under the Limitation of Macro-economy. International Taxation in China, (11), pp. 7–12. See Tifu An. (2012). On Several Issues concerning Structural Tax Reduction. Taxation Research, (5), p. 3. See Geoffrey Brennan and James M. Buchanan. (2004). Constitutional Economics, translated by Feng Keli, et al. Beijing: China Social Science Press, pp. 6–10. According to the requirement of Department of Finance and State Administration of Taxation, before December 31, 2009, the function of levying of the two types of tax should be transferred from local fiscal departments to local taxation administrations. The Decision to Rescind the Regulation on Agriculture Taxation was passed by the Standing Committee of the National People’s Congress in December 2005, thus the Regulation on Agriculture Taxation that passed in 1958 was rescinded from January 1, 2006. Article 3 of the Law on Taxation Administration has made explicit stipulations on this and it shall be discussed in subsequent sections. One of the taxes is “corporate income tax”, and the other is “income tax of foreign invested company and foreign company”. The unified Law on Corporate Income Tax was passed by the National People’s Congress and has been implemented since Jan 1, 2008. Originally, foreign companies and individuals were subject to urban real estate tax and vehicle and vessel license tax. After the reformation, such agents are subject to the same real estate tax (from Jan 1, 2009) and vehicle and vessel tax (since Jan 1, 2007)

48

Consistency of key distribution systems

as domestic companies thereby achieving the unification of real estate tax and vehicle and vessel tax. 59 For example, the “income tax for foreign invested and foreign companies” is now abol­ ished, yet a new “corporate income tax” has been imposed. The “urban real estate tax” for foreign companies has been abolished, yet a new “real estate tax” has been levied. The “vehicle and vessel license tax” imposed on foreign companies has been abolished, yet a new “vehicle and vessel tax” has been imposed. 60 In China, the suspension of tax must result from the fact that the levying of such tax is inconsistent with the social and economic policy, therefore the influence of such sus­ pension would be minor. Apart from the tax for guiding the investment on fixed assets, the suspension of the “interest tax” is another instance. 61 For example, according to Article 28 of the Law on Corporate Income Tax, the rate for micro-scale companies is 20%, while the rate for high and new tech companies sup­ ported by the state is 15%. In addition, during particular periods, the State Council may grant micro-scale companies more taxation preferential measures.

3

Unification and difference of distribution systems

The governance of laws, especially economic laws, is indispensable to the solving of distribution issues. Based on the unification of the legal system, distribution systems that are relevant to each other should also be unified to a certain degree. This is essential to solving essential and common distribution issues. However, the unification of the distribution system can only be relative. Because of the fact that the specific situations of various types of agents are different, the violation or exception to a unified distribution system always exist, and new differences in the system are generated. These differences constitute a violation of the unified distri­ bution system. Whether such violations are legal and comply with the principles of the rule of law are worthy of serious research and discussion. Therefore, when focusing on the unification of the distribution systems, existing differences should also be addressed. The relationship between unification and difference shall also be resolved in order to better realize the comprehensive aim of the distribution system. In fact, arrangements with regard to discrimination in distribution systems are very common. For instance, the “experiment” for taxation legislation is a discrim­ inated arrangement outside the unified system. At the same time, the focus should be on the realization of distribution goals and the unification of the legal ground during such a process, given that it is especially important during the implementa­ tion of structural tax reduction measures. Besides, the differences existing in the unified law of corporate income tax, under some circumstances, for example, the very special collection taxation system, partly resulting from the consideration to factors relating to the state. For such purposes, it is necessary to illustrate the dialectical relation between the unification and differences of distribution systems with the institutional practice in the aforementioned areas, as well as the existing issues’ different distribution systems.

3.1 Difference outside the unified distribution system To solve the complicated distribution problems, selective arrangements are made outside the unified distribution system because of the practice of “experimen­ tation” during the establishment of the distribution system, which is, to some extent, against the requirement of the law. In the area of taxation, the legislative

50  Unification of distribution systems  “experiment” is more common and it directly affects the distribution of interest of relevant agents, especially the distribution between the state and the citizen. For example, the experiment on the reform of real estate tax once drew a lot of attention. In fact, besides the real estate tax, there have been many “experiments”, some of which are ongoing. Analyzing the merits and flaws of the mode of the experiment would assist us to analyze the existing problems of the Chinese distri­ bution system from another perspective. Since the start of China’s reform and opening-up, economic legislation has received an increasing focus among which taxation legislation is centrally impor­ tant and is predominantly typical.1 After all, the income tax legislation in interna­ tional areas, as the earliest economic legislation after the reform and opening-up, has laid an important foundation for the rule of law of taxation and for the com­ prehensive rule of law of the economy.2 Meanwhile, massive economic legisla­ tion in every cycle has been led by taxation legislation. Although currently, the basic framework of taxation legislation has been established, the taxation system is still flawed and the structure is still not completed.3 Thus, it is still necessary to profoundly explore the issues in taxation legislation. From the legislative process since the reform and opening-up, one important characteristic of Chinese taxation legislation is to emphasize the legislative “exper­ iment”. For example, in the first stage of reform and opening-up, the State Council announced a series of taxation regulations (draft) within the framework of the “experiment”.4 With the deepening of reform and opening-up, though many taxa­ tion legislations are not in an “experimental period”, they still remain “interim”.5 In recent years the “experiment for taxation reform” has been conducted in areas including VAT, real estate property, and resource property, while reforms regard­ ing the adjustment of taxation elements or taxation levying are implemented at the legislative level. Therefore, the aforementioned “experiment for taxation reform” is, in essence, a “legislative experiment”. The long-term, quantitative, and frequent legislative experiments as a common and significant phenomenon in Chinese taxation legislation deserve attention and deserve to be researched. In fact, the legislative pattern to “to experiment first” has been widely applied to many areas and has formed a model. The legislative institution prefers the “experiment” for many reasons: to accumulate legislative experiences through such experiments, to find out the flaws of the original institution, to improve the institution, and to lower costs. It is reasonable to apply such a method based on the abovementioned factors given that it corresponds to the “trial and error” method proposed by Karl Popper. Therefore, “first experiment, then popularize” has become the approach of many institutions in China. However, to conduct the legislative “experiment” requires that it is necessary to identify factors that need or could be “experimented”, to find out whether such experiments could solve the abovementioned issues, genuinely improve the flaws of the institution, and reduce the cost associated with the rule of law. If a legisla­ tive “experiment” increases instead of reduces the cost and brings chaos rather than facilitate the improvement of the institutions, then such “experiment” is not preferable.

 Unification of distribution systems  51 Besides, the “experiment” should also take the legal ground, feasibility, neces­ sity, and reasonableness into account, and should focus on the achievement of val­ ues through justice and efficiency. If the experiment lacks sufficient legal ground or may have a negative impact on justice among relevant agents or the efficiency of the operation of the system, then such an experiment should not be conducted. Thus, a specific taxation legislative “experiment” should comply with the princi­ ples of law, justice, and efficiency, which are standards set to verify legality, rea­ sonableness, and necessity. Meanwhile, such principles or standards are important parameters for assessing the “experiment model” for taxation legislation. Considering that VAT is the biggest tax in China and that it is likely to sig­ nificantly impact the distribution of interests for various kinds of agents, the fol­ lowing part, taking the legislative experiment of VAT as an example, intends to discuss the legality and reasonableness of the “experiment model” and bring out its merits and demerits. We intend to promote the improvement of comprehensive taxation legislation and economic legislation and to enhance the understanding of the unification/difference of the distribution system as well as relevant issues pertaining to the rule of law. 3.1.1 The VAT system under a long-term “experiment” state VAT covers wide areas including sales of goods, provision of labour, import/ export, and areas which continue to expand through “experiment”. The comple­ tion and relative stability of the VAT system are vital given that VAT constitutes one third to half of the entire taxation income and generates enormous influence to the distribution of the taxation interest and wealth of the state and citizens. Yet the VAT system in China has always been under “experiment”. The following part will observe and analyze the underlying legal issues through the process of the legislative experimentation of VAT as a way of investigating the common issues existing in the “experiment model” of taxation legislation. During the early stage of reform and opening-up, the economy was mainly a product economy and industry/commerce tax or product tax was once in a pre­ dominant position. VAT appeared at the time as the replacement of product tax to solve the issue of repeated levying, and finance and taxation administrations initiated the “experiment” of VAT in relevant industries. Considering the fact that the State Council was not eligible to make taxation legislation, the Standing Committee of the National People’s Congress decided on September 18, 1984 to authorize the State Council “to formulate relevant taxation regulations and pub­ lish in the form of draft during the process of implementing the reform of ‘profit to tax’ for state-owned enterprise income and the reform of industry/commerce tax. The State Council was also authorized to amendments to such drafts accord­ ing to experiences generated from practice and submit to the Standing Committee of National People’s Congress’ reviewing” (The Standing Committee of the National People’s Congress 1984).6 The State Council, on the same day, pub­ lished Regulations for VAT (draft) and it was “experimented” for ten years, till the publishing of the Interim Regulation on VAT. Although the following “Interim

52  Unification of distribution systems  Regulation” was not “experimented” in the form of a “draft”, the VAT institution has, in essence, constantly changed. The Department of Finance and the State Administration of Taxation have promulgated numerous normative documents to fix the loopholes which have made the Interim Regulation on VAT different from its original form. Many nominally valid stipulations have been made void. By the beginning of the 21st century, the VAT institution became relatively mature but from 2004, having started in the northeast region of China, the “experiment for transformation” which changes VAT from “productive” to “consumptive”, was initiated and gradually spread to central areas and finally to the entire nation in 2009 forced by pressure resulting from the financial crisis. At that time, the appeal to upgrade the Interim Regulation on VAT to law continued to grow. Yet, before the realization of the effort to upgrade the level of VAT regulations, a new experi­ ment began in 2012 starting from Shanghai then spreading to the whole nation. The experiment, of “business tax to VAT” has become the emphasis of the whole taxation reform in the new era. The VAT system in China has been constantly in an “experiment” phase. This has resulted from various reasons including the diversity and complicity of socialeconomic relations, the shift from a planned economy to a commodity economy with plans, and to the market economy all of which call for a corresponding change of the taxation law system. Also, some objective elements contribute to such change, for example, the legislators’ lack of acknowledgement of the princi­ ples of VAT and VAT systems, the lack of comprehension to the speed of devel­ opment of the national economy and society, the lack of legislative technology and capacity, etc. Nevertheless, from the normative perspective, VAT needs to be “a complete chain”, which requires that the VAT system should be commonly applied throughout the nation. Therefore, the VAT system in a constant “experi­ ment period” needs to be stable and needs to become a vital system that is appli­ cable to the whole nation and which directly affects economic development. A stable VAT system is somehow problematic from the perspectives of both the stability of laws and the applicability of taxation laws (Shouwen Zhang 2001).7 It is vitally important for the rule of law in taxation to make the appropriate bal­ ance and coordination between stability and flexibility. As discussed earlier, China has conducted experiments for system transforma­ tion in areas like real property tax and resource tax.8 “Experiment before full-scale application” is a common economic reform and economic legislation practice in China. Such an “experiment model” is advisable for human reasons especially the lack of experience of the government with regard to economic management, as well as the lack of understanding by legislators of principles, techniques, and results of economic legislation. In the early stages of the reform, because of the lack of understanding and experience in shifting the economy, implementing insti­ tutional reforms, undertaking upper construction or top-level design, and because of the relative absence of a strong economy and the rule of law, it is necessary to emphasize “prior experimentation”. However, the market economy and the con­ struction of the legal system have developed, and experience from mature marketeconomy states and emerging market-economy states has been accumulated by

 Unification of distribution systems  53 China. The question now is whether the “experiment model” should be applied and whether continuous, quantitative legislative “experimentation” is necessary. Is the “experiment model” legal and how does it affect equality and efficiency? Such issues are worth studying. The following part discusses these issues, taking the legislative “experiment” of VAT as an example. 3.1.2 Legality of legislative “experimentation” Legislative “experimentation” in any field should have its legal ground. It is directly linked to the legality of the legislative “experiment” and the effectiveness of relevant legislations. In the case of legislation that is authorized, it involves the issues of the legality and effectiveness of authorization. Meanwhile, it is relevant to the stability and flexibility of legislation (Shouwen Zhang 2002).9 In the discussion above, VAT legislation in China has constantly been in the “experiment” state. In the early stages of reform and opening-up, the finance and taxation administrations considered introducing the French VAT system and con­ ducting experiments in several industries across several cities. To solve the issue of legality of the reform with regard to industry and commerce, tax conducted by the State Council, the Standing Committee of the National People’s Congress passed the Decision to Authorization on September 18, 1984, which approved the reformation scheme proposed by the State Council to reform the industry and commerce tax. Based on such a decision, the State Council published six “Regulations (draft)” including the “Regulation on VAT (draft)” which enabled VAT legislation to gain legality, at least, on the surface. During the experimental period of the Regulation on VAT (draft), the State Council continuously expanded the sphere of VAT and the original 12 items were extended to 31. For such an “extension”, the State Council did not amend the “Regulation (draft)” according to the authorization in 1984, nor did it promulgate any “Interim Regulation” according to the National People’s Congress authoriza­ tion in 1985. Therefore, the legality of such an extension is doubtful. As the replacement, completion, and supplement to the Regulation on VAT (draft), the Interim Regulation on VAT came into effect in 1994, and the legal ground for this Interim Regulation is, as is commonly believed, the “Decision to Authorization” in 1985, the core of which is that the National People’s Congress “authorizes the State Council to, when necessary, make interim regulations con­ cerning issues relevant to the reformation of the economic system and openingup in accordance with the Constitution without violating relevant laws and basic principles of decisions made by National People’s Congress as well as its Standing Committee” (The Third Conference of Sixth National People’s Congress 1985).10 For this is the sole basis upon which the issue of legality can be solved. Yet if the “Decision to Authorization” in 1985 is the legal ground for the Interim Regulation on VAT, it has to comply with the limitations made by the National People’s Congress concerning the legislative sphere, necessity, and legality, without which the legal ground or legality is still problematic. The fol­ lowing questions need to be answered: is VAT legislation an issue of economic

54  Unification of distribution systems  system reformation and opening-up? Is it necessary for the State Council to make such a regulation? Does VAT legislation made by the State Council conflict with laws and basic principles of decisions made by the legislators? If we apply a broader interpretation of the concept of “economic system refor­ mation and opening-up” and consider reformation to taxation system and relevant taxation legislation in the domain which the State Council has been “authorized” to conduct legislation, then such problems could be solved. That is why there is no serious investigation against such events. However, strictly speaking, the “Decision to Authorization” of the National People’s Congress should be clear, specific with a fixed term (instead of being ambiguous), broad, and indefinite (given that in such a state, the authorization could be essentially indefinite). In fact, in the “Decision to Authorization”, terms such as “issues regarding the economic system reform and opening-up” and “when necessary” are broad and ambiguous (Shouwen Zhang 2011),11 resulting in the State Council gaining tremendous space to legislate. This has given rise to a flood of “Interim Regulations” in various areas. Though the acceleration of the legal system construction has been achieved within a relatively short period of time, whether the “Decision to Authorization” is appropriate remains worthy of our profound consideration. Besides, the “Decision to Authorization” requires that the legislation should be in accordance with the Constitution and not in conflict with laws. Yet in practice, little attention is paid to whether the taxation legislation conducted by the State Council is against the law as well as the basic principles of the law. According to Article 8 of the Law of Legislation and the principle of statutory taxation, regulations concerning basic principles of taxation or basic tax elements should be prescribed by the law and relevant taxation laws should be made. Of impor­ tance, especially under the current circumstances, the level of taxation regulations should be upgraded given that the VAT system has been experimented for many years and that there are abundant foreign experiences available to learn from. Based on the abovementioned factors, in the field of VAT, the state legisla­ tive institution should pass legislation instead of constantly using the “Decision to Authorization” passed in 1985 which makes the administrative institution the main body to make taxation legislation. The “experiment to transformation” or “experiment to extension” should not become the reason to delay direct legis­ lation by the National People’s Congress. Only through this could the Law of Legislation and principle of statutory taxation be obeyed and the issue of the legality of VAT legislation be better solved. In accordance with the requirements of statutory taxation, the taxation element should also be stipulated by the law. Therefore, the adjustment to relevant taxa­ tion elements with regard to each VAT legislation “experiment” should strictly be governed by laws. In fact, the “experiment to the initiation of the tax” at the begin­ ning of the reform and opening-up or the “experiment” of Interim Regulation on VAT, or the “experiment to extension” of VAT involves the change of taxation items and rates. While the “experiment to transformation” of VAT involves the exercising of taxpayers’ rights to deduction, it directly affects the adjustment to the basis of the tax. Such change or adjustment to the taxation elements should

 Unification of distribution systems  55 strictly abide by the principle of statutory taxation, which is the only approach to guarantee the legality of the “experiment”. In general, during the transitional period from a product to goods economy and further to market economy, the VAT system in China has constantly undergone “experiments”, a phenomenon far from the requirement of the rule of law and which seriously affects the stability of the system. Although the shift of economic institution and system has caused the emergence of new types of transactions which are increasingly complicated and which have become a vital foundation for VAT, the shift has also rendered the VAT system rigid and exceptionally “flex­ ible”.12 Therefore to reinforce the balance and coordination between stability and flexibility within the taxation law system becomes important. Even if the level of “stability” of taxation law could never be achieved as with some traditional laws, at least relative stability should be pursued. Especially the institutional ref­ ormation of VAT, as the biggest tax, directly affects the freedom of operation of corporations and property rights of citizens as well as the distribution of interests of various agents. For such reasons, the stability and predictability of VAT laws should be maintained. Also, the “certainty” based on its stability is more impor­ tant (Hayek 2002).13 Besides, the “Decision to Authorization” in 1985 by the National People’s Congress once required that the published regulations, “after being examined by practice, when the time is mature, should be made into laws by the National People’s Congress or its Standing Committee”, which means the principle of legal reservation is still emphasized and insisted. However, according to past practices, the focus was on “authorization” while the attention to the ultimate legislative power and ultimate responsibility of the legislature was absent. Therefore, the partial understanding of the “Decision to Authorization” has to be corrected and from the perspective of ensuring legality, the National People’s Congress and its Standing Committee have to bear the responsibility to legislate and to promote and upgrade the level of VAT legislation. 3.1.3 The issue of fairness in legislative “experimentation” The legislative “experiments” of VAT involve not only the issue of legality but also the issue of fairness which has attracted more attention from the public. In fact, various legislative “experiments” are institutional reform mostly targeting some sort of issue of unfairness. For example, the “transitional experiment” of VAT aims to solve the issue of unfair deduction, the “extension experiment” aims to solve the issue of duplicate taxation or unfair tax burden,14 while one significant goal of the experiment on real property tax reform intends to solve the unfair­ ness of income distribution or the distribution of real estate resources.15 Because various legislative “experiments” involve the value of fairness and aim at solving specific issues of unfairness, the legislative experiments have thus been justified to a certain extent. One vital goal of the VAT system in different countries is to solve the issue of unfairness brought by duplicate taxation. As a typical “neutral” tax, VAT is not

56  Unification of distribution systems  supposed to bring extra costs or interests to taxpayers. However, because of com­ plicated reasons, such benefit in practice is not abundantly achieved in the realistic system, thereby revealing the unfair nature of the system. Besides, the unfairness resulting from “experiments” and the limitations in solving the issue of fairness is generally neglected. Hence, focus on the legislative experiments of VAT requires attention to the following points. First, the legislative “experiment” may create new unfairness. Each “experi­ ment” is conducted in a specific “spot” in a specific area. This means it is in con­ flict with the principle of universality. The experiments are conducted in specific areas or industries which require the special application of the law. Sometimes, this causes the emergence of a so-called “low-lying land effect”, directly affect­ ing the distribution of interest and the realization of the value of fairness among different agents in different areas and industries. For example, from the perspec­ tive of substantial fairness, though the “transitional experiment” conducted in the northeast in 2004 was necessary and the industries and amount of wealth involved were not significant, it did cause a difference compared with other regions and industries and it made agents in other regions and industries feel indignant. That is one of the significant reasons why the state extended the application of relevant institutions to the central area as well as the whole nation. Besides, the more “uni­ versal” the VAT system is, the better the effect it has to solve the duplicate taxa­ tion, and the better the chances of protecting fairness. Meanwhile, “experiments” in isolated industries or regions would not contribute to solving the issue of dupli­ cate taxation. In fact, they may even create new cases of unfairness. For instance, the “extension experiment” once negatively affected the fairness of the tax burden because of the inconsistency of the taxation chain among relevant industries. Second, the legislative “experiment” cannot solve the issue of fairness among different types of taxpayers. VAT is widely applied and VAT payers are hugely diverse. Yet, as a tax that targets agents instead of individuals, it does not focus so much on the difference and fairness between different agents, therefore whether the legislative “experiment” will be applied or not cannot solve the issue of dif­ ference resulting from the diversity of internal agents as well as the unfairness in institution and implementation.16 For example, in terms of the use of VAT Specific Receipt (fapiao), the standard of deduction and actual tax burden, ordi­ nary taxpayers and small-scale taxpayers are treated differently. Though Pareto improvement in legislation could be achieved, the unification of treatment and status among taxpayers still could not be realized. Neither the “transitional experi­ ment” nor “extension experiment” of VAT can solve the issue of unfairness in the tax burden resulting from the difference in identity and status of taxpayers. Although VAT emphasizes “neutrality” or “no difference”, the differences among taxpayers and institutional design problems cause differences in the exercising of rights or tax burdens of various agents, bringing about vertical unfairness. At last, it is difficult for the legislative “experiment” to solve the issue of the fair distribution of taxation revenue. On one hand, VAT, as a commodity tax, is closely linked to the place of sale of the relevant commodity (Fikentscher 2010)17 and thus, should be administered by the corresponding jurisdiction which closely

  Unification  of distribution systems  57 connects to local taxation revenue. On the other hand, VAT is a typically shared tax which is relevant to the taxation revenue of the central government. The fair­ ness in the distribution of VAT income is vitally important. In fact, the scheme for “business tax to VAT” had been brought long ago, yet it was not implemented only because of the fact that it would affect the core interests of the local govern­ ment. For this reason, when “extension experiment” was implemented the state emphasized that this should not affect the taxation interest of the local govern­ ment.18 As long as the conflict of interests exists between central and local gov­ ernment, the interests represented by the two sets of taxation administrations will have “permanent differences” that are difficult to solve. It could be concluded that the legislative “experiment” of VAT involves vari­ ous issues of fairness but, sometimes, it brings about new issues of unfairness. The unfairness between regions and industries where the experiments are and are not conducted is in conflict with the “unification of law” and the “unification of the taxation system” required by the market economy; it affects fair competition and distribution and it should be solved. 3.1.4   Considering the efficiency of the legislative “experiment” In addition to the abovementioned issues of legality and fairness that are involved in VAT legislative “experiments”, the issue of efficiency is also relevant. The real property taxation legislative “experiment” in Shanghai and Chongqing aims at safeguarding comprehensive economic efficiency by promoting the healthy devel­ opment of real property markets, preventing the overheating of the economy, and avoiding the economic bubble from bursting. From the perspective of efficiency, every type of legislative “experiment” needs to comply with the requirement of both economic and administrative efficiency. Based on the principles of economic efficiency, the legislative “experiment” of VAT should contribute to the development of the economy. In fact, both the “extension experiment” aimed at preventing or reducing duplicate taxation and the “transitional experiment” aimed at extending the scope of deduction intend to excite the energy of enterprises, promote the efficiency of the economic opera­ tion, and to advance economic development. From this sense, these two types of “experiments” both comply with the principle of economic efficiency. Besides, as the typical indirect tax, the “extension experiment” of VAT reduces the overall tax burden of some agents that were originally subject to business tax, and further affect the price as well as the final agent that bears such a tax. Therefore, such reform could contribute to relieving the pressure of enterprises and citizens and could promote the development of the economy, thereby comply­ ing with the principle of economic efficiency. From the requirement of administrative efficiency, the legislative “experi­ ment” should lower the cost of the tax administration or the cost of taxpayers for such costs are ultimately borne by taxpayers. The rising cost of taxation is not only the result of administrative inefficiency of taxation administrations, it equally affects the efficiency of the economy because of the increasing burden of

58  Unification of distribution systems  taxpayers. Besides, the cost of taxation of the whole taxation system should be examined, especially the cost of coordination among taxation administrative bod­ ies (Streit and Kasper 2000).19 For example, the “extension experiment” directly involves coordination between the two sets of taxation administrations. The issue of the cost of coor­ dination or institutional reform should be considered comprehensively based on the principle of efficiency and from the perspective of cost-benefit analysis. It is common knowledge that without the design of two sets of taxation administra­ tions, the costs, including the cost of tax collection and the obedience of tax­ payers, the cost of coordination, and the reform of institution, will be lowered. If two sets of institutions could be combined, and as long as the institutional arrangement is reasonable and the power, type, and benefits of taxation could be effectively defined, the interest distribution between central and local gov­ ernments could be solved. Otherwise, even with the two sets of institutions and without a steady institutional arrangement to the distribution of taxation income, the issue of the relationship between central and local government will continue to exist. When the taxation revenue gained by the local government is not suf­ ficient to support the performance of its functions, the financial pressure of the local government increases and the “land finance” or other types of “non-taxa­ tion financial revenue” become difficult to deal with.20 Therefore, the key is the reasonable distribution of taxable income and the shift of government functions which are not solely resolved through the setting up of taxation administrations. The configuration of power to taxation and the arrangement of various “institu­ tions” are required. 3.1.5 Further thinking on the “experiment method” for taxation legislation The issues of legality, fairness, and efficiency with regard to the VAT legislation “experiment” are common in various types of taxation legislation and they further have a vital influence on the distribution of income of relevant agents. To solve such problems, the three fundamental principles of taxation law shall be main­ tained. Because of the fact that the “experiment” of VAT legislation is very typi­ cal, the corresponding issues are thus quite typical to undertake research on the “experiment method” of taxation legislation. Given that there is prior discussion during the process to implement the “experiment method” of taxation legislation, the following questions should be further considered and focused on. 3.1.5.1 Should the legislation “experiment” focus on legality at multiple levels? Both regular taxation legislation and the legislation “experiment” as reformation exploration should emphasize the issue of legality. Prior discussion on the VAT legislation “experiment” has already reflected the common problem existing in taxation legislation as well as the whole economic legislation. For a long period of time, China has been in the process of reform and transformation. As long as the 1985 “Decision to Authorization” still forms the legal ground, only a “permission

Unification    of distribution systems  59 by the State Council” could lead to the “experiment” or “amendment” of the laws in most areas of taxation – an action which is relatively easy to undertake. The legality of such conduct has already received criticism. There are also doubts regarding putting the “Decision to Authorization” as the legal ground for “experi­ mentation”. The existence of the prior issues would have a profound influence on the seriousness and compliance of the taxation law as well as on the development of rule of law in taxation. Considering that the Law on Legislation has substantially stipulated the power and level of taxation legislation, it is worth discussing whether the “Decision to Authorization” made at the beginning of the Reform and Opening-up should be abolished, and whether a transition period should be set for the purpose of ending such authorized legislation.21 From the overall development trend, the “Decision to Authorization” should be abolished at the proper time, given that the authoriza­ tion was vague and broad and that the principle of statutory taxation should be strengthened (Shouwen Zhang 1996).22 The main target of the legislation “experiment” concerning various types of taxation is to reform the current system, a practice which sometimes leads to emphasis on the regulation, control, and collection of tax while neglecting the protection of the freedom of operating and property rights. To effectively balance these two aspects has always been a significant task in terms of the rules of taxa­ tion in the construction of the law. In order to better achieve the goal of rule of law in taxation collection, the principle of statutory taxation must be fully respected when dealing with the common issue that, in practice, the principle of “tax ele­ ments by law” is not strictly respected. To emphasize the legality of the taxation legislation “experiment”, the focus should not only be on the compliance to statutory principles with regard to the grounds of legislation and institution adjustment but also the legislation “experi­ ment” must abide by the requirement of constitutionalism and protect the funda­ mental interests of citizens. From the requirement of legality at a higher level, the taxation legislation “experiment” should never violate the comprehensive and long-term interests of citizens, otherwise it would lose its legitimacy or legality. Therefore, the experiment of real property tax reform should not only conform to the basic statutory principle, but also to the overall and long-term interests of citi­ zens. It should protect the individual interests of taxpayers, which is fundamentally important to ensure the effectiveness of taxation law (Shouwen Zhang 2012).23    legislation “experiment” should be both fair and efficient 3.1.5.2  The The taxation legislation “experiment” may affect property rights and the right to business operation of citizens and may constitute an extra burden to taxpayers which may likely affect the fairness of tax burden. Meanwhile, an unfair taxation system may generate a twisting effect which would negatively affect efficiency. Therefore, good taxation legislation must focus on the close connection between fairness and efficiency, and must strictly conform to the principles of fairness and efficiency of taxation law in institutional design as a way of protecting the

60  Unification of distribution systems  relevant values of order and justice. During the process in which taxation law exercises its function to regulate and distribute, it is relevant to present the new unfairness that may possibly be brought by the legislation “experiment” while pursuing the “Pareto improvement” in efficiency. 3.1.5.3 The future for “experiment methods” Based on the issues of legality, fairness, and efficiency existing in legisla­ tion “experimentation”, the following questions should be further investigated: whether the taxation legislation “experiment” method should be maintained and how the negative effects produced by “experiments” should be viewed. As is mentioned earlier on, the experiments implemented at the beginning of the reform and opening-up were indeed necessary and reasonable, yet while China has already accumulated legislation and gathered experience for many years, including from foreign countries, the question that remains to be answered is whether the frequent and widespread “experiment” is necessary.24 In fact, if a relatively accurate prediction could be made for the real effect of legislation, then legislation “experi­ ment” is not necessary; needless to say that if the choice of “experiment” scheme is improper, the whole situation of legislation would be affected. With the establishment and development of the rule of law, when the principle and system are both relatively clear, the establishment of a stable institutional framework should be emphasized, instead of conducting “experiments” which are neither just nor necessary. From a practical perspective, maybe someone would believe that the “structural tax reduction” is a temporary measure to deal with the crisis and therefore an “experiment” would not be a problem. Yet from the per­ spective of the law, the reduction of tax is always a serious legal issue regardless of the reason because it involves the basic rights of citizens, including property rights, which should be treated with caution. Hence, although “business tax to VAT” is a significant element of the “structural tax reduction”, experimenting with it should not be normalized.25 3.1.6 Summary Taxation legislation involves a complicated distribution of interest and affects wide spheres. The circumstance for its implementation also varies considerably thereby making the “experiment before widespread application” method reason­ able and worthy of extensive application accounting for the “experiment method” for taxation legislation. Although the purpose of “experiments” is usually to solve current institutional issues, it is worth noting that legitimacy may be absent dur­ ing the process of “experimenting” and that it may negatively impact fairness and efficiency. Therefore, the flaws of an experiment scheme or the demerits of institutional designs, as well as the deficits of the “experiment method” should be noted and deeply researched. Based on the importance and typicality of the VAT legislation “experiment”, the previous part emphasized analyzing existing problems and brought out the

 Unification of distribution systems  61 common issues involving various taxation legislation “experiments” including the issue of legality and justifiability reflected in fairness and efficiency. First, in terms of legality, the legal ground, adjustment to taxation collection elements, or specific institutional design, and the protection of the rights of taxpayers in the “experiment” of taxation legislation are particularly worthy of our attention. In the field of taxation legislation, the most outstanding issue is the issue of author­ ized legislation, and the “Decision to Authorization” by the National People’s Congress must be cancelled at the proper time and real taxation legislation in accordance with the Law on Legislation should be conducted. Meanwhile, the adjustment or specific institutional design for collecting taxes should abide by the principle of statutory taxation upon which the interest of the public and the long-term interest of the citizens should be considered so that the basic rights of taxpayers can be protected. Second, in terms of justifiability, the taxation legisla­ tion “experiment” should be visible through the improvement of institutions via the accumulation of experience, and through the assimilation of values including fairness and efficiency. On the ground of meeting the requirement of legality, the taxation legislation “experiment” must solve the existing issue of unfair­ ness and avoid triggering new cases of unfairness. Meanwhile, the efficiency of the economy and administration should be promoted and for such purpose, the institutional problems existing in fiscal and taxation institution should be further solved. When focusing on the necessity and justifiability of the existence of an “experi­ ment method”, the deficits should especially be considered, in addition to the con­ ditions and costs of “experiments”. Since the economy and society have gained tremendous development and the experience of legislation and economic manage­ ment has been increasingly abundant, and based on the spirit of rule of law, unless absolutely necessary, the “experiments” should be reduced so that different treat­ ments that might exist could be eliminated allowing for the unification of basic legal institutions. Therefore, the level of the rule of law can be promoted and the modernization of the state governance system can be enhanced.

3.2 Unified regulation to differentiated distribution To realize justice in distribution, the distribution system should be differentiated. This is otherwise known as differentiated distribution. The degree of difference is difficult to define, and this may lead to further increases in the distribution dif­ ferences and may affect justice in distribution. Therefore, the power involving distribution must have legal grounds and should be exercised in a unified manner. For instance, “structural tax reduction” reflects the difference in the distribution system, namely through making tax reduction arrangements in specific tax sys­ tems to achieving tax reduction for certain, not all, agents. Although “structural tax reduction” is a type of differentiated arrangement, it requires the coordina­ tion of various relevant tax law systems, especially in terms of legal basis and exercising the power of tax reduction, which should be unified. For this reason, the following part discusses the power to reduce taxes involving “structural tax

62  Unification of distribution systems  reduction” as an example to discuss the “difference and unified regulation” in the distribution system. 3.2.1   The multiple definitions of the power of tax reduction The implementation of “structural tax reduction” must be grounded on statutory power to tax reduction, which is the foundation for “unified regulation”. Without the power to reduce taxes, any tax reduction, regardless of its nature, would lack legality. In accordance with the principle of statutory taxation and regulations of relevant laws including the Law on Taxation Collection, no agent is entitled to make decisions to reduce taxes autonomously and by so doing, violate the law.26 Considering the fact that the approaches for “structural tax reduction” vary, the appropriate ground for such tax reduction should be the “power to reduce taxes in the broad sense”. This so-called “power to reduce taxes in the broad sense”, namely the power to decrease the collection of tax, includes the power to reduce the types and items of taxation, to reduce the rate and foundation, to suspend one type of tax, and to reduce the amount of tax, all of which aim to decrease the burden of taxpay­ ers. As a vital part of the power to impose taxes, the “power to reduce taxes in the broad sense” corresponds to the “power to increase the tax”. The difference compared with the “power to reduce taxes in the narrow sense” is that the lat­ ter is the foundation for the “tax reduction measures”, which belong to special taxation measures. Special taxation measures do not align with basic taxation ele­ ments including tax items and foundations – “tax reduction measures” being one of them. The “power to reduce taxes in the broad sense”, which will be thoroughly investigated in this chapter, corresponds to the multiple approaches to tax reduc­ tion and involves not only various tax elements but also considerably exceeds tax elements and connects to the maintenance/abolition of taxation as well as the overall change of taxation law structure. Based on such broad understanding of tax reduction power, this chapter dis­ cusses the power of legislation and administration to tax reduction, which is not equal to the “power of administrative review and approval to tax reduction” exercised by taxation administration as part of law enforcement. According to the principle of statutory taxation, the power of legislation to tax reduction is the foundation for the exercise of tax reduction and the power of administrative review and approval that is more specific. During the process of implementing “structural tax reduction”, the target of exercising power to reduce taxes might be multiple, i.e. fair distribution, macro regulation and control, improvements in the lives of the people, social stability maintenance, etc. Such targets should be incorporated into relevant taxation law norms through exercising the power of legislation to tax reduction and be fulfilled through law enforcement activities of tax reduction. From the overall theory of power to taxation, the state power to taxation includes both the power to increase tax and the power to reduce tax.27 In the past, people tended to understand the power to impose tax solely as the power to

  Unification  of distribution systems  63 increase tax while neglecting the power to reduce tax. In fact, both tax increase and deduction are normal for a state to exercise its power to taxation. To realize “the encouragement and promotion to positive elements” and “the restriction and prohibition to negative elements” through the adjustment of the tax burden are exactly a significant aspect of the functions of taxation law. Besides, from the perspective of constitutional law or constitutionalism, the abovementioned power to reduce taxes is essentially the state’s “power to make decisions concerning tax reduction”, which is relevant to the citizens’ “right to request for tax reduction”. Based on such right of citizens, the state should con­ sider whether to exercise the tax reduction. Of course, exercising the right to request a tax reduction should be connected with the state’s power to make deci­ sions concerning tax reduction through the legislative activities of the National People’s Congress or parliaments. Though the nature and level of such power and rights are different, they are closely linked with each other under the frame­ work of rule of law and are both vital elements that may influence the rule of law system. On the constitutional law level, based on the “binary structure of objects” of the state and citizen, and also on the idea and regulation that “all power belongs to the people”,28 the right to request a tax reduction is more fundamental and the state must seriously consider the realities of the demand of citizens and the situation of the development of society and the economy, and pay attention to the legality of the collection of tax. In this way, the state’s exercising of power to make decisions concerning tax reduction must be restricted. Besides, if the “contract hypothesis” between state and citizens is accepted, then the right of citizens to request a tax reduction also corresponds to the state’s power to request tax collection, and the exercising of such two types of rights would be reflected by the public goods game on pricing. Nevertheless, whatever theory is chosen, the citizens’ right to request a tax reduction should be emphasized and the state’s power to implement a tax reduction, which means “statutory power to tax reduction, should be restricted”. 3.2.2 Statutory power to reduce taxes and relevant issues The foundation for “structural tax reduction” is the statutory power to reduce taxes. Based on the principle of statutory taxation, all powers and rights concern­ ing taxation must be regulated by the law, including the tax reduction powers. Based on the protection of the property rights of citizens, normally the issue of “power to increase the taxes” is raised more frequently, while the “tax reduction power” is rarely mentioned. In fact, the exercising of both powers would affect the interests of the state and citizens, and merit strict regulation by the laws. The state exercising power to reduce taxes is not only relevant to the protection of the state’s taxation interest or fiscal interest but also has the potential to directly affect the property interests of citizens and may result in an unfair tax burden to taxpayers. For that, the exercising of tax reduction power is directly linked to the adjustment of relevant types of taxation, items, rates, foundations, and pref­ erential measures. In addition, the initiation, suspension, and change of taxation

64  Unification of distribution systems  elements should strictly abide by the principle of statutory taxation and the exer­ cising of power to reduce taxes should also strictly comply with such a principle. Article 56 of the Chinese Constitution stipulates that “it is the duty of citizens of the People’s Republic of China to pay taxes in accordance with the law”. Thus, the foundation and basis for citizens to perform their duty to pay tax are only through laws, just as the basis for the relief or exemption of the duty to pay tax is on the law. Besides, the law directly affects the determination of taxpayers’ duty to pay tax by regulating the types of tax and taxation elements. It is important that the exercising of the power to reduce taxes through the change of tax types and taxation elements aimed to relieve the taxpayers’ duty must comply with regula­ tions of laws. In addition, the law should decide whether the duty to pay tax can be waived. This is the requirement and reflection of the principle of statutory tax and is a vital restriction to exercising the power to reduce taxes. In China, the relevant taxation laws have more clearly stipulated the power to tax reduction.29 For example, Article 3 Clause 1 on the Law on Tax Collection of China stipulates that: The initiation, suspension, reduction, exemption, return and making up should be in accordance with the stipulations of laws. When the law author­ izes the State Council to make relevant regulations, then the administrative regulations made by the State Council shall be followed. The abovementioned suspension, tax reduction, exemption and return relevant to these stipulations are directly linked to the exercise of the “power to reduce taxes in the broad sense”. The legal requirement that such conducts should “be executed in accordance with the stipulations of laws” reflects the principle of statutory taxation. Also, this article emphasizes the strict principle of statutory taxation by stipulating that only when the law authorizes the State Council to make regulations can such measures be conducted “following the administrative regulations made by the State Council”. These stipulations are also the practice and reflection of the content of Article 56 of the Constitution. According to the principles of the Constitution,30 the prin­ ciple of statutory taxation must be strictly implemented. Therefore, Article 3 of the Law on Tax Collection focuses on the “power to reduce taxes in the broad sense” on the laws as well as on the administrative regulations when there are legal authorizations. This is because departmental rules and regulations made by departments of the State Council (i.e. the Department of Finance, State Taxation Administration, and General Administration of Customs) and local regulations are not mentioned in this article. Hence, if this article strictly abides by departmental rules and regulations, then local regulations cannot serve as the basis or legal grounds for the exercise of power to tax reduction. Correspondingly, departments and committees cannot serve as agents exercising the power to tax reduction. Furthermore, among the Law on Tax Collection and relevant implementa­ tion regulations, there are stipulations concerning “the right to request for tax reduction” and correspondingly, the taxation administration that disposes of the

   of distribution systems  65 Unification “power to approve the tax reduction”. Tax elements cannot be changed during such request or approval processes and without statutory procedures, the tax ele­ ments cannot be adjusted. This means the order could be maintained during the process of tax reduction, thereby protecting the overall order of distribution. The abovementioned “tax reduction elements” mean there are various important elements directly connected with the tax reduction, i.e. the suspension of one type of tax, the adjustment of tax items and rates, the adjustment of the method to determine the tax foundation, and the adjustment of the scope of tax reduction or exemption. All these measures may bring about the effect of tax reduction. They are factors that affect the tax burden, and they are specific approaches through which tax is reduced. Such adjustment to “tax reduction elements” profoundly affects the state’s power and citizens’ rights to taxation behaviour and relevant taxation interest (Shouwen Zhang 2003)31 as well as to the fairness of taxation and the distribution of income. As a consequence, caution is needed in dealing with them. Because of the importance of such “tax reduction elements”, some states even make restrictive stipulations on the initiation of certain types of taxes in their constitutional laws. For example, the US Constitution once stipulated that “no State shall, without the Consent of Congress, lay any Duty of Tonnage”.32 The duty of tonnage in China corresponds with regulations made in the 1950s for a long period of time until 2012 when the new regulation was published.33 Yet till today, legal stipulations are absent and this is contrary to the requirement of the principle of statutory taxation. China has not made explicit stipulations on what types of taxes can and cannot be imposed, because of the fact that it is still not clear which types of taxation a benign taxation system should include, and the taxation system and taxation law system are still changing and developing. Yet, with the development of the market economy and the gradual maturing of the taxation law system, the taxation law system in China should also become relatively stable. The main types of taxation that the taxation law system should include as well as the basic taxation elements of each taxation system should be clear. This is especially important for making effective legal definitions to the adjustment of various “tax reduction elements”. To emphasize the principle of statutory power to reduce taxes and adjust “tax reduction elements” according to the law does not provide significant value to the development of taxation law theory and even to public law theory.It also contrib­ utes tremendously to the practice of relevant distribution systems. Analyzing the institution of tax reduction may reveal existing issues concerning the statutory power of tax reduction and illustrate why the tax reduction power must be exer­ cised in accordance with laws. 3.2.3 The proper exercising of the tax reduction power in accordance with the laws It is not difficult to realize, through reflecting on the institutional practice of “structural tax reduction” in China, that numerous legal issues exist in terms of the agent, the scope, and procedure in the process of exercising power to reduce

66  Unification of distribution systems  tax. It is only through ensuring the legality and justice of the assertion of control to reduce taxes that such issues could be better solved and effective regulation to distribution achieved. From the perspective of legislation, the taxation law structure of one state would directly affect “structural tax reduction”. Within a certain taxation law sys­ tem, the types of taxes that should be abolished, suspended, or merged would directly affect the distribution of interests among relevant agents and therefore tax reduction should not be conducted at will. On the contrary, various factors should be considered, and the power to reduce taxes should be exercised with legality and justice in mind. For such a purpose, the agent, scope, procedure, and principle to exercise the tax reduction power should especially be considered. First, in terms of the agent to exercise the power, stipulations of the Constitution and relevant laws must be complied with, and the source of the tax reduction power, as well as the legitimate agent to exercise such power, must be clearly identified. China had emphasized multiple times that the power to introduce taxa­ tion legislation (including tax reduction legislation) should comprehensively be recollected by the central government while the local governments could exercise the power to reduce taxes only within the scope where the laws have author­ ized them to do so. Meanwhile, even at the level of the central government, the power to reduce taxes by various agents should also be clearly identified and the ultra vires of relevant agents should be prevented. These are vitally important for the maintenance of a unified regulation. Based on the stipulation of the Law on Legislation in China,34 taxation legislation that involves basic taxation sys­ tems must be regulated by the law. Therefore, the National People’s Congress and its Standing Committee should be the main agent exercising the legislative power to impose tax reductions, and the State Council should not be allowed to exercise such power because it is beyond its legal authority. For example, the Regulation on Agricultural Tax was passed by the Standing Committee of the National People’s Congress and, therefore, the decision to abolish agricultural tax should be made by the Standing Committee of the National People’s Congress. For its part, the State Council should not act beyond its statutory functions to abol­ ish this type of tax. Even if the elimination of such tax is necessary, the legislative procedure must be followed, and it should not be left to the local government to stop the implementation of the law which is still in effect. Identifying the agent to exercise such power is significant in preventing the ultra vires concerning the legislative power to impose tax reduction and to protect the just exercise of power to reduce taxes in accordance with the law. An important characteristic could be seen through the process of “structural tax reduction” in China where in most cases, the legislative power to impose taxes is actually exercised by the State Council and, correspondingly, the State Council has become an important agent to exercise the legislative power to reduce taxes. The formation of such characteristics is directly connected with the Decision to Authorization of 1984 and 1985. After deciding to employ the market economy system, and as the process to improve the modern taxation system continues, it is indeed problematic to continue with the abovementioned decisions. The Standing

 Unification of distribution systems  67 Committee of the National People’s Congress is clearly aware of such issues so it specifically abolished the Decision to Authorization of 1984 in 2009.35 However, the Decision of 1985 is still valid and the authorization has almost no limitation in terms and scope. This has led to a significant number of problems, so the timely abolition of such a Decision is required (Shouwen Zhang 1996 & 2012).36 Tax reduction is connected with basic property rights and many other relevant rights of various agents. To exercise such power by the National People’s Congress and its Standing Committee could meet the requirement of the principle of statutory taxation and it complies with the regulations of current laws. Hence, the agent to exercise the legislative power to impose tax reduction should gradually transfer from the State Council to the National People’s Congress and its Standing Committee. Second, the scope of exercising power to impose tax reduction, which cor­ responds to the specific approach of “structural tax reduction”, involves both the continuance, abolition, merging, and transfer of types of taxation, and the adjust­ ment to various important “tax reduction elements”, especially the adjustment of items, rates, foundations, and preferential measures. Currently, in terms of the scope of exercising power, the first and immediate task is “to fulfil the principle of statutory taxation comprehensively”.37 For such a purpose, legal authorizations should be given to relevant agents in order to exercise tax reduction powers which would contribute to solving the issue of the lack of a legal basis and to further pro­ tect the legality and justice in the process of exercising of power to reduce taxes. For instance, in 2007, China amended Article 12 of the Law on Personal Income Tax, stipulating that “the initiation, reduction, suspension and implementation of taxation on deposit interests should be stipulated by the State Council”. Based on such authorization, the exercising of power to impose tax reduction on deposit interests now has legal grounds. Considering the complexity of the taxation law and the social relationships it adjusts, the scope of the exercise of the power to reduce taxes should reflect the combined compliance to both policies and laws, as well as the unification of stability and flexibility in order to achieve the spirit of “differentiated treat­ ment” or “discriminated distribution”, and to realize the institutional function of taxation law. Normally in areas concerning the protection of individual property rights, the requirement for legality toward tax reduction is higher, and the exercise of the power to reduce taxes or the change of approach to tax reduction would attract more public attention. Therefore, the legal and proper exercising of power to impose tax reduction should be emphasized. In addition, in terms of the procedure regarding the exercise of power, irrespec­ tive of whether it is legislative power or executive power that imposes tax reduc­ tion, the emphasis should be on the issue of proper procedure. It should be noted, however, that in the practice of “structural tax reduction”, some procedures are still not sufficiently transparent. For example, adjustments to the amount deducted from a salary for the personal income tax or the adjustment to the rate of stamp duty for security transactions (aka the “Midnight Cockcrow” incident) (Ming Sheng Yuan 2008)38 which both reflect a lack of transparency in the procedure. The public nor­ mally would not reveal their doubts from the perspective of ultra vires or abuse of

68  Unification of distribution systems  power, yet they would at least believe that this is the improper use of power and would further question the fairness and justifiability of the relevant distribution. Therefore, the power to reduce taxes must be exercised strictly in accordance with relevant procedures, and the institutional construction for the taxation procedural law should be further strengthened so that the rule of law in taxation can be pro­ moted and the relevant distribution problems can be effectively solved. At last, in terms of the principles regarding the exercising of power, it is not only the aforementioned principle of statutory taxation that must be abided by, but there is also a need to put into practice the principles of fairness and efficiency. The principle of fairness would be presented as the principle of moderation or proportion (Schliesky 2006)39 which requires that the exercise of power be moder­ ate in terms of the scope and degree of tax reduction. Meanwhile, the relationship between compliance to policies and laws needs to be handled in order to better achieve the functions and goals of “structural tax reduction”. Based on the prin­ ciple of moderation which reflects the spirit of fairness, the exercise of the power of tax collection needs to be modest or controlled, especially the power to impose tax reduction, through which the legal rights and interests of various agents will be protected and the stable development of society as well as the stability of the state realized. For that, the “structural tax reduction” may grant specific agents in specific areas of taxation interests, if the exercise of the legislative or executive power to reduce taxes is improper, the value of fairness embodied in the princi­ ple of fairness would be violated and therefore, “structural tax reduction” should especially value the substantial fairness and to effectively solve the issue of distri­ bution. Otherwise, the necessity for the State’s implementation of “structural tax reduction” would be difficult to explain from the perspective of formal fairness alone. Other than the requirement of the aforementioned principle of fairness, the exercise of the power to reduce taxes also needs to benefit economic develop­ ment and fulfil the requirement of efficiency by substantially reducing the burden on taxpayers. For example, the unification of the corporate income tax system in China reduced the burden of corporations and promoted fair competition and economic development. Therefore, such a “structural tax reduction” is one that meets the principle of efficiency. If the “structural tax reduction” is promoted in name and new types of taxation are added in substance, then the overall burden of taxpayers rises, the economic development would be hindered, and the require­ ment of efficiency would not be met. To fulfil the abovementioned principles of taxation law, the exercise of the power to collect taxes needs to be moderate. In other words, the collection of tax by the state is intended to satisfy the needs of the public for public goods, without producing an oppressive government. Instead, the burden of taxpayers should be reduced so that they can survive (Jun Wang 2009).40 To emphasize on the “mod­ eration” of the power to collect taxes contributes to the protection of the rights of citizens, to the better promotion of the development of a market economy, to the efficiency of resource configuration, and to facilitate the operation of the economy. Also, it would guarantee the fiscal revenue of the state and lead to

 Unification of distribution systems  69 a “win-win” situation for national finance and citizens’ benefits. In addition, a benign relationship of “give–receive” would be established. During the process through which the state exercises its power to collect taxes, “expansion” and “moderation” usually happen simultaneously. The “expansion” of tax collection powers corresponds to the power to increase taxes while mod­ erating the power to reduce taxes. The exercise of both powers is normal for the state to exercise its tax collection power and it reflects the regulating nature of the taxation law. This means combining the characteristics of “encouraging and promoting the positive factors” and “restricting or prohibiting the negative fac­ tors”. Therefore, it is necessary to restrict its “expansion” from the perspective of principles of statutory tax, fairness, and efficiency. In recent years, China has conducted “structural tax reduction” but the burden of market agents remains high. This phenomenon reflects that fact that the power to reduce taxes is not exercised properly in accordance with laws, that the fulfill­ ment of the principles of the taxation law is not adequate, and that the systematic thinking and comprehensive design for tax reduction are lacking. The “struc­ tural tax reduction” in China is implemented inadvertently during the process of the continuous resolution of multiple issues in various fields. Therefore, the top design needs to be strengthened and the tax law structure needs to be optimized so that a scientific and justifiable taxation law system can be established that will act as a solid institutional foundation for “structural tax reduction”. It is solely through this that problems, like in VAT system reform, that are susceptible to be exposed during continuous experiments, can be avoided. 3.2.4 The issue of tax reduction power in VAT system reform The most important “structural tax reduction” currently underway is “business tax to VAT”. Because of the fact that the VAT system in China has constantly been in the process of reform or “experiment” and the overall intention has been to continuously reduce the burden of taxpayers through a better reflection of the principles of VAT, it is necessary to explore this specifically by combining the past VAT system reforms as well as the issue of the power to reduce taxes regard­ ing the practice of “business tax to VAT”. The VAT system reform in China includes both the adjustment to internal taxation elements brought by “VAT transformation”, and comprehensive adjust­ ment among different types of taxes brought by “business tax to VAT”. Hence, the aforementioned two “structural tax reduction” approaches are both reflected in the field of VAT, and such two closely linked approaches both involve the issue of the power to reduce taxes. The following part will briefly discuss this. 3.2.4.1 The issue of tax reduction power in previous VAT system reforms As the type of tax with the largest scope, VAT not only covers a wide sphere but also once constituted around half of the overall tax revenue. Although in recent years, tax reduction has been conducted through adjustments to the tax

70  Unification of distribution systems  foundation and rate, VAT revenue has always constituted over 40% of the total tax revenue. However, given that is it such an important tax, the system reform has never stopped. The relevant issue of tax reduction power is especially typical and common. As is mentioned before, from 2004, China has initiated the “structural tax reduction” and the reform of the VAT system is one element. At that time, the “VAT transformation” experiment in the northeast that aimed at “expanding the area of deduction”41 has been a vital step toward “structural tax reduction”,42 and it contributed to adjusting the industry structure of the northeast region and also led to the optimization of the structure of taxation law. Though the new system applied to limited industries and regions, due to its tax reduction effect, the central region also applied such policies43 and finally in 2009, it became an important system that was applicable to the whole nation. The direct motivation for the extension of the “VAT transformation” across the nation was the urgent need for “structural tax reduction” after the occur­ rence of the financial crisis. Because of the further expansion of the sphere of deduction due to system transformation, the base of VAT was directly decreased. Meanwhile, the reduction of the taxation rate for small-scale taxpayers also reduced the overall tax burden of VAT. Through the internal adjustment of tax elements within the VAT system, the obvious “tax reduction effect” could then be generated. The aforementioned “VAT transformation” belongs to the second approach of “structural tax reduction” and scholars have not yet paid sufficient attention to the tax reduction power involved. The direct basis for the expansion of “VAT transformation” from limited experimentation to the whole nation is basically the “regulations” or “interim methods” made by the Department of Finance and the State Administration of Taxation. Though these documents reflect the intentions of the State Council, the level of effectiveness is still too low for such an expan­ sion of the scope of deduction. Adjustment to the rate corresponds to substan­ tial stipulations of taxation elements whereas such affairs should be stipulations under the law.44 Such a basis for “VAT transformation” obviously does not fit the requirement of the principle of statutory taxation. Besides, in the process of spreading the “VAT transformation” experiment, though the regulations concerning expanding the scope of deduction have a tax reduction effect, it should be noted that such measures were experimented only in certain industries or areas rather than applied to the nation. It is against the principle that the collection of VAT should be unified within the nation45 and the chain of VAT should remain integral. This violates the principles of taxation and taxation law and also fails to reflect the spirit of the rule of law. In addition, the principles of statutory taxation, fairness, and efficiency are not exercised either. Thus, it could be concluded that though the reform of “VAT transformation” is important and it could generate the effect of “structural tax reduction”, predomi­ nant issues exist in the relevant basis and ways of the exercise of power to tax reduction. These issues also existed in the previous “VAT transformation” and “business tax to VAT”.

   of distribution systems  71 Unification 3.2.4.2 The issue of power to reduce taxes in the practice of “business tax to VAT” “Business tax to VAT” has attracted special attention from the central and local governments given that it is the most important step in the “structural tax reduc­ tion” and it is also the main direction toward which China improves its overall taxation law system. In addition, it involves the relationship with and significant interests of central and local governments, the adjustments to industry structure, the protection of the rights of taxpayers, and the future of China’s taxation law. From the perspective of overall design, the targets of taxation for VAT and business tax are binary objects (goods and service), and the “business tax to VAT” reform involves very broad areas. With the completion of the reform, the original “co-existing of two types of tax” will become “one type of tax covering all areas”. The replacement by VAT could, when the chain of deduction is complete, avoid the duplicate collection of taxes in the area of business tax, and could reduce the actual burden on taxpayers. Therefore, the effect of “structural tax reduction” would be obvious, would contribute to the development of many industries which were subject to business tax before, and would contribute to the fulfilment of the goals of adjustments to the economic structure. “Business tax to VAT” tries to realize “structural tax reduction” through the overall adjustment to types of tax and it belongs to the first approach to “structural tax reduction”. Business tax, with its long history, was absorbed by VAT, which vastly changed the VAT system with regard to the scope of taxation, the specific foundations, the confirmation of the rate and the structure, etc. In addition, the substantial interests of many taxpayers were affected. The property rights, free­ dom of business operation, and choice of occupation of market agents are directly influenced; therefore the legality of such changes must be seriously considered. During the practice of “business tax to VAT”, the direct basis for the exercise of tax reduction power is the “Experiment Schemes”, “notices” published by the Department of Finance and State Administration of Taxation that are “agreed” upon or “approved” by the State Council.46 The level of effectiveness of these documents is the same as the documents concerning “VAT transformation” and therefore the issue of legality also exists here. From the initiation of the VAT system reform and the practice of other taxation law systems, the issue of the lack of legality to exercise the power to reduce taxes has become a “chronic illness” that has remained unhealed for a long period of time and a predominant problem that requires a solu­ tion during the process intended to improve the rule of law in China. Although in substance, the following areas are led by the State Council: to promote “structural tax reduction” through “business tax to VAT”, to strengthen the competitiveness of corporations, and to facilitate structural adjustment and industry update. And, the basis for the State Council to exercise the power to impose tax reduction seems to be the “Decision to Authorization” by the National People’s Congress in 1985. As we have discussed, the “Decision” has already been questioned widely for it does not only violate the principle of statutory taxa­ tion but is also against specific legal stipulations of the Law on Legislation and

72  Unification of distribution systems  the Law on Taxation Collection Management. Therefore, its legality is obviously flawed and should no longer constitute a basis. The aforementioned “VAT transformation” only involves the internal adjust­ ment of one single type of tax, while “business tax to VAT” involves the change of systems of two significantly important types of tax and it has a greater influ­ ence on the basic rights of taxpayers. Since “business tax to VAT” involves the vital adjustment to taxpayers, items, rates, and foundations, and experiments on relevant tax items have been applied to the whole nation, the State Council had to amend the Interim Regulation on VAT and abolish the Interim Regulation on Business Tax. For such adjustment to the fundamental taxation affairs that involve the basic rights of taxpayers, the National People’s Congress should make relevant legislation, in accordance with the stipulations of the Law on Legislation and the principle of statutory taxation, to complete upgrading the effectiveness of VAT laws. It is through this method that the long-existing issue of legality in the VAT system reform can be thoroughly solved. In recent years, the issue of the lack of a legal basis exposed by the VAT sys­ tem reform has been increasingly intensified and advocates for an increase in the level of VAT have also appeared. In fact, during the process to promote the rule of law in taxation, the form and the procedure are both important. If the conditions to pass legislation by the National People’s Congress are temporarily insufficient, at least the Standing Committee could adopt a practical approach by first announc­ ing relevant “Decisions” and proceeding, when the time is ripe, to passing the unified Law on VAT. In conclusion, all types of taxation system reforms, including “business tax to VAT”, must pay attention to the concept of legal basis when exercising the power to reduce taxes, and the “Decision to Authorization” made by the National People’s Congress should no longer act as the basis for the unlimited implementa­ tion of “experiments”.47 For the implementation of economic reform, economic growth is not the only point that needs to be pursued. The legal basis for such reform should also be considered. The theories and practice in many states prove that changing the taxation law system has always been closely linked to the “eco­ nomic constitution”. In China, to “strengthen economic legislation and to improve macro-regulation and control” in view of maintaining a steady growth of the national economy constitute both the basic requirement of the Constitution48 and the reflection of the state ration and function. Therefore, to fulfil the requirements of the Constitution, the economic legislation in taxation areas must be strength­ ened to facilitate targets that facilitate the adjustment of economic structure and to ensure that the steady growth of the economy through “business tax to VAT” can be realized, based on which the principles of fairness and efficiency of taxa­ tion can be better executed and the basic rights of citizens can be better protected. 3.2.5 Summary “Structural tax reduction” is an important institutional practice in China and it fundamentally affects the development of the economy, politics, law, and society.

  Unification  of distribution systems  73 For a better solution to relevant distribution issues, China has, at least since 2004, initiated structural adjustments to taxation law institutions. To discuss the “structural tax reduction” in the broad sense would contribute to finding embodied legal issues within a broader time-space background, especially the crucial issue of the tax reduction area. Under the context where “structural tax reduction” is commonly treated as an issue of policy or economy relevant to the adjustment of economic structural adjustment, instead of a legal issue,49 the issue of power to reduce taxes is not valued and the issue of the legality of “structural tax reduction” is usually neglected, thereby triggering problems from various aspects. Therefore, it should be emphasized that the statutory power to impose tax reduction is the foundation for “structural tax reduction”, without which “struc­ tural tax reduction” would have no legality. Either the legislative power or the executive power to impose tax reduction must be stipulated in the law, which is important to the legal adjustment of various “tax reduction elements”. Besides, the statutory power to impose tax reduction must be fairly exercised in accord­ ance with the law, and the requirement of compliance to the law and justifiability must be met in terms of various aspects including the agent, scope, procedure, and principles of the exercise of such power. Such “structural tax reduction” would better reflect the requirement of basic principles of taxation laws, includ­ ing the principle of statutory taxation, the principle of fairness, and the principle of efficiency. Besides, the VAT system reform which in recent years has been the focus of the “structural tax reduction”, “transformation of VAT” and “business tax to VAT” reflect the two main approaches for “structural tax reduction”. For this rea­ son, this chapter specifically analyzes the relevant issues of the power to impose tax reduction and further reveals the long-existing issue of lack of legality when exercising the power to reduce taxes and to highlight the fact that the principle of statutory taxation should be strictly abided by and also the fact that the level of VAT legislation needs to be upgraded. The abovementioned issues and the solu­ tions are also applicable to the improvement of other taxation law systems other than the VAT system. Through the above discussion, it is also not difficult to find out that “struc­ tural tax reduction” is directly relevant to the adjustment and improvement of the taxation law structure and to the coordination of specific taxation law systems. The direct foundation for the coordination of various systems is the tax reduction power in taxation law, not a “policy” to put in place tax reduction. Policies cannot replace the stipulations of taxation law and this is an important issue that requires special emphasis. From the perspective of law, “structural tax reduction” always directly connects with adjustments to the structure of taxation law. It is a “legal” instead of a “policy” issue and is far beyond merely an “economic” issue. “Structural tax reduction” as an important institutional practice, will continue for a long period of time. The above discussion has indicated that the issues of violation against the law during tax reduction must be reviewed and effec­ tively solved. The legal stipulations and limitations to tax reduction power must

74  Unification of distribution systems  be emphasized. The above issues concerning the power to reduce taxes are also worth noting for taxation law, economic law, as well as the whole public law area. The comprehensive development of rule of law in taxation will be achieved and the overall theory about the power to reduce taxes, the theory of taxation power, and taxation law will be improved, as long as the power to reduce taxes is truly and effectively defined and exercised in accordance with the law under the structure of rule of law and constitutionalism, and the distribution of rights and interests of relevant agents is protected.

3.3 The internal differences in a distribution system There are differences in many aspects of a distribution system, including the agents and objects within the distribution system which appear to be unified on the surface but have many differences. The existence of some differences is justifiable, but others need to be eliminated to improve the distribution system. For that, the unreasonable difference is a vital cause leading to the emergence of significant distribution problems and distribution crises. The internal differ­ ences within a system require our attention and action to undertake research on its justifiability. The Law on Corporate Income Tax is important for the income distribution of corporations and relevant agents. However, different income tax systems are applied to different types of corporations, thereby generating huge negative effects on fair competition and distribution. Therefore, since 2008, China has applied a unified Law on Corporate Income Tax, although many institutional differences still exist today. For this purpose, the following part will, taking the unified, inte­ grated Law on Corporate Income Tax as an example, analyze the existing issues of difference and highlight the issues that bring about the differences within the distribution system. 3.3.1 Introduction The unification of the Law of Corporate Income Tax is the long-term ideal and a milestone for the fiscal and taxation legislation and even the economic legislation in China. As significant legislation that attracts the attention of the whole nation, the unified Law on Corporate Income Tax undoubtedly has a strong symbolic meaning because it indicates the dedication of the state to establish a legal system that fits the requirement of the market economy system with the spirit of rule of law. Hence, research on this law could expand beyond the technique of taxation law and radiate to broader areas including economy, society, and law. The unification of the Law on Corporate Income Tax will not happen with­ out the increasing acceptance of the ideas of “unified market, unified law, equal agents, fair competition”. The expansion of these ideas lays the conceptive foun­ dation for much important economic legislation and contributes to a series of important laws that are dispensable to a market economy, and further lays a solid foundation for the overall unification of legal system.

 Unification of distribution systems  75 Among the many cornerstones, the fiscal and taxation legislation which directly affect the power, rights, and interests of the state and citizens are undoubt­ edly vital, especially the direct taxations like income tax which directly affects the production and operation of market agents as well as the fair competition and interests of various agents. The unification of income tax law and the uni­ fied application of specific norms are significant to the interests of all the parties. Therefore, eliminating the diversified or binary legislation in the area of corporate income tax50 becomes the most basic consent of all groups. The unification of the Law on Corporate Income Tax is a requirement of the development of economy, society, and law whose conceptive foundation is also relatively solid. For this reason, the publishing of the unified Law on Corporate Income Tax was praised for unification, especially for the unification regarding its application to different agents, the unification on the pre-taxation deduction system, and the unification on rate and preferential measures which has already been amply discussed.51 Meanwhile, the fact that there are limitations for the uni­ fication of the Law on Corporate Income Tax should not be neglected given that it would be beneficial for the improvement of legislation and execution, and in providing a better solution to distribution problems. Therefore, the following part intends to analyze the internal limitation of such unification and the reflection of such limitation on the system and explores the cause and relevant principles of such limitation. It will be based on the foundation for emphasizing the “principle of difference” of the economic law, objectively perceive the “outward unification and inward difference”, and the “harmony with difference” of the unification of laws, thus achieving a better understanding of the internal difference of the distribution system.    internal limitation of the unification and  3.3.2  The its reflection on the system level Similar to the multiple limitations of the universality of taxation law,52 the unifi­ cation of Law on Corporate Income Tax would also comprise of multiple limita­ tions, including the realistic level of development of the economy and society, the state economic and political institutions, the condition of the rule of law, the level of perception of the people, etc. Such limitations are vital factors affecting the unification of the Law on Corporate Income Tax and as elements that constitute the outside environment of legislation, they decide the basic appearance of the unified and integrated Law on Corporate Income Tax as well as the overall level of legislation. Such limitations could be described as outside limitations affecting the unification of taxation elements of corporate income tax. At the same time, internal limitations should also be considered. The particularities and differences of the taxation elements of corporate income tax would result in constrained ele­ ments that affect the unification of the system. In fact, whether such outside limi­ tations exist or not, internal limitations may play a role. Therefore, the unification of the Law on Corporate Income Tax would be profoundly influenced by internal limitations.

76  Unification of distribution systems  Some would believe that the unification of the Law on Corporate Income Tax should realize the unified application of the Law on Corporate Income Tax to all agents. Yet, in fact, because of the effect of the constrained elements includ­ ing subjects, objects, standard for the quantification of duties, etc., the degree of unification of the Law on Corporate Income Tax is very limited and far from the degree of comprehensive unification and integration imagined or expected by people. For such purpose, the following part intends to discuss the specific reflec­ tion on the institutional level of various internal limitations. 3.3.2.1  The    intrinsic limitation of the difference among agents The intrinsic limitation of the difference of agents results from the realistic dif­ ferences of taxpaying agents. The taxpaying agent is a vital standard for the clas­ sification of income tax because it is directly linked to the taxation interests of relevant agents and is a typical direct tax. The corporate income tax system in the history of China was classified based on differences of ownership or whether the agent was involved in foreign elements. This indicates that such a system considered the difference of agents. Though the legislation aims at achieving the universal application of a unified taxation law to different types of corporations, especially domestic corporations and foreign-invested corporations, as long as different agents exist, specific measures need to be taken in some areas in accord­ ance with the specific circumstances and different rules required to be applied based on the differences among agents, instead of the universal application of the same rule – an action which is impossible. From the performance of the current system, the Law on Corporate Income Tax is not actually equally applied to different agents. First, the implementation of the Law on Corporate Income Tax is limited, which means it is not applied to all types of corporations. For example, it is not applicable to partnerships and sole proprietorships, thereby making the scope of the application of this Law smaller than what its name indicates. Second, the application of the Law on Corporate Income Tax, in some areas, exceeds what its name indicates. It is not only lim­ ited to corporations, but also “other forms of organizations that obtain incomes” including governmental bodies, official functional institutions, and social groups. This means the reality of the application of this law exceeds the sphere of “cor­ porations”. Third, differences still exist among corporations that are under the jurisdiction of the Law on Corporate Income Tax. Sometimes, the same taxation law norms cannot be applied by the same standard. For instance, the differences between residence corporations and non-residence corporations still objectively exist and the legal application to such two types of agents are not always unified. Also, the existence of taxation preferential measures is based on the differences among agents. In reality, the taxpaying agents are diversified and the state would inevitably discriminate against these agents due to economic, social, or political considerations leading to the emergence of a complicated taxation preferential measures system. The existence of taxation preferential measures implies that not

Unification    of distribution systems  77 all agents enjoy such preferential measures in the same manner, and therefore the distribution of income would inevitably be affected. Therefore, differences with regard to taxpaying agents are vital intrinsic limita­ tions affecting the unified application of the Law on Corporate Income Tax. These differences make it difficult for the total integration of the Law on Corporate Income Tax, hence it is impossible to apply unified, identical norms to different types of corporations. And, as long as the differences among agents still exist, differences in taxation law norms will continue to exist for a long period of time. 3.3.2.2  The    intrinsic limitation of subjective quantification According to the theory of taxability, the nature of income and profitability is vital for determining whether an object is taxable or not (Shouwen Zhang 2000).53 In each area of taxation, “no taxation without income” exemplifies the principle of fairness in taxation. In the area of income tax, the “income” should be spe­ cifically emphasized. Without taxable income, income tax cannot be collected. This is a basic requirement of the principle of taxation by capability. Therefore, when designing the system of corporate income tax, the fundamental questions that need to be considered are how to determine whether relevant agents have gained taxable income, how to determine the taxable income, and how to quantify the objects of taxation. In the area of the Law on Corporate Income Tax, because of the obvious differ­ ences existing among agents, both in theory and in practice, the object of taxation collection is the taxable income, yet huge differences exist in the specific quantifica­ tion to the objects. The reason is that income tax, being different from other types of tax, is quite complicated in terms of factors that affect the determination of tax­ able income, and such determination is closely linked to the identity of the agents. Different types of taxpayers are actually subject to different rules of taxation law and they enjoy different statuses under taxation law. Because it is difficult to unify these rules and statuses, the quantification of objects becomes an intrinsic limitation that affects the unification of the Law on Corporate Income Tax. For example, during the process of the unification of the Law on Corporate Income Tax, the legislators strived to include various “organizations that obtain income” into the net of taxation and law,54 resulting in a situation where govern­ mental bodies, official functional institutions, social groups, and the military were all subjected to corporate income tax as long as they received income. Although the nature of these organizations is different and the differences between cor­ porations and non-profit organizations are huge, the norms applied to quantify taxpaying objects are diversified. Organizations that do not frequently undertake business activities, or whose goal is not to make profit, should first deduct the amount of income that is not subject to taxation, including fiscal appropriation, administrative functional charges obtained in accordance with the law, govern­ mental funds, etc., which are closely connected to the performance of duties or presume governmental functions representing the government (providing public

78  Unification of distribution systems  or semi-public goods to the general public).55 Therefore, it could be concluded that the quantification of non-corporate taxpaying objects could not be totally uni­ fied with the quantification to the taxable income of pure enterprises. Besides, even compared with different types of corporations, huge differences exist among corporations in different areas and industries which have different legal natures. Therefore, the quantification of their taxable income would be dif­ ferent. For example, compared with resident corporations, the whole amount of non-resident corporation interest of stock, interests, dividends, a fee of concession is subject to taxation without any deduction. Or in different tax collection modes, the ways to collection applicable to corporations with different scales are differ­ ent, and the applicable rules to the quantification of their taxable income are dif­ ferent. These are limiting factors affecting the integration of laws in terms of the aspect of quantification of taxation objects. The difference in the quantification of the objects results largely from the dif­ ference in the agents. Therefore, the research on the quantification of objects should combine with the specific taxpaying agents solely through whom the sys­ tem of object quantification can be improved and the grounds for taxation effec­ tively determined. This has the potential of laying the foundation to correctly weigh the taxpaying duty of taxpaying agents and the protection of the legal rights and interests of both parties – the collector and the payer. 3.3.2.3   The internal limitations to the quantification of duty The difference in taxpaying agents is closely linked to the quantification of objects and duty. In fact, the precondition for the quantification of duty is the quantification of objects, without which the quantification of duty is impossible, for the realization of quantification to duty is ultimately through the application of relevant rates or preferential measures or a heavier burden to quantified objects. Therefore, the quantification of the objects is the foundation for the quantification of the duty. It may even be categorized as the quantification to the duty. From the general principles, the formation of abstract taxpaying duty normally relies on the application of rate to specific tax foundations. Where there are preferential meas­ ures, it also relies on the application of preferential measures or heavier duties. Though the Law on Corporate Income Tax is considered to unify the rate and preferential measures, the unification of the tax rate system and tax preferential measures system is still incomplete.56 For instance, there are multiple levels of rates even though the rate of corporate income tax is officially 25%. The rate for with­ holding income tax to non-resident corporations is 20% (most of the taxation trea­ ties between China and other countries stipulate that the rate should be 10%), and the preferential rate is 20% or 15%,57 etc. These rate differences indicate that there are “general principles” and “particular situations” in the area of state taxation law adjustment. Also, the state would consider which areas need to be regulated, con­ trolled, and guided, and in which areas the distribution of interests should focus on. In different circumstances, different rates should be applied to different agents, which implies that it is impossible to completely unify the tax rate.

 Unification of distribution systems  79 Besides, the system of tax preferential measures has more influence with regard to the quantification of the duty. Tax preferential measures enjoyed by different agents are more diversified, and the difference in the actual taxpaying duties of agents is more pronounced. The state would directly stipulate preferential meas­ ures including reduction, exemption, preferential rates, additional deduction, reductive calculation of income, etc., to decrease or even eliminate income tax by corporations including grand-agriculture, high and new technology industry, public infrastructure construction, environmental protection and energy-saving projects, etc. These measures are directly correlated to the long-term economic and social policies made by the state in accordance with the current conditions. As for numerous corporations that are not included in the above sphere, they are excluded from such preferential measures regardless of the nature of ownership. For a better exercise of the function of tax preferential measures, the law would not apply the same preferential measures to different types of agents. The unified preferential measures are against the original purpose of the system of preferential measures. In conclusion, the difference in the agents as well as the behaviour of agents directly affect the quantification of agents and duty and this affects the unified application of legal norms, thereby highlighting an internal limitation of the Law on Corporate Income Tax – its inability to integrate. 3.3.3 The cause for the internal limitation and relevant principles In general, the existence of various internal limitations is due to the particularity of the objects of the Law on Corporate Income Tax, especially the visible com­ plicity and differences among the taxpaying agents. As a direct tax, income tax directly involves the agents and their interest distribution. Such complicity and difference would inevitably result in the complicity and difference of the income tax legal norms that adjust to the interests of agents, hence making it difficult for the income tax norms to be unified among various types of agents. The unification of the legal system or law is “relative”. The unification of the Law on Corporate Income Tax is only achieved in general and concerning cer­ tain important aspects. The original binary income tax system that discriminates against domestic and foreign corporations has been relatively unified, yet in terms of many fractions and many specific institutions or norms, divisions still exist. The external unification and internal division are caused by the internal contradic­ tion of the Law on Corporate Income Tax. As long as the differences in the nature and specific behaviour of taxpaying agents exist, the situation of “external unifica­ tion and internal division” is inevitable. In fact, in the Law on Corporate Income Tax, there are many cases where “principles and exceptions simultaneously exist”, a reflection of the “divisions among unification” and “unification among divisions”. For example, in terms of the agents, many people believe that the current Law on Corporate Income Tax adopts a legal person in the taxation system, thereby highlighting the independ­ ence of taxpaying agents. The reason is that the legal person shall be responsible

80  Unification of distribution systems  for himself/herself, and shall bear his/her own taxpaying duties as its independ­ ent status indicates. In that sense, the “independent taxpaying principle” could be confirmed in the field of taxation law. However, there are exceptions to such a principle. In some circumstances, there exists consolidated taxpaying or col­ lective taxpaying. Though they are exceptions to the principle of independent taxpaying their existence is justifiable (Shouwen Zhang 2007).58 Besides, in real­ ity, the dependence (or affiliation) might be in conflict with the independence required by the law. This means targeting the objective situation of the affiliated corporations and by emphasizing its independence, the Law on Corporate Income Tax makes specific stipulations which enable affiliated corporations’ systems or anti-tax avoidance systems to emerge. Directly relevant to the anti-tax avoidance system, it should be noted that the purpose of the agents’ behaviour is also important when focusing on the inde­ pendence of agents. The purpose of corporate behaviour is mainly commercial otherwise tax evasion would directly affect the legality of such behaviour, and the principle of “substance precedes the form” may become applicable.59 Therefore, the taxation law should also distinguish between corporations with different pur­ poses and it should equip relevant norms to react to such behaviours so that dif­ ferent corporations may enjoy different taxation law statuses, thus achieving the justice of distribution, which means, each entity gets what it deserves. In summary, the “external unification and internal division” of the Law on Corporate Income Tax” is manifested by the taxation law norms and systems that stipulate different treatment to different types of agents. The main reason is the existence of differences among taxpaying agents, their behaviour, as well as the relevant internal limitation elements such as the quantification of the objects and duties. Only through discrimination based on existing differences can taxation based on capability and taxation according to the law be better applied to achieve justice, and to further the principle of taxation efficiency in order to realize the fundamental principles of statutory taxation and fair taxation. Meanwhile, it is by maintaining the division of relevant norms to various types of agents that macro regulation and control can be better conducted, which may contribute to the better realization of functions of taxation and taxation law, and to the fulfilment of the multi-purposes or goals of the Law on Corporate Income Tax. Besides, the difference in the system generated from the difference in the agents reflects an important principle of economic law – the principle of differ­ ence. Unlike traditional civil and commercial law, the adjustment by economic law is based on the difference and non-balance of the agents as well as many other aspects, and the goal of such adjustments is to solve the issues of difference that have to be settled to realize substantial justice and to guarantee overall efficiency. Therefore, economic law needs to incorporate huge amounts of norms that reflect the economic and social policy to discriminately adjust different agents and dif­ ferent behaviours, forming various specific institutions that “are in harmony yet not the same”. The internal limitations for the unification of the Law on Corporate Income Tax is an important reflection on the principle of difference, which makes the Law a vital system that is in “harmony yet not the same”. In other words,

 Unification of distribution systems  81 though there are differences within various systems, they collectively form a har­ monious entity and could better correspond to the reality of society and realize its system performance. 3.3.4 Summary The release of the Law on Corporate Income Tax in China was unified with the corporate income taxation law on the surface (Krause & Walt 2005),60 yet due to the restriction by internal and external limitations, such unification is not complete and the unified law has only be applied to a limited degree. Because of the existence of multiple and mutual limitations, such as the difference in agents and quantification to objects and duties, the specific taxation law norms applied to different types of taxpayers are not identical. Corporations in different regions, industries, and areas are all taxpaying agents stipulated under the Law on Corporate Income Tax. However, the applicable specific norms may be vastly different from one another. Meanwhile, there are many specific issues that are worthy of our attention, in terms of the unification and division of system, the independence and affiliation of agents, and the commercial purpose and taxationrelated purpose of behaviours. Such issues reflect the principle of difference in economic law. It would be immensely beneficial for the effective implementation and future improvement of the law, and for the coordination of relevant systems in the taxation law area, if these issues could be comprehensively understood and the relevant distribution issues effectively solved.

3.4 The national factors in the difference of distribution systems In relevant distribution systems, based on considerations to national interest or in the name of national interest, there exist different institutional arrangements. For example, corporations which are all taxpaying agents of the abovementioned Law on Corporate Income Tax may be affected by discrimination in taxation laws because of the so-called national factors. Among these systems, the collective taxpaying system for enterprise groups reflects such discrimination and would directly affect the distribution of taxation interests of relevant corporations. For such purposes, the following part will use it as an example to reveal the national factors that constitute the difference in distribution systems. 3.4.1  The    issue and its definition Among the complicated taxation law systems, enterprise groups’ collective tax­ paying system is a type of new-emerging system. Research into such an impor­ tant system is currently focused on the aspect of taxation management.61 Yet, this system not only involves taxation collection and management but it is also connected to economic issues such as accounting and industry policy, as well as various other aspects like politics and law.62 The influence it has is far-reaching

82  Unification of distribution systems  and therefore legal research, from the perspective of department laws including taxation law, needs to be conducted. Due to the complexity of taxation law, especially the complexity of the process through which the taxation law system forms, many concepts in taxation law need to be defined to avoid confusion. “Collective taxpaying” is one such concept. In fact, in the past, to, the term “collective taxpaying” was also used in the income tax and VAT systems and the application of such concept was more common in the area of income tax.63 Within the field of income tax, the term “collective taxpaying” is mainly applied to two areas with as many meanings. The first is collective taxpaying that directly corresponds to the determination of the founda­ tion for income tax. The other is collective taxpaying relevant to the deduction of the taxation amount in the taxation offset and deduction. The latter could be illustrated through the concept of taxation offset and deduction in international or domestic taxation law. The former meaning, therefore, is more common when people use the concept of collective taxpaying. Such definition also originates from realistic institutional stipulations. Article 14 of the Interim Regulation on Corporate Income Tax which came into effect in 1994 in China stipulates that “unless otherwise stipulated by the State, the taxpayers of corporate income tax shall pay corporate income tax to the local taxation administrations”. As for the part that requires the State to make specific stipulations, Article 43 of Implementation Regulation on the Interim Regulation on Corporate Income Tax further stipulates that: “As for railway operation, civil aviation transportation, post, and telecommu­ nication enterprises, [the corporate income tax] shall be paid by the organizations that are responsible for the operation and management and are in control of such enterprises.” Therefore, since 1994, the State Administration of Taxation has released a series of regulatory documents including both comprehensive regulations to col­ lective taxpaying by corporate groups and specific regulations to specific types of corporate groups in relevant industries. Such industries include finance (espe­ cially the four biggest state-owned commercial banks, policy banks, insurance companies, securities companies, etc.), telecommunication (including large-scale enterprises such as China Mobile, China Unicom and China Telecom), transporta­ tion (including railway, civil aviation, etc.), and the collective taxpaying system of Chinese corporate groups have thus emerged. From the perspective of the institutional construction, the core of the collec­ tive taxpaying system for corporate groups is to emphasize that the corporate groups and affiliated enterprises that fit the legal conditions be seen as one entity in terms of collectively calculating and paying corporate income tax. To be spe­ cific, collective taxpaying means the method that relevant corporations “calcu­ late the amount of taxable income (or loss) according to relevant regulations and the headquarter or the taxpayer designated by the law pays the income tax col­ lectively”.64 For that, the collective taxpaying system allows agents to add up the income and expenditure of relevant agents. In general, this would affect the

  Unification  of distribution systems  83 confirmation of the foundation of the tax for relevant corporations and therefore would affect the final amount of income tax. This is far from the basic requirement of normal principles of independent taxpaying and jurisdiction. Therefore, it is an exceptional and special system. Although the collective taxpaying system is special, since the agents subjected to it (large-scale corporate groups in special industries) are of crucial importance to the schemes of the state and the life of the people, and their operation network covers the whole nation that profoundly and widely affects life, the scope of its application is not narrow. The relevant existing problems are not only about taxa­ tion law but also connected to company or corporation law, accounting law, com­ petition law, industry law, as well as constitutional law and administrative law. Therefore, deeper research needs to be conducted from various angles. As for the particularity and the difference compared to other systems of corpo­ rate groups’ collective taxpaying systems, and for the basic issues including the institutional goals and configuration of taxation power, despite their importance, relevant research is still lacking among scholars. Besides, the following issues require further investigation: the conflict between the corporate group collective taxpaying system and the independent taxpaying system, the reflection to basic requirement by taxation law, and the connection with the transfer pricing system and loss transfer system. Such an effort may contribute to revealing the particular­ ity of a collective taxpaying system and its value while enhancing and improving current systems. 3.4.2 The particularity of the collective taxpaying system The particularity of corporate groups’ collective taxpaying system means this sys­ tem is “special” and “different” compared with other types of taxpaying systems. As mentioned earlier, as a special system in the field of corporate income tax, it is an exception to the common “independency-jurisdiction” taxpaying system. Originally, according to the requirement of the principle of taxpaying by “inde­ pendency-jurisdiction”, the branches of companies’ head offices, especially for subsidiary companies controlled by parent companies, could act as independent taxpaying agents and pay tax directly to the local taxation administrations, instead of together with other branches or subsidiaries that collectively pay taxes with the head offices or parent companies. For that, if there are losses incurred by the branches or subsidiaries when paying tax collectively, the overall taxable amount would be decreased and the whole amount of tax payable by the corporate group and the taxation revenue of the state would be decreased. As a special type of taxation law system, a collective taxpaying system is not universally applicable as ordinary taxation law systems due to the limitation to the agents. This could be considered a limitation of the applicability of taxation law.65 Such limitation is connected with the whole “principle of difference” in economic law. In the area of taxation law, because of the difference in the sta­ tus, strength, or taxpaying capability of taxpaying agents, the State makes many

84  Unification of distribution systems  special considerations in terms of economic policy and social policy and applies differentiated treatment to different agents concerning taxation law, thus constitut­ ing many exceptional systems in taxation law. The collective taxpaying system emphasizes the difference in defining the taxation foundation with regard to dif­ ferent agents, or in other words, the particularity of certain agents in terms of taxation law treatment. The particularity of the collective taxpaying system is directly related to the particularity of the agents to which such a system is applied. According to cur­ rent stipulations, the agents entitled to the right to apply for collective taxpaying must be corporate groups that meet the requirement of the regulations (which are all “large-scale enterprises”). This is different from the emphasis on prefer­ ential measures on “medium and small-scale enterprises” by past taxation laws. Currently, agents that have been approved for collective taxpaying are mainly large-scale groups in finance, telecommunication, and transportation, i.e. banks, security and insurance companies, and telecommunication enterprises66 which are all directly related to the foundation of the existence of the State and the life of the people. With regard to their nature, these huge corporate groups cover ample areas and have complicated branches, and normally have extensive monopoly attributes (economic monopoly, administrative monopoly, natural monopoly, or a combination of these). Some agents (i.e. policy banks) theoretically have a public interest nature. Such particularities are vital to the formation and development of a collective taxpaying system. The nature of trans-territory and complex branches is the common attrib­ ute shared by these enterprises. Yet, there are other corporate groups in other industries that share this attribute.67 Why is the collective taxpaying system not applied to these corporate groups? Why is the taxation law treatment different with regard to different types of corporate groups? The perception of these issues is diverse. For example, some believe that to treat different corporate groups differently with regard to taxation is obviously unfair and to apply a collective taxpaying system to all corporate groups is exactly the direction for the future amendment to taxation law (Lei Liu 2006).68 This opinion is justifiable. Based on past practices and relevant principles, the influence of one certain industry or corporate group to national schemes and the life of the people, and the relevant nature of monopoly and public interest would affect the policy nature of the system. Meanwhile, the policy nature of a system is the particularity of system differences. In fact, the aforementioned corporate groups like finance, telecom­ munication, and transportation are with a significant nature of monopoly or pub­ lic interest and are fundamentally important to the national schemes and life of the people, and to the stability of the economy and society, and they constitute the vital foundations for the application of such a special collective taxpaying system. The state, based on the economic, political, and societal considerations takes special care of state-owned or state-holding enterprises, which constitutes an important motivation for the confirmation of such a special collective taxpay­ ing system. Therefore, the formation of a special distribution system actually incorporates the interests and factors of the State.69

 Unification of distribution systems  85 3.4.3 Aims of the collective taxpaying system The previous discussion about the collective taxpaying system included the aims of such a system. For what purpose should the special collective taxpaying system be established beside the basic systems (independent taxpaying system and sys­ tem of taxpaying) according to jurisdiction? What are the aims or values of such a system? Under the collective taxpaying system, the offset of profits by losses would decrease the whole taxable amount of the corporate group and further lower the overall amount of taxation, thus it would be beneficial to the corporate groups. In this sense, the main aim of the collective taxpaying system is to encourage and promote the development of corporate groups in relevant industries, enhancing its competitiveness and increasing economies of scale. Since most of the corporate groups subjected to a collective taxpaying system are typically state-owned or are state-holding enterprises and are protruding monopolies with a huge impact on the public interest of society and the foundation of the national economy, the implementation of collective taxpaying system is, in essence, the promotion by the state of relevant industries and enterprises through transferring the interest of taxation, which in many aspects reflects the “factors of the state”. In conclu­ sion, the main purpose of the collective taxpaying system is to directly affect the industry policy through the taxation system, especially to optimize the industry structure and promote the ability of risk resistance and market competitiveness of enterprises by influencing the industry organizing policies and industry structure policies. Therefore, the ability of the state to develop the macroeconomy could be facilitated, and the national economy and public interest of society could be protected. Judging from the aims of the system, collective taxpaying is not only a techni­ cal issue, it also contains various considerations to policies. Meanwhile, collective taxpaying is not a normal operation in taxation but reflects considerations to taxa­ tion preferential measures. Thus, the collective taxpaying system is a predomi­ nant facet of the natural economy and regulation.70 From the perspective of the economy, for relevant taxpaying agents, collective taxpaying is more economical in general and would reduce their cost for taxation or reduce the taxation burden. From the perspective of regulation, a collective taxpaying system may combine positive encouragement and positive prohibition, reflecting the state’s will to sup­ port and promote the development of a series of important corporate groups, a phenomenon which is significant for the promotion of competitiveness of enter­ prises in relevant fields and the safety of the state economy. Similar to the situation in China, in many countries, the aims of corporate groups’ collective taxpaying system could be summarized as follows: to impact industry policy, to optimize the allocation of resource, to raise the efficiency of the economy, to promote the development of the economy, and to protect the public interest. Historically, the development of corporate groups in many coun­ tries is directly linked with the impact of taxation laws, and such a connection is so close to a degree that some believe “the trace of legal policies concerning corporate groups in Western countries almost always appear first in taxation law”

86  Unification of distribution systems  (Changbin Wang 2004).71 Each country tries to promote the development of cor­ porate groups through the adjustment of taxation law and therefore, in terms of collective taxpaying, no matter what specific mode, the US and Germany mode, or Australia and Netherland mode,72 the aims of the system are similar. However, in these countries, the ownership of enterprises is not emphasized. The focus is more on fair competition among market agents. Therefore, in general, these sys­ tems do not differentiate corporate groups and the core of such collective taxpay­ ing systems is to regulate the “collective taxpaying” behaviours of relevant agents within one corporate group. What needs to be further clarified here is that, at present, some scholars hold that the terms “collective taxpaying” and “combined taxpaying” should be distin­ guished.73 In China, regulatory documents concerning collective taxpaying use the term “collective taxpaying” more frequently, yet some documents adopt the term “combined taxpaying” or “collective (combined) taxpaying” or “combined (collective) taxpaying”, all of which demonstrate the chaos in the use of basic concepts in taxation law, as well as the lack of coordination among regulatory documents in the use of terms. From the development of the system, normally when regulating issues concerning collective taxpaying, the content of combined taxpaying is contained while combined taxpaying has already become an object that the collective taxpaying system specifically regulates. Therefore, when talk­ ing about the concept of collective taxpaying, the extension of such a term already includes combined taxpaying. Besides, the aim of a collective taxpaying system is also directly relevant to the basis of such a system and it should be reflected in relevant legislation. Article 52 of the Law on Corporate Income Tax in China stipulates that “unless otherwise stipulated by the State Council, corporations shall not pay corporate income tax collectively”. This article emphasizes the principle of independent taxpaying (namely, non-collective taxpaying is the principle), meanwhile reserv­ ing space for the existence of a special and exceptional collective taxpaying sys­ tem (namely, the combined taxpaying system targeting special agents). However, relevant laws do not make specific regulations on topics including the aims of the collective taxpaying system. From the perspective of effective implementation of a system, there should be a systematical stipulation of the collective taxpaying system including the clear stipulation of the aims of such a system. It could also contribute to preventing the abuse of collective taxpaying systems by relevant agents. 3.4.4 The allocation of taxation power in the collective taxpaying system The allocation of taxation power is the core of any taxation law system. In terms of the corporate groups’ collective taxpaying system, the allocation of taxation power also appears as the significant “binary structure of levying and paying”. From the perspective of the levying agent, the collective taxpaying system tar­ gets national, transregional corporate groups, and therefore the legislative power concerning collective taxpaying system should be kept by the centre, in other

  Unification  of distribution systems  87 words, it should be stipulated mainly by the National People’s Congress and State Council. In terms of the power to levy and regulate, because the collective taxpay­ ing system is a type of special and vital system with strong nature of policy and it involves the “tax expense” of the state, it should be treated with caution. To that end, the state explicitly applies the approval system which means it is the State Administration of Taxation that owns the power to approve collective taxpay­ ing and specifically determines which corporate groups in which industries could enjoy collective taxpaying. Such power seems to be merely procedural, yet it is essentially important to taxpaying agents. To emphasize the exclusiveness of this power, from 2000 the State Administration of Taxation has released many documents repeating that collec­ tive taxpaying has to be approved by the State Administration of Taxation, so the local tax administration is not entitled to make such decisions. Therefore, if local tax administrations have approved collective taxpaying or expanded the scope of collective taxpaying, that situation must be corrected. It could be concluded that collective taxpaying approval is closely connected to the taxation interest of the state, the taxation interest of the local government, the corporate groups, and various relevant corporations, and should be decided by the central administration based on the overall situation. In this sense, the centralization of power is justifi­ able. However, if there is no limitation to the types of corporate groups to which collective taxpaying is applicable, then the high centralization of the power to approve collective taxpaying is unnecessary. Corresponding to the power to impose taxes by the agents that levy tax is the taxpaying obligation of agents that pay tax. Originally, if the behaviour or facts of a corporation meet the statutory taxation requirements, it should be subject to taxation according to the principle of independent taxpaying. Yet, considering various factors including the economy, society, and politics, the state specifically sets up the collective taxpaying system to enhance the development of corporate groups in relevant fields. Due to that, the amount of taxation of such corporate groups could be decreased in general, and therefore collective taxpaying is, in essence, a type of preferential tax policy. Enterprises are motivated to apply for collective taxpaying which makes the right to apply for collective taxpaying by relevant corporate groups an important procedural right. The collective taxpaying system is constantly changing. According to the orig­ inal arrangement, the agents entitled to apply for collective taxpaying have to be corporate groups meeting relevant requirements. At that time, corporate groups with such a right were mainly: 1) 120 large-scale corporate groups that could con­ duct such “experiment” as determined by the State Council; 2) corporate groups that were experimenting corporate group policies and collective taxpaying poli­ cies approved by the State Council; 3) railway operation, civil aviation transporta­ tion, post, telecommunication, and finance corporations (including non-banking financial institutions as securities and insurance companies) stipulated by the taxation law; 4) corporations under the culture system reform experiment; and 5) corporations with the nature of corporate group which were decedents of corpora­ tions subject to collective taxpaying after restructuring. Collective taxpaying may

88  Unification of distribution systems  apply to the aforementioned corporate groups after approval, and once approved, the members of such groups, including the branches and wholly owned subsidiar­ ies, could pay tax according to collective taxpaying guidelines. If the situation about member corporations changes, and the list of member corporations needs to be amended, the corporate group should submit applications within limited time and wait for approval by the State Administration of Taxation. During the process of re-grouping, adjusting, or asset restructuring, if one wholly-owned sub­ sidiary becomes a non-wholly-owned subsidiary,74 then from the current year that subsidiary should cease to be subject to collective taxpaying and principles of independent taxation, and taxation according to jurisdiction should apply. Such a subsidiary should pay its corporate income tax to the local tax administration instead of enjoying the right to collective taxpaying.75 Thus, it could be concluded that in terms of the taxpaying agent, the issue that corporate groups could pay tax collectively is, in essence, an issue of the eligibility to the right of collective taxpaying. Inside a corporate group, the types of enterprises that should be eligible for collective taxpaying is relevant to the independence or degree of independence of such enterprises. Such issues should be the focus when allocating the power to impose taxation. 3.4.5 Several issues that need further investigation The above part briefly discussed several basic topics including the particular­ ity, goals, and allocation of power to impose taxes with regard to the collective taxpaying system. A series of important issues need further investigation. For instance, the relationship between collective taxpaying and the principle of inde­ pendent taxation, whether collective taxpaying aligns with the measures, whether the fairness of taxation is affected, as well as the difference in the allocation of power to taxation with other systems. To that end, the following part intends to discuss such issues. 3.4.5.1 Collective taxpaying: exception to the principle of independent taxation As mentioned earlier, the collective taxpaying system is just a particular excep­ tion to the common rule. From the perspective of the theory of taxpaying agent and the management of tax levying and regulation, independent taxation and taxation according to jurisdiction are basic principles. Based on the principle of independent taxation, all the independent taxpaying agents, according to taxation law, should pay tax independently instead of collectively with other agents. This practice is relevant to the allocation of the taxpaying obligation and the inde­ pendent performance of taxation duties. However, from the perspective of the collective taxpaying system, many subsidiaries fully constitute independent tax­ paying agents according to taxation law. However, for its particular affiliation with their parent companies, in order to meet relevant regulations that encour­ age and facilitate the development of corporate groups, they could pay their tax

   of distribution systems  89 Unification according to collective taxpaying methods. Still, such exception is not the total denial of the basic principle of independent taxpaying, for on the one hand, when relevant agents fail to meet the equity requirements, etc., they should again be subject to independent taxation. On the other hand, even under collective taxpay­ ing, the relevant information concerning taxation should be submitted to local taxation administrations for supervision, which is in conformity to the principle of independent taxpaying. Therefore, the conflict between the collective taxpaying system and the principle of independent taxation is relative and the principle of independent taxation remains fundamental. In principle, the dependence of enterprises or companies on taxpayer qualifi­ cation may result in dependency in taxpaying, which means that when relevant enterprises are dependent and the state has set up a collective taxpaying system, the application of the principle of independent taxation can be avoided. However, the key precondition is that there must be a collective taxpaying system estab­ lished by the state, otherwise, even when there is dependency, a collective taxpay­ ing system could hardly be applied. The difference between two modes of corporate income tax, namely the classi­ cal system and the integrated system, could inspire us to comprehend the connec­ tion between the principle of independent taxation and the collective taxpaying system. To solve the issue of repeated economic tax levying, the classical sys­ tem, represented by the US and based on the realistic theory of the legal person, emphasizes that the company and its shareholders are independent agents, so they should independently bear their duties to taxation in accordance with the principle of independent taxation. The integrated system, represented by some states in the EU, is based on the fiction theory. It emphasizes that a company and its share­ holders may be deemed as one agent and therefore the taxation duties of compa­ nies and individuals could be combined and solved together.76 Such integration is similar to the spirit of the collective taxpaying system. Therefore, if the integrated mode could be spread based on the internal arrangements between companies and their shareholders (here specifically indicating the parent company or the head office), the taxpaying of these agents could be combined in an integrated approach for collective taxpaying. Comparatively, though it is not appropriate to simply equate a collective taxpay­ ing system with the abovementioned modes (sometimes the collective taxpaying system is similar to a mixture of both), generally speaking, the collective taxpaying system emphasizes the maximization of the overall interest, and therefore is more similar to the integrated model, reflecting the idea of holism. It is internally related to the overall strategy of corporate groups, with the comprehensive considerations of the state, and with the whole effect pursued by the taxation law adjustment. Besides, from the principle of taxation according to jurisdiction, which is directly connected to the principle of independent taxation and to which adminis­ tration the taxpayer pay taxes directly, relates to the issue of the jurisdiction of the taxation and the power to gain taxation interests. Collective taxpaying changes the common principle of jurisdiction and the situation of the taxation interest of the

90  Unification of distribution systems  local government, thereby affecting the distribution of taxation between the cen­ tral and local government. It is, therefore, likely to affect the relationship between the central and local government. 3.4.5.2 Viewing collective taxation from the perspective of the requirement of basic principles of taxation law As discussed above, the principle of collective taxpaying is the opposite of the principle of independent taxation. Is it a type of preferential measure? After all, the original motivation for the state to levy tax is to gain taxation interests, both in the short term and in the long term. Yet under collective taxpaying, the state has to give up part of its taxation interest. From the perspective of the state’s “giving up” and decreasing the burden of enterprises, collective taxpaying fits the general defi­ nition of taxation preferential measures, and some economic scholars therefore treat it as a type of preferential measure. Of course, such preferential measures are based on foundations and the effect is similar to the transfer of loss. If collective taxpaying is treated as a preferential measure, then the issue of fairness should be involved, and problems such as whether collective taxpaying comply with basic principles of system goals of the taxation law would emerge. For according to principles of taxation law, taxation preferential measures are tax­ ation special measures which should comply with and reflect the three basic prin­ ciples of taxation law, namely, the principles of statutory taxation, fairness, and efficiency. Therefore, issues relating to collective taxpaying could be researched from the perspective of requirement by basic principles of taxation law. According to the principle of statutory taxation, the collective taxpaying sys­ tem should also be statutory, including the applicable agents, scopes, conditions, and approaches, which all require explicit stipulations by the law. Judging from current regulations in China, though there are bases and reflections in the collec­ tive taxpaying system in state legislation, the core content has been established by a series of regulatory documents released by taxation administrations. As far as the documents are concerned, it suffices to say that their level is too low and the conditions for application are unclear, resulting in the expansion of administrative discretion. This is still considerably far from the requirement of the principle of statutory taxation. In terms of realization of the fairness of taxation, the current collective tax­ paying system is also very problematic. For instance, from the perspective of horizontal fairness, why are certain corporate groups eligible to enjoy collective taxpaying? Why are only a few types of corporate groups approved while there are many other corporate groups that meet the criteria? Though explanations based on policy considerations exist, sometimes the justifiability of policy is questionable. Therefore, satisfactory answers are required for normative fairness and substantial fairness. Besides, from the perspective of vertical fairness, compared with a rela­ tively disadvantaged medium and small-scale enterprises, corporate groups have strong economic capabilities and enjoy more public goods, therefore they should contribute more to the state in terms of taxation. Is it appropriate to instead give

   of distribution systems  91 Unification corporate groups taxation preferential measures? Especially for corporate groups that are obviously with monopoly status, will such measures further increase their monopoly status and influence economic efficiency and consumer interest? Closely related to the two abovementioned principles is the issue of, from a tax­ ation efficiency perspective, whether collective taxpaying will twist the resource allocation by the market and further decrease the efficiency of the economy. Are the costs of taxation levying of the administrations and the cost of taxation by rel­ evant enterprises really lowered? Further calculation is needed instead of simple speculation from stipulations on the paper. Various questions related to basic principles of taxation law may have already been highlighted, yet deeper questions exist that need to be explained in theory. For example, does the development of corporate groups or the encouragement of corporate groups by the state represent the public interest? How should we define public interest? How should fairness and efficiency be defined and how should the relationship between them be arranged properly? Besides, how could the scale benefit of groups be increased and how could the competitiveness of corporate groups be increased? Which entity should bear the cost of corporate groups? Is it appropriate that the taxpayers collectively pay for the results of collective tax­ paying? There is bound to be increasing consent with regard to these questions given the increasing enterprise independence and market competition as well as a deepened understanding of the public interest. 3.4.5.3 Interrelations between collective taxpaying and the system of transfer pricing and loss transfer Apart from the collective taxpaying system, taxation law systems that are closely related to corporate groups also include the system of price transfer and loss trans­ fer. These systems share similarities though they have distinctions. Therefore, the merit further investigation and discussion in order to increase the understanding of issues including the allocation of taxation power and the protection of interests. As is widely known, in the field of corporate income tax, that there exists a spe­ cific type of system, namely transfer pricing, which is specifically applicable to affiliated enterprises within corporate groups. The core of such a system is to solve the issue of transfer pricing among affiliated enterprises. In fact, the branches and subsidiaries of corporate groups are typically affiliated enterprises and, in accord­ ance with stipulations of taxation law, when transactions occur among them, the principle of independent transaction has to be followed in terms of charges or pay­ ing of funds. Otherwise, if pricing (therefore profit) is transferred through internal transactions among affiliated enterprises, the result of such transactions would not be admitted by taxation law. That explains why the taxation administration is entitled to adjust the amount of taxation.77 It could thus be concluded that the system of transfer pricing emphasizes the fairness of transactions among affiliated enterprises indicating that such transactions should be conducted in a way that is similar to market agents without affiliations. In other words, it emphasizes the independence of affiliated enterprises.

92  Unification of distribution systems  Yet, the system of collective taxpaying is different. It focuses not on the affili­ ated transactions among affiliated enterprises within corporate groups, but on the issue of collective taxpaying based on profits or losses after examining the finan­ cial operation of affiliated enterprises. At this juncture, it does not emphasize the independence of affiliated enterprises, but instead the connection among them and the integration of the losses and profits of all these agents. Such two systems are applicable to two phases. The system of transfer pricing is applicable to the phase of the formation of benefit/loss before taxation, which emphasizes the principle of independent transaction (aka principle of independent competition, principle of fair transaction), and it directly affects the formation of the foundation for taxation of individuals. Meanwhile, the system of collective taxpaying is applicable to the phase when the result of the operation of enterprises is clear and the benefit/loss has been subjectively realized. Collection would change the overall foundation for taxation. The aims and phases are different between such two systems. Besides, from the perspective of economics, transfer pricing is reasonable because it contributes to the decreasing cost of transactions and to the realization of the goals of multiple parties. Yet, from the perspective of the law, transfer pricing may generate numerous negative effects and therefore should be regulated through the taxation law, thereby reflecting the requirement of the independent competition of agents in the external market. It focuses on the individual. The system of collective taxpaying, however, emphasizes the depend­ ent competitiveness of enterprises which reflect the requirement to decrease the cost of taxation through the integration of benefits and losses within the internal market. In addition, the connection between the system of collective taxpaying and loss transfer is also worth researching. From the design of the system, loss transfer aims at adjusting the foundation for taxation through the offset of profit and loss in different years, enabling the enterprise to enjoy deferred tax and lowered rate by determining the taxable amount in a longer term.78 Collective taxpaying tries to realize the offset of benefits and losses among affiliated enterprises, decreasing the burden on relevant agents by the integration of profits and losses. Besides, loss transfer also emphasizes the importance of individuals, in other words, enter­ prises as independent individuals may conduct loss offsetting. Collective taxpay­ ing emphasizes the meaning of the entirety, maximizing the profits of the whole group. The difference of both, in this aspect, is similar to the difference between the system of collective taxpaying and the system of transfer pricing. 3.4.6 Summary The issue of collective taxpaying for corporate groups is a complicated issue that demands deeper research by academia. The terms and scope of application and the relationship with relevant systems need to be cleared so that the relevant legal issues can be investigated more profoundly. Based on the basic definition of col­ lective taxpaying, the previous sections discussed the particularity and goals of the system of collective taxpaying as well as issues such as the allocation of taxation

  Unification  of distribution systems  93 power within such system, emphasizing that the particularity of the system lies in its exception to normal systems of independent taxpaying and taxation accord­ ing to jurisdiction, etc., and that such particularity is directly related to its system goals. In fact, without the attempt to achieve specific system goals, the doubtful system of collective taxpaying would not exist. It is to realize specific system goals that special allocation of power to taxation is needed in such a system, that emphasis on the exclusive power of State Administration of Taxation to approve of collective taxpaying is necessary, and that the overriding nature of policy or difference is apparent in terms of collective taxpaying. Earlier sections also focus on the relationship between the system of collective taxpaying and relevant systems or legal principles, from which we could further analyze the particularity of the system of collective taxpaying and therefore better understand the aims of this system. In fact, many analyses of the relative conflict between collective taxpaying with regard to the system of independent taxation and taxation according to jurisdiction intend to further illustrate the particularity or difference of the system of collective taxpaying and to emphasize that it is only an exception to the norm, and its implementation should meet specific conditions. Analyses concerning the relationship between collective taxpaying and basic prin­ ciples of the law of taxation attempt to illustrate that the realization of the goals of the system of collective taxpaying may conflict with the basic principles of taxa­ tion law and that, in practice, it may generate many problems or doubts. The dis­ cussion on the correlation between the system of collective taxpaying and transfer pricing and loss transfer implicitly contains the focus on the shift from an individ­ ualism standard to a holism standard concerning the allocation of taxation power or interest on taxation, as well as the shift from individualistic thought emphasized by traditional systems to holistic thought emphasized by modern systems.

Notes 1 The initiation of reform and opening-up and the economic law legislation were passed almost at the same time, and benign interaction happened between them. Taxation leg­ islation, as the earliest economic legislation since the reform and opening-up, has tre­ mendous influence. The deepening of reform or the expansion of macro-regulation and control involve taxation legislation. 2 Since the reform and opening-up, the first laws made in economic legislation are the Law on Individual Income Tax (1980) and the Law on Foreign Corporate Income Tax (1981). As laws passed by the national legislative body, their precedency is higher than the later taxation interim regulations. 3 Though in 2011 China announced that the socialist legal system with Chinese char­ acteristics had been established, many important pieces of legislation in the taxation field had not yet been published, and the overall taxation law structure was still in the process of improvement. 4 On September 18, 1984, the State Council, in accordance with the decision to author­ ized legislation by the Standing Committee of National People’s Congress, published relevant taxation regulations (draft), including the Regulation on Commodity Taxation (draft) and the Regulation on VAT (draft). 5 Based on the Decision to Authorized Legislation in 1985 of the National People’s Congress, the State Council made and implemented a series of interim taxation regula­

94  Unification of distribution systems  6 7 8 9

10 11

12

13 14 15

16 17 18

tions, ending the history of taxation “Regulation (Draft)”. Currently, most taxation laws are “interim regulations” made by the State Council. The Standing Committee of National People’s Congress (1984). The Decision to Authorize the State Council to Reform the Industry and Commerce Taxation System and to Publish and Experiment Relevant Taxation Regulations and Drafts. Shouwen Zhang. (2001). The Universal Applicability of Taxation law and its limita­ tions. Peking University Law Review, 4(05), pp. 554–566. In recent years, the employment of “experiment mode” in taxation legislation has been increasingly frequent. Apart from the expansion of experiments on VAT, real estate tax and resource tax are also under experiment. Given that taxation law has the function to distribute income and conduct macro-regu­ lation and control, its changeable nature makes it worthy of our attention. For relevant discussion, see Shouwen Zhang. (2002). The Periodical Change of Macro-regulation and Control Law. Peking University Law Journal, 5(06), pp. 695–705. The Third Conference of the Sixth National People’s Congress (1985). Decision on Authorizing the State Council to Formulate Interim Regulations Concerning Economic Institution Reform and Opening-up. Similarly, Article 1 Clause 8 of the US Constitution grants the Congress the power con­ cerning taxation levying, expenses, adjusting international trade and inter-state trade, and authorizing the Congress “to make all laws which shall be necessary and proper for the foregoing powers, and all other powers vested by this Constitution in the gov­ ernment of the United States, or in any department or officer thereof”. However, the terms “necessary” and “proper” have been controversial for their ambiguity. Through the constant constitutional interpretations made by Associate Justice Marshall, etc., the power of the federation has been expanding. See Qianfan Zhang. (2011). The US Federal Constitution. Beijing: China Law Press, pp. 95–103. Therefore, both constitu­ tional authorization and legislative authorization may result in the problem of ambigu­ ity, yet the agents being authorized are obviously different in China and the US. For example, though there are already many specific stipulations in the Interim Regulation on VAT as well as its implementation regulations, the fiscal and taxation department still needs to publish an expanse of documents. This is directly related to the complexity of economic activities, and reflects the changeable nature of the VAT system. “Though to increase the certainty is the aim of the laws, however the laws are only capable in terminating part of the source of uncertainty”. See Friedrich Hayek. (2002). Law, Legislation and Liberty. Vols. II, III. Beijing: China Encyclopedia Press, p. 213. See the Experiment Scheme to Change Business Tax to VAT, which emphasized “to regulate the taxation system and make the burdens reasonable”, and “basically termi­ nate the duplicate taxation”. The real estate tax reform experiment started on January 28, 2011 in Shanghai and Chongqing. Both stipulated that the aim of such experiment is to “adjust income dis­ tribution, guide the real estate consumption and effectively allocate the real estate resource”. During the process of “the experiment of business tax to VAT”, a common problem is that the burden of taxpayers with lower capital may rise. The increase of tax burden of logistic companies is an illustration. Fikentscher believes that the jointing point decides whether a taxation fact is taxable. See Wolfgang Fikentscher. (2010). Wirtschaftsrecht. Translated by Shiming Zhang. Beijing: China Democracy Legislative Publishing House, p. 32. Based on Experiment Scheme to Change Business Tax to VAT, during the experiment period, the basic fiscal institution should remain stable, and the income generated from business tax should belong to the original region. The corresponding reduction of fiscal revenue should be shared between the central and local government. Thus, the local taxation interest would not be affected.

  Unification  of distribution systems  95 19 In terms of the cost to obey and coordinate, see Manfred Streit and Wolfgang Kasper. (2000). Institutional Economics: Social Order and Public Policy. Translated by Chaohua Han. Beijing: Business Press, pp. 152–156. 20 When taxation income is insufficient, even though the local government does not rely on the income of the land, it will seek other fees or non-taxation income, and the whole income distribution system would become chaotic. Therefore, it is vital for the future development of China to shift the function of the government, relieving the govern­ ment from “operational activities”. 21 Under the efforts of various groups, the Standing Committee of the National People’s Congress has already paid attention to this issue. Especially under the circumstance that the advocacy for “fulfilling the principle of statutory taxation” has been rising, the date when the Decision to Authorization will be abolished will not be far. 22 In terms of the problem of authorized legislation and the violation against principle of statutory taxation, see Shouwen Zhang. (1996). On Statutory Taxation. Chinese Journal of Law, 18(06), pp. 59–67. 23 Shouwen Zhang. (2012). Three Basic Problems of Real Estate Tax Legislation. Taxation Research, (11), pp. 50–55. 24 For various problems that may result from legislation “experimentation”, the public has accumulated abundant understanding, and therefore the state emphasizes the grand design, instead of experimenting under all circumstance. 25 Law on VAT has been listed into the legislation scheme of the National People’s Congress, and should be published as early as possible. This is vital to avoid the demer­ its of “experimenting”. 26 Article 3 of the Law on Taxation Collection stipulates that no government bodies, units, or individuals could make decisions to initiate, suspend, reduce, or exempt rebate tax that is against current taxation laws and regulations. This article reflects the power to reduce taxes in the broad sense. 27 Taxation scholars divide the power to taxation into power to taxation legislation, taxa­ tion administration, and taxation income. From the perspective of increasing or reducing tax burdens, it could also be divided into the power to increase tax and the power to reduce tax. It is mainly relevant to the abovementioned power to taxation legislation, and would have a direct impact on the power to taxation administration and taxation income. 28 Article 2 of the Constitution of the People’s Republic of China stipulates that “all power in the People’s Republic of China belongs to the people”. Similar stipulations exist in the constitutional laws of many other states. Therefore, the power to make deci­ sions concerning tax reduction should be exercised mainly by the National People’s Congress or parliament. 29 At present, China has not made Tax Codex or General Rules on Tax, and the basic stipu­ lations of taxation institution laws concerning the distribution of power to taxation, and the specific stipulations on the power to reduce taxes are mainly in the Law on Tax Collection. 30 Some states have already included the principle of statutory taxation into their consti­ tutional law. For example, Article 317 of the Constitution of the Bolivarian Republic of Venezuela specifically stipulates the principle of statutory taxation. 31 Power to taxation, taxation behaviour, and taxation interest are the three basic catego­ ries of the field of taxation and they reflect the core issues of taxation law. For relevant discussion, see Shouwen Zhang. (2003). The Abstract and Value of the Category of Taxation Behavior. Taxation Research, (7), pp. 43–49. 32 Article 1, Clause 10 of the US Constitution stipulates that “no state shall, without the consent of Congress, lay any duty of tonnage”. This is crucially important to reducing the burden of enterprises and encouraging domestic free trade and fair competition. 33 China implemented the Interim Regulation on Custom Duty of Tonnage, published in September 1952. The new Interim Regulation on Duty of Tonnage came into effect on January 1, 2012.

96  Unification of distribution systems  34 According to Article 8, Clause 8 of the Law on Legislation, affairs concerning basic institutions of taxation could be regulated only by the law. 35 This decision was abolished by the Standing Committee of the National People’s Congress on June 27, 2009. 36 Shouwen Zhang. (1996). On Statutory Taxation. Chinese Journal of Law, 18(06), pp. 59–67; Shouwen Zhang. (2012). Three Fundamental Issues Concerning Real Estate Tax Legislation. Taxation Research, (11), pp. 50–55. 37 Though in the Decision to Reform in 2013, the National People’s Congress is required to fulfil the “principle of statutory taxation” with regard to legislation, the implemen­ tation of this principle in execution is equally important and it is the direction for the improvement of taxation legislation. 38 In late May 2007, officials of the Department of Finance insisted that the rate of secu­ rity exchange stamp duty will not be increased, while four working days later, in the early morning of May 30, the Department of Finance announced that the rate would be increased. This resulted in a sharp drop in the stock market. The public doubted such behaviour. See Mingsheng Yuan. (2008). The Crazy Stock Market, Stamp Duty and Rule of Law of the Government: Thinking on the Adjustment to the Rate of Security Exchange Stamp Duty from the Perspective of Jurisprudence. Law Science, (8), p. 25. 39 The principle of proportion contributes to avoiding the violation of the state power against the legal interests of citizens. It is comparatively more important to emphasize this principle regarding the reduction of tax. If the measures of tax reduction violate the principle of proportion, then such measures are against the law. If the law is against the principle of proportion, then such law is against the constitution. See Utz Schliesky. (2006). Öffentliches  Wettbewerbsrecht. Translated by Wenguang Yu. Beijing: China Law Press, p. 103. 40 Sima Guang ni Song Dynasty believed that through reducing the burden of the people, the source of taxation would be maintained, achieving the sustainability in tax levy­ ing. See Jun Wang. (2009). The Institutional Change and Thinking Evolution of Fiscal Institution in China (Vol 1, Part 2). Beijing: China Fiscal Economy Press, pp. 822–823. The thinking of Sima Guang is consistent to Laffer, yet it is much earlier than Laffer. 41 Approved by the State Council, the Department of Finance and State Administration of Taxation enacted the Regulations on Several Issues concerning the Expansion of VAT Deduction in Northeast Regions. It is the direct basis for the exercise of power to reduce taxes in the field of VAT in the northeast region. 42 The VAT transformation experiment initiated in the northeast region and the experi­ ment for exemption of agriculture tax in Heilongjiang and Jilin are both important measures of “structural tax reduction”. However, at that time, people did not view these events from such a perspective given that they failed to identify the vital position and meaning in restarting the taxation institution reform. 43 The Interim Method for Expanding the Scope of VAT Deduction in Central Regions is the direct basis for the exercise of power to reduce taxes in VAT area in central regions. 44 Some states even make strict restriction to the exercise of power to reduce taxes in constitutional laws. For example, Article 219 of the Constitution of Republic of Haiti stipulates that “no tax exemption, increase, decrease or elimination may be established except by law”. Thus, the exercise of power to reduce taxes shall comply with strict principle of statutory taxation. 45 VAT is a typical neutral tax and should be applied with unified standard. More than that, various indirect taxes, including VAT, should be applied. Therefore, Article 1 Clause 8 of the US Constitution stipulates that “the Congress shall have Power To lay and col­ lect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States”. 46 For instance, the Experiment Scheme to Change Business Tax to VAT published by the Department of Finance and State Administration of Taxation.

  Unification  of distribution systems  97 47 For specific discussion on relevant legal problems concerning VAT experiments, see Shouwen Zhang. (2013). The “Experiment Mode” of Taxation Legislation in China: Taking VAT Legislation Experiment as Example. Law Science, (4), pp. 61–68. 48 “The State strengthens economic legislation, improves macro-regulation and control” is explicitly stipulated by Article 15 in Constitution of China, which is crucial for the maintenance of the steady growth of national economy. For such purpose, Article 109 of the Basic Law for the Federal Republic of Germany stipulates the “overall eco­ nomic balance”, which is deemed as a core aim of the state. See Rolf Stober. (2008). Allgemeines Wirtschaftsverwaltungsrecht: Grundlagen des Wirtschaftsverfassungsund Wirtschaftsverwaltungsrechts, des Weltwirtschafts- und Binnenmarktrechts. Translated by Libin Xie. Beijing: Commercial Press, p. 333. 49 Many problems in the process of economic structure adjustment in China are legal problems, which are vital for analyzing the issue of “structural tax reduction”. For relevant analysis, see Shouwen Zhang. (2011). Economic Law Thinking on “Dual Adjustment”. Law Science, (1), pp. 30–34. 50 The period of multi-legislation indicates the period when the standard of legislation is the ownership of enterprises. While the dual-legislation period indicates the period when the income tax system for domestic enterprises and for foreign enterprises coexisted. 51 After over ten years of preparation, the Law on Corporate Income Tax was finally passed in March 2007 and the approval vote was as high as 97.8%. At that time, it was studied or reported in many essays and in the news. 52 For the brief discussion on the universal application and limitations of taxation law, see Shouwen Zhang. (2001). The Universal Applicability of Taxation Law and its Limitations. Peking University Law Journal, 4(05), p. 554. 53 Shouwen Zhang. (2000). On the Taxability in Taxation Law. Jurists Review, (5), p. 12. 54 According to Article 1, Clause 2 of the Law on Corporate Income Tax, individual soleinvested corporations and partnership corporations are not subject to this law. 55 Such institutional arrangement is also an important reflection on the taxable princi­ ple. See Zhengwen Shi. (2007). Discussion on the Issue of “Income not Subject to Taxation” in Law on Corporate Income Tax. Taxation Research, (9), p. 44. 56 The different treatments do not exist in terms of rate and preferential measures. However, the difference still exists, and the unified application of the same norms or institutions to all types of corporations is impossible. 57 Article 28 of the Law on Corporate Income Tax stipulates that micro-scale enterprises fitting the requirements are levied at 20%, and the high-tech enterprises supported by the State are levied at 15%. 58 Shouwen Zhang. (2007). Legal Analysis to the Collective Taxpaying by Corporate Groups. Law Science, (5), pp. 41–49. 59 Taxation law theory and practice in both the common law and continental law system value this principle. In fact, in the whole economic law field, to fulfil the substantial justice, this principle must be established. 60 It is a vital problem, whether substantial unity is achieved, and whether certainty, predictability, and stability have been established. See Jody Krause and Steven Walt. (2005). The Jurisprudential Foundations of Corporate and Commercial Law. Translated by Haijun Jin. Beijing: Peking University Press, p. 193. 61 For instance, some scholars believed that collective taxpaying was one of the reasons for the “deviation”, when discussing the issue of deviation between regional taxation and tax resource. See Wanjun Jin. (2007). Primary Thinking on the Issue of Deviation between Regional Taxation and Tax Resource. Taxation Research, (1), pp. 28–34. 62 Collective taxpaying, as a type of special system, changes the original principle of local tax and impacts the interest and competition of enterprises as well as the taxation interest of local government. It will further affect the relationship between central and local government and correspondingly will bring forward political and legal problems. Research from the perspective of the department of law is required.

98  Unification of distribution systems  63 In other fields, the term “collective paying” similar to “collective taxpaying” is used. For instance, in terms of stamp duty, as early as in 1989, the State Administration of Taxation and the Department of Railway stipulated that the stamp duty of the carrier should be collectively paid by the railway administrations in order to simplify the tax­ paying procedure and to enhance the taxation administration. Yet the exact meaning of “collective paying” is not the same as “collective taxpaying”. 64 See the State Administration of Taxation. (1995). The Interim Regulation on Enhancing the Levying of Corporate Income Tax for Collective Taxpaying Enterprises. 65 For relevant discussion, see Shouwen Zhang. (2001). The Universal Applicability of Taxation law and its limitations. Peking University Law Journal, 4(05), p. 554. 66 For instance, The Ministry of Finance and Taxation. (1996). The Reply Concerning the Calculation and Paying of Income Tax of State-owned Commercial Banks; (2001). Notice Concerning the Income Tax of Entities subject to CAAC, State Taxation Letter No. 502. 67 As for other enterprises, the State Administration of Taxation stipulated the Regulation on the Administration of Tax Levying of Income Tax for Enterprises Conducting Interregion Business, which came into effect on January 1, 2013. However, the scope according to this Regulation, is limited to the branch without the legal person status. Therefore, the meaning is different. 68 Lei Liu. (2006). On the Formation of Modern Enterprises and Income Tax. China Economic Studies, (2), p. 56. 69 A vital reason is that such tax income belongs to the revenue of central government, and should be paid to the central treasury in full amount. Therefore, the applicable system is naturally different. 70 The nature of the economy and regulation is a basic characteristic of economic law including taxation law. See Shouwen Zhang. (2004). The Reconstruction of Economic Law Theory. Beijing: People’s Press, pp. 221–226. 71 Changbin Wang. (2004). Comparative Studies on Corporate Group Laws. Beijing: Peking University Press, p. 155. 72 Some believe that the US and Germany apply a collective-sharing system, which means that the entities subject to one corporate group calculate their taxable income respec­ tively, and the total amount of such taxable income constitutes the taxable income of the entities of the higher level. While in states such as Australia, a total-combination system is applied, where the corporate groups are treated as independent taxpaying agents. See Wenchuan Xia. (2007). Thinkings on Collective Taxpaying of Corporate Income Tax. Taxation Research, (1), p. 44. 73 The collective taxpaying by headquarter and branches would be called collective tax­ paying, and the collective taxpaying by parent company and subsidiaries would be called combined taxpaying, which is reasonable. 74 In many developed countries, the companies subject to combined taxpaying are not limited to wholly-owned subsidiaries. For example, the US once stipulated that owning over 80% of shares with the power to vote is one of the conditions for applying com­ bined taxpaying. 75 The State Administration of Taxation. (2006). Notice on Regulating the Scope of Collective Taxpaying of Corporate Income Tax, State Tax Letter No. 48. Currently, this Notice is abolished, which reflects the process of change of the collective taxpaying system. 76 Some scholars call these two modes the American independent taxation system, and European unified taxation system. See Kaneko Hiroshi. (2004). Tax Law. Translated by Xianbin Zhan. Beijing: China Law Press, p. 198.

  Unification  of distribution systems  99 77 Article 41 of the Law on Corporate Income Tax stipulates that “where a transaction between an enterprise and its related party is not conducted pursuant to the arm’s length principle and this results in the reduction of Taxable Gross Income or Taxable Income of the Enterprise or its related party, the tax authorities shall have the authority to make adjustment using appropriate methods”. 78 For example, article 18 of the Law on Corporate Income Tax stipulates that “the loss incurred during a tax year by an Enterprise is allowed to be carried forward to the following years and set off against the profits of the following years, but the carrying forward period shall not exceed a maximum of 5 years”.

4

The legal protection of distribution rights and interests

The emergence and expansion of distribution risks and crises are directly related to inadequacies in the protection of relevant rights and interests by distribution systems. For example, the right to economic development involves the survival and development of various agents and as an important economic right, it contains the right to participation in distribution. If the right to economic development can­ not be effectively protected, the distribution risk may increase and the possibility of the occurrence of distribution crises would arise. Therefore, the focus needs to be on the resolution of distribution issues in development while the right to the economic development of various agents needs to be valued. Directly related to the right to economic development is the decreasing of the tax burden of market agents which helps to protect and promote the development of relevant agents, and to better solve the relevant distribution issues. For this reason, China has implemented many “structural tax reduction” measures, among which is the “transition” and “expansion of the scope of application” of VAT. These measures have attracted significant attention given the fact that they are all important institutional adjustments aimed at dealing with the distribution crisis. For this reason, this chapter mainly reveals the distribution issues involved by illustrating the issues related to the protection of the deduction right concerning the transition of VAT. In addition, the chapter demonstrates the influence of the distribution right or power of relevant taxpayers or the state. Besides, real estate, as a type of property with extreme importance, would hugely affect the realization of the basic human rights of individuals. Meanwhile, real estate ownership would directly affect the distribution of income of residents. Issues such as whether and how to levy tax on property owned by individuals and how to improve the current property tax legislation not only influence the devel­ opment of the real estate market or the adjustment of relevant economic structures but also involve the prevention of relevant distribution risks. The relevant issues of the protection of different rights are also worth researching. Therefore, this chapter also discusses the issue of improving property tax legislation and reveals the important influence of distribution interests among relevant agents using dif­ ferent approaches to such improvement. In the grand scenario of distribution, apart from focusing on the distribution rights and interests of enterprises and individuals, the distribution of interest of

Legal protection of distribution rights 101 the government also needs attention, especially the distribution of interest of local governments, which, has currently gathered significant steam and may trigger distribution risks and distribution crises including local government debt risk. For these reasons, this chapter investigates the issues of the distribution of interests of local governments and the relevant legal protection, combining the notable prob­ lems caused by the development of a binary system of taxation in China and the important characteristics of the binary system.

4.1 The issue of distribution and the protection of the right to economic development That fact that the issue of distribution has become crucial is directly related to the lack of protection of the right to economic development. The right to distribution forms part of the right to economic development and when the right to distri­ bution cannot be effectively protected the issue of distribution would naturally become obvious. To analyze the issue from the perspective of rights to economic development would contribute to the further understanding of the reasons for the protection of rights and interest of distribution of relevant agents, and the reasons why the enhancement of economic law regulation is needed in order to resolve distribution issues. 4.1.1 The right to economic development that directly relates to distribution Development is the current theme for all countries, so it is especially important for developing countries to understand how to develop or what approach should be taken to achieve development. Development economics, development sociol­ ogy, and development politics have already researched such issues,1 while devel­ opment law, as a newly emerging discipline, has not yet conducted sufficient research in this area.2 Since economic law is the law to promote development, it is particularly necessary to strengthen the research of economic law on legal issues related to development. Throughout history and till today, countries face extremely complicated “development problems” in their endeavour to achieve multiple goals including industrialization, modernization, urbanization, and informatization. This requires the clarification, in the law, of power or rights of states and citizens in terms of development, thereby giving way to a complicated “right to development” system. The right to development is usually comprehended as the right of individuals (i.e. a natural person) or a community (i.e. a state or nation) to participate and promote the comprehensive development of the economy, society, culture, and politics and to enjoy the fruits of such development.3 In the past, research and dis­ cussion on the right to development have occurred mainly in the field of interna­ tional law, especially in the field of human rights. In notable historical documents, such as the Charter of the United Nations, the idea of the right to development already existed.4 Since Kéba M’Baye brought the concept “right to development”,

102 Legal protection of distribution rights in documents such as The Declaration on the Right to Development, the right to development has been repeated over and over again5 and has become a vital object in international law research. However, many scholars have realized that the achievement of the right to development of different agents would be impos­ sible without the protection of domestic laws including, most importantly, the protection of economic development. Based on existing theories on the right to development, all the countries (tra­ ditionally mainly developing countries) may choose their approach to economic development according to the conditions of the world and of each country. This constitutes the “right to economic development” within the right to development of one country, which is essential. The exercise of the right to economic develop­ ment is vital to protect the economic development of relevant states and nations, and to establish a new international economic order. To realize the right to eco­ nomic development, different countries are entitled to employ various measures to promote and protect economic development including legal measures, among which economic law measures are central. In previous economic law research, some scholars integrated “development” into the discussion on the ideas, values, and principles of economic law in fields including value theory, and have achieved considerable results.6 However, the overall research to the right to development (especially the right to economic development) is quite insufficient. Since the occurrence of the financial crisis in 2008, based on the profound influence to the crisis by distribution, “how to develop” and how to solve the crisis resulting from distribution issues has become a major topic for all countries. China, based on the complicated international environment and domestic conditions, has made a major strategic decision to change its way of economic development, which is related to both international and domestic laws. For example, at the level of international law and based on the right to development, China is completely autonomous in terms of deciding how to develop and how to change its way to develop. Meanwhile at the level of domestic law, to realize the goals of changing its ways to develop, the right to the development of various agents needs to be further clarified and defined, with the support of domestic laws including economic laws. Considering that the chang­ ing of ways to develop is a long-term strategy of the state, the right to economic development of various agents needs the protection of economic law. Therefore, it is quite necessary to focus on and study the issue of the right to economic development. In fact, the approach to economic development of one state is directly related to the right to economic development. The realization of the right to economic development, especially the right to distribution, especially calls for protec­ tion by economic law. Economic law is “the law to promote development” and relates to the increasing relevance of the nature of regulation,7 the adjustment of which would directly affect the right to economic development and the interest of development of relevant agents. To consider the issue of the right to eco­ nomic development through the perspective of economic law may contribute to solving the issue of the protection of domestic laws aimed at enhancing the

Legal protection of distribution rights 103 right to development that has long been brought up in the area of international law and yet has never been effectively solved, thereby transforming the issue of the right to development into an issue of domestic law. It may contribute to the establishment of a new international economic order and a new domestic economic structure in this new historical era. It may also facilitate the devel­ opment and improvement of the theories of economic law and even the entire development law. Therefore, the following part hails from the perspective of economic law. It locates the right to economic development within economic law, thereby reveal­ ing the right pedigree of economic law agents and their complicated hierarchical structure, and explores the relationship between basic power and the right of eco­ nomic law agents with various types of rights to economic development. Based on that, the following section discusses the issue of economic law protection of the right to economic development and highlights relevant issues that affect the right to economic development and that require immediate solutions. The expectation is that this may promote the development of economic law theory, the improve­ ment of relevant institutions, and it may facilitate “development law” and inter­ national law. 4.1.2 The position of the right to economic development in economic law It is generally agreed that the right to development includes the right to economic development, the right to social development and the right to political develop­ ment, etc. The right to economic development is widely admitted as the core to the right to development and it is the foundation for the effective realization of other types of rights to development. Some scholars believe that the right to economic development is the most active element in the law and social development moti­ vation system, and it is the right for a state or nation to demand the establishment of a fair and justifiable economic order, deciding and adjusting its economic struc­ ture and its development policy (Xigen Wang 2008).8 Since the right to economic development directly relates to the domestic adjustment of economic structure and economic development of a state, it is necessary to define such right in domestic laws, including economic law, in terms of its types and specific precedency. From the perspective of economic law, the right to economic development is a type of important comprehensive right owned by economic law agents whose realization is based on the power and the rights of economic law agents. Therefore, there is higher precedence. Because of such a status, the right to economic devel­ opment is both closely related to various specific types of power or the rights of economic law agents being studied by academia, and also, obviously different from such other powers or rights. It is necessary, with regard to the position of the right to economic develop­ ment, to further clarify, through investigation, the content and category of the right to economic development. In fact, the content of the right to economic development is abundant and is embodied in various types of rights. In economic law research at least, the following types need our attention.

104

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First, based on the binary structure of state-citizen, the right to economic development could be divided into the state’s right to development and the citi­ zens’ right to development. The citizens’ right to development could include the rights of both enterprises and individuals to development as well as the third sec­ tor’s right to development, etc. At the international level, if the broad definition of the right to development is considered, both developed countries and develop­ ing countries may enjoy the vital right to economic development.9 While at the domestic level, the right to economic development of enterprises and other indi­ viduals is neglected and especially requires protection by economic law. The state right to development involves national interest and social and pub­ lic interest, while citizens’ rights to development involve personal interests. The exercising of state right to economic development directly affects the results of the approach to economic development, while different approaches to economic development would significantly influence citizens’ right to economic develop­ ment. Generally speaking, it should be an important goal to adjust economic law that could effectively guarantee the right to the economic development of various agents and to ensure the fair distribution of various kinds of interests. Second, based on the binary structure of the community and individual, the right to economic development could be divided into the right to the develop­ ment of the community (or the collective right to development) and the right to the development of individuals.10 The right to the development of the community concerns the interest of the whole group or the community, while the right to the development of individuals concerns individual interests. To achieve the benign development of the economy, the rights and interests of economic development of various agents have to be effectively coordinated and protected. Based on the experience and lessons of development since the initiation of reform and openingup in China, while protecting the right and interest to the economic development of individuals there has been a focus on the right to development of the commu­ nity. The contradictions between the profitability of individuals and social public interest require constant effort to solve. Efficiency and fairness need to be bal­ anced, and the fairness of distribution needs to be guaranteed so that balanced, sustainable development can be achieved, and the benign operation and coor­ dinated development of the economy and society can be promoted comprehen­ sively. These are the highest goals of the adjustment of economic law. Third, based on the binary structure of government and market, the right to economic development could further be divided into the right to promote develop­ ment and the right to self-development. The right to promote development is the right for the government to achieve the comprehensive development of a coun­ try by promoting the development of other agents. For example, the state may implement measures such as macro-regulation and control, market regulation, etc., to facilitate the economic development of the macro-economy. While the right to self-development enables market agents to realize their self-improvement and self-development through their own conducts. Taking medium and smallscale enterprises as an example, the state may facilitate the development of such enterprises through the implementation of The Law on Facilitating Medium and

Legal protection of distribution rights 105 Small-scale Enterprises. A reflection of the right to self-development is when such enterprises strive to achieve self-development through exercising relevant rights stipulated by this law. Besides, the state facilitates the development of enterprises through quantitative fiscal and taxation systems and financial systems, while enterprises are fulfilling their self-development through such systems, which are both a reflection to the abovementioned two types of rights to economic development. It is not difficult to conclude that such categorization lays bare the increasing importance of economic law. In the field of economic law, the abovementioned types of rights to economic development are all comprehensive power or rights with high precedency owned by economic law agents while the effective protection of such rights directly relates to the achievement of the goals of economic law adjustment. To clarify the position of the right to economic development in the field of economic law would contribute to conducting the study on the typology of different rights to economic development, especially to the development of economic law theories and improvement of systems. For example, in the past, based on the binary structure of economic law agents, the difference between the power to economic regulation of the regulator and the decision-making right of market agents, constituting the binary structure of the duty and right of economic law agents. From the perspective of the right to economic development, such regulation and control reflect the state’s power to promote development, while the decision-making right corresponds to the right to self-development of citizens, which both belong to a higher ranking in the right to economic development. Therefore, a common upper concept between the power to regulate and right to decision making is found. This constitutes a significant category which could be applicable to different economic law agents, contain­ ing power and right, namely the right to economic development. This could, at least from one specific aspect, solve the problem that the powers and rights of different agents lack the same upper concept in the power-right structure theory in economic law. This situation could further facilitate research on the economic law norms theories. Another example is that after the financial crisis in 2008, most countries began to realize the importance to adjust their economic structure. The famous econo­ mist Joseph Stiglitz believes that the crisis in 2008 “is not only a financial crisis” because adjustments to the economic structure are necessary. It should, however, be understood that such adjustments to the economic structure cannot occur spon­ taneously. The government must play a core role in the process of the transition of economic structure (Stiglitz 2011).11 The Chinese government has been positively promoting a change of approach to development in recent years and the adjust­ ment to the economic structure is central to such a process. Meanwhile, legal support is provided for such adjustment. The adjustment of the economic struc­ ture involves the optimization of the industry structure, the distribution structure, the consumption structure, etc., and for the effective realization of the goal to structural optimization, the power to adjust the industry structure, the distribution structure, and the consumption structure need to be established within the law.12

106

Legal protection of distribution rights

Although the abovementioned structural adjustment power exists, it is still sub­ ordinate to the higher right to economic development and it is directly relevant to various types of basic power or rights to economic law agents. The basic power or right closely related to the abovementioned right to eco­ nomic development and power to undertake structural adjustment mainly reflects the power to economic regulation and the decision-making right of economic law agents, which contains different layers of powers or rights and which constitutes the hierarchical structure of the right of economic law agents. The fundamental power of regulation and the right to decision making owned by economic law agents are important protections for the fulfilment of the comprehensive right to economic development. The aim of the exercise of fundamental power or the rights of economic law agents, irrespective of whether it is the power to regulate that lies with the regu­ latory administration or the right to decision making owned by the objects of such regulation, is to protect the right to economic development which represents the idea of development. During the implementation of economic law, different agents try to promote the overall development of the market economy through the exercise of the power to macro-regulation and control and the power to market regulation. Such protection is compatible with the development of market agents and it fits the development orientation of the state. It is therefore consistent with the power to promote the development of the state. Meanwhile, market agents also try to achieve self-improvement and self-development through the exercise of the right to decision-making and the maximization of its self-interest – and endeavour for consistency with the right to self-development of market agents. Therefore, the right to economic development is more related to the goals and fundamental interests of agents to some extent. Compared to the upper and more comprehensive right to economic development, the economic regulation pow­ ers and decision-making rights are more instrumental and the issue of the con­ nection between the purpose and instrument of right or power is worth deeper investigation. 4.1.3 Legal protection of the right to economic development In accordance with the state’s right to economic development, a state is entitled to choose its approach to development, to decide whether to change the approach to development and to adjust the structures. It is also entitled to conduct macroregulation and control and market regulation to promote economic development. As the fundamental power of the regulatory agent, the power to macro-regulation and control and the power to market regulation stipulated by the economic law of one state especially requires the limitation of law and should be exercised by the law. Besides, in accordance with citizens’ rights to economic development, enterprises, residents, and other types of agents are also eligible to participate in development in accordance with the law and to share the fruits of the development of the state and society. Also, they are entitled to eliminate the factors hindering their development.

Legal protection of distribution rights 107 Theoretically, the right to economic development of different agents should all be protected by the law. Even the state’s right to economic development requires the protection of economic law given that protection from international public law or international economic law is insufficient. The infringement to the state’s right to economic development is from some domestic market agents. Of course, in reality, people tend to believe that compared with the state, citizens are in a disadvantaged position and it is easier to infringe upon their right to economic development, therefore, the citizens’ rights to economic development attract more attention and it is protected more by the economic law. Based on the diversity and hierarchy of the right to economic development, relevant legal protection is reflected at multiple levels. For example, in the field of macro-regulation and control, the power to issue currency and levy taxes that are relevant to finance and taxation regulation and control directly affects the right to economic development of both the state and citizens, as well as the distribution of income of relevant agents. Whether a state is able to issue currency independently and to exercise the power of taxation independently involves the core interest and long-term development of the state, and directly affects the right to economic development of the state. Therefore, it is necessary to make relevant stipulations in constitutional law or other important laws. If legal protection is insufficient in a state, the power to issue currency and levy taxes would be interfered or violated by other states or individuals, and economic development would inevitably be negatively affected. Meanwhile, the exercise of the power to issue currency may generate an impor­ tant influence on the economic development of other states (for example, consid­ ering the special status of US dollar, the US power to issue currency would affect other relevant states). At a domestic level, this may directly affect the right to economic development of citizens because the power to issue currency is directly connected to the amount of currency supply, the inflation affecting the value of currency, or the stability of prices. This implicates the economic stability of the whole economy and therefore influences the distribution of interests of enterprises and individuals.13 The economic development of enterprises and individuals requires a stable currency environment and a relatively stable property situation, while the abuse of power to issue currency constitutes a significant cause for infla­ tion. In addition, it helps to worsen the property status of citizens. To effectively protect the right to economic development of enterprises and individuals, the state has to exercise the power to issue currency in accordance with the law and to impose strict regulations on those who abuse the power to issue currency. Besides, the power to levy taxes should also be limited in order to protect the rights of citizens to economic development. Though there are still many debates concerning whether the tax burden in China is high or low, a comparatively reason­ able consensus is that China is definitely not a low-tax burden country. To make the tax burden fair and reasonable, the state is considering how to reduce duplicate taxation, especially commodity tax which is at the centre of the reform. For exam­ ple, to extend the scope of the application of VAT to solve the issue of duplicate taxation of business tax, the state has specifically implemented the experiment

108

Legal protection of distribution rights

for “business tax to VAT” (Department of Finance and State Administration of Taxation of PRC 2011).14 In addition to that, the Planning Outline for the Twelfth Five-years of the state stipulates specifically in one chapter that “the distribution relations need to be reasonably adjusted”. This goes a long way to emphasize that a justifiable and orderly income distribution system needs to be speedily estab­ lished, that the percentage of residence income in the national income needs to be increased, and that the percentage of labour compensation in the initial distribu­ tion needs to be raised as a way of reversing the ever-increasing gap between the rich and the poor (The Twelfth Five-Year Plan of PRC 2011).15 For this purpose, “structural tax reduction” must be conducted so that the tax burden of relevant agents can be reduced. It is solely through this method that the re-distribution adjustment institution can be improved and the adjustment of the distribution structure promoted. Taxation is a vital limiting factor for the development of mod­ ern enterprises, and to promote the development of enterprises through taxation leverage is an issue that every state needs to solve and which especially relies on the continuous improvement and effective regulation by taxation law. The abovementioned power to issue currency and levy taxes involves the financial interest and taxation interest of the state. Meanwhile, as a monopoly power of the state, they would directly affect the distribution of relevant interests and influence the competitive environment of enterprises and the living condi­ tions of individuals. To promote the economic development of enterprises, the right to free operation and to fair competition of enterprises needs to be protected and there is the necessity to establish an external environment of fair competition. After all, the condition to issue currency and levy taxes corresponds to the power to issue currency and levy taxes. This has the tendency of affecting fair and effec­ tive competition among enterprises which cannot be resolved by relying solely on competitive laws and regulations. Therefore, a joint force from the overall economic law adjustment to the protection of the right to economic development is necessary.    issues affecting the right to economic  4.1.4  Significant development that need to be solved According to the Declaration on the Right to Development passed by the UN Congress in December 1986, States have the right and the duty to formulate appropriate national develop­ ment policies that aim at the constant improvement of the well-being of the entire population and of all individuals, on the basis of their active, free, and meaningful participation in development and in the fair distribution of the benefits resulting therefrom. (UN Congress 1986)16 Therefore, various agents within a state are entitled to participate in development and to enjoy the fair distribution of development interests because the continuous

Legal protection of distribution rights 109 improvement of the group and individual welfare is intrinsic to the right to eco­ nomic development. Correspondingly, the right of market agents to participate in development and fair distribution is extremely important. With regard to such aspects, the reality is that there are many outstanding issues directly affecting the realization of the overall right to economic development meaning that adjust­ ments by economic law are required. In fact, as early as March 1979, the Human Rights Committee of the UN reit­ erated, in the form of a resolution, that the right to development is one item of human rights and it emphasized that “the equal opportunity to development is the right of a nation and of individuals within a nation”. In order to protect the equal opportunity to development of various types of market agents including individu­ als, it is necessary for such agents to be able to fairly participate in the competi­ tion. Therefore, it is crucially important to protect the right to participate in the competition of individuals of one nation. Without the chance to fairly participate in the competition, the realization of the right to economic development of market agents is improbable. From a fair competition perspective, all the market agents should be entitled to participate in fair and just competition devoid of illegal monopoly or unfair com­ petition. If this does not happen, those responsible should be punished based on the stipulations of anti-monopoly and anti-unfair competition laws. In this sense, the market regulation based on competition law is an important protection of par­ ticipation in fair competition. However, the situation in China is not that satisfactory. The regulation of compe­ tition law is flawed with limitations in many aspects. From the perspective of mar­ ket entrance, sometimes the right for different types of enterprises to participate in fair competition cannot be equally guaranteed. Private-owned enterprises have long been treated unfairly compared with state-owned enterprises with regard to entry into the market. In order to promote the development of the private economy, the State Council released Several Instructions concerning Encouraging and Guiding the Healthy Development of Private Investment (Guo Fa [2010] No.13, also known as “the New 36 Articles”) in 2010, having followed the publishing of Several Instructions concerning Encouraging, Supporting and Guiding the Development of Non-public Economy Including Self-employed Business and Private Business (Guo Fa [2005] No.3, also known as “the Original 36 Articles”) in 2005. Despite the fact that the general spirit and contents of these documents are beneficial because they try to protect the rights of private enterprises to participate in market competition in some fields through effective measures, it not easy to achieve comprehensive fair competition between private enterprises and state-owned enterprises due to multiple reasons. There is still a long way to go prior to the actual implementation of such documents. The issues of usurious loans and the difficulty in financing for private enterprises indicate that it is necessary to enhance the protection of the right of pri­ vate enterprises to participate in fair competition, only through which the right to economic development can be better realized. In reality, the state usually stipulates different regulations to enterprises with different ownership, in different regions, with different scales and nature with

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regard to a specific financial system, taxation system, fiscal system, industry sys­ tem, investment system, and foreign-trade system. Different market agents may enjoy quite a different treatment. It reflects the principle of differentiation of the economic law, while economic law also needs to exercise its adjustment function against such situation. In terms of the participation in fair competition of market agents, competition policy or system alone is insufficient. The assistance from competition law and other types of legal systems, and coordination from eco­ nomic law and economic policy are necessary, for that fiscal and taxation system, financial system, etc., are all significant limitations to the fair competition and effective self-development of market agents. In terms of comprehensively realizing the right to economic development, to fairly participate in competition and development only means to fairly par­ ticipate in distribution and to increase the welfare of the group and individual. For this reason, the Declaration on the Right to Development once emphasized that “States should undertake, at the national level, all necessary measures for the realization of the right to development and shall ensure, inter alia, equality of opportunity for all in their access to basic resources, education, health ser­ vices, food, housing, employment and the fair distribution of income” (the UN Congress 1986).17 Therefore, the state is obliged to ensure equal opportunity in basic resource, fair distribution, etc. Hence, when studying their participation in fair competition, special focus should also be paid to the participation in fair distribution. Currently, there exists the major “problem of distribution” with regard to par­ ticipating in fair distribution. Since the reform and opening-up, China has always focused on “two types of distribution”, namely the distribution of citizens’ indi­ vidual interest, and the financial distribution of the state. In addition, “two types of distribution” is an important motivation that promotes the reform and openingup (Shouwen Zhang 2009).18 However, due to multiple reasons, the problem of distribution has become increasingly urgent given that the distribution structure is not balanced, that the distribution gap is too large, and that distribution is unfair. These factors have already affected many aspects including economic growth, social development and political stability. Economic law as the typical “law of distribution” must exercise its function effectively, conducting effective alloca­ tion to the right to income distribution of relevant agents, and promoting the reso­ lution of various distribution issues (Shouwen Zhang 2011).19 For example, the imbalance of the distribution structure and the imbalance of income distribution of the state, enterprises, and residents are significant. Among these, the percentage of income of residents in the national income and the per­ centage of labour compensation in the initial distribution are both relatively low. These would seriously affect the right to economic development of residents and require the adjustment of the law including economic law through the adjustment of the right to income distribution. Since the reform and opening-up, the percent­ age of fiscal revenue in GDP has shown an apparent U-curve. In recent years, the rise of the fiscal revenue has been notably faster than the rise of the GDP, while the percentage of resident income in GDP has been obviously descending. This

Legal protection of distribution rights 111 situation tends to generate a negative influence on the right to the economic devel­ opment of market agents. Therefore, comprehensive adjustment involving fiscal laws, taxation laws, and financial laws within economic law must be conducted to solve the issue of the relative decrease of resident income. Besides, in terms of the distribution gap and distribution unfairness, the Gini coefficient of China has been near 0.5 for many years. The gap in income distri­ bution between urban and rural areas, or among different regions, and the gap in income distribution among different groups is significant and it affects the right to the economic development of relevant agents. Under the circumstance that the gap in distribution is significant distribution is unfair, the issues of distribution fair­ ness and distribution justice have already attracted considerable attention from the public, influencing the right to the economic development, social development, and political development of relevant agents. It requires comprehensive adjust­ ment using economic law as well as other types of legal systems and policies. In general, both fair competitions relating to the economic development of private enterprises and fair distribution relating to the difference among regions as well as the gain in distribution involve the issue of the right to economic devel­ opment and are vital factors affecting the economic imbalance or developmen­ tal imbalance. Therefore, the degree of economic law adjustment needs to be increased to obtain an ongoing solution to the problems that hinder economic development. 4.1.5 Summary The research for the right to economic development is relatively weak, yet issues in this field worth investigating are abundant given that this is an interesting per­ spective for research that addresses issues of distribution. Generally speaking, the right to development, or the right to economic development, is not only a research object for international law or international human rights law, but should also be an important field for the economic law research. The right to economic development as a vital upper concept contains com­ prehensive powers and rights, including the power to structure adjustment, and meanwhile relies on fundamental power and right, including the power to regulate and to control and the right to countermeasures of economic law agents. It pro­ vides a new approach for examining the right spectrum of economic law agents. Research through this new approach would contribute to enrich the theory on the right-obligation structure of economic law and promote the corresponding con­ struction of institutions. Correspondingly, the right to development may also become an important factor in “development law”. Despite the fact that scholars may have different understandings of the concept of right to development, the fundamental conno­ tation has been gaining increasingly wider acceptance. If the research relating to it is limited to international law without introducing it into the domestic law area, then the research and protection of the right to development would be seri­ ously hindered. The right to development should not become a tool for developing

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countries to struggle with regarding their legal rights and interests, but instead, it should become a right that could be fulfilled in domestic law. How to protect the right to development is a significant task in the research of “development law”, while how to protect the right to economic development is specifically the task of researchers of economic law. In economic law study, the focus should be on the types of rights to economic development. The national right to economic development is an important basis for China to change its economic development approach. During the process to change the economic development approach, the protection of the right to eco­ nomic development of various types of citizens especially needs to be strength­ ened. The right to development of the group and of individuals should both be protected by integrating the “right to development-promotion” and “right to selfdevelopment”. For such purpose, legal confinement to the power to structure adjustment and to the more fundamental power to macro-regulation and control and market regulation is necessary, especially to the power to issue currency and levy taxes that directly affect the right to the economic development of various subjects. The exercise of such power must be confined to the railway of rule of law, only through which the right to economic development and development interest of various types of agents can be protected. Predominant issues affecting the right to economic development including the hindrance to fair participation in development (or fair participation in competi­ tion), and to fair participation in distribution still exist. These may affect eco­ nomic efficiency and fairness, social effect, and justice, and may endanger the future development of the state and the nation. Given that fair competition and fair distribution are both significant issues in the field of economic law, it is neces­ sary to comprehensively employ various institutions of economic law as well as of laws in other fields to gradually solve these problems. Also, it is necessary to further enhance the institutional protection of the right to economic development, to promote the realization of the right to distribution of relevant agents, and to better achieve the goals of development.

4.2 The protection of the right to distribution through the “transformation” of VAT The direct motivation for China to introduce VAT is to deal with the negative effects of financial crises to enterprises since it is directly linked to the issue of distribution. Before the transformation of the VAT system, the right to the deduc­ tion for taxpayers as a significant right to distribution had never been comprehen­ sively protected. In fact, the extent of the right to deduction directly influences the final tax burden and the distribution of the economic income of taxpayers. Adequately protecting the right to the deduction for taxpayers through the “trans­ formation” of VAT would contribute to raising the capability of the distribution of taxpayers and further to solve the issue of distribution. In practice, the transformation of VAT was first brought by academia and stakeholders and was then experimented in limited areas. Yet, until the financial

Legal protection of distribution rights 113 crisis in 2008 when the tax burden of enterprises became heavier and the distri­ bution pressure grew, the comparatively more comprehensive “transformation” was finally realized through the amendment to the Interim Regulation on VAT.20 The transformation of VAT from “productive” to “consumptive” is meaningful not only in the economic sense but also is, in essence, a “significant reformation” and an improvement in legislation. The “transformation” of VAT and the relevant improvement in legislation directly affect the distribution of interest of relevant agents and this warrants a deeper discussion. VAT has become one of the most important taxes in China and the institutional reform of VAT would generate a huge impact on the right and interest of taxpayers and the state, and also on microeconomic activities and operation of the macro-econ­ omy. The amended Interim Regulation on VAT has realized the “transformation” of VAT and could solve some of the problems exposed in the past practice, while there are still many flaws. First, some of the significant issues are left unsolved including the precedency of the legislation. Second, there are some issues that fail to attract enough attention, including the issue of ideal legislation. In fact, the legislative transformation of VAT only solves part of the important issues. VAT legislation is a continuous process and requires further improvement after the “transformation”. Therefore, it is necessary to further discuss the legislative improvement of VAT and the corresponding issue of protection of the right of distribution, com­ bining the “transformation” of VAT and the distribution of the right/obligation and interest adjustment. The following part will emphasize the idea, value, legis­ lation precedency, and legislation technique, etc., of VAT legislation based on the importance and correlation of issues. Also, the right to deduction and the power of the agents to levy taxes will also be discussed because they are important issues of power allocation in legislation. The aim is to contribute to the better protection of the right to distribution of relevant agents. 4.2.1 The legislation idea and value orientation of VAT 4.2.1.1 The issue of legislation idea The so-called legislation idea normally contains many aspects including the con­ ception, ideal, and belief in legislation represented in the spirit and principle of legislation (Qicai Gao 2006).21 Though the legislation idea can be described in a variety of ways, generally speaking, the idea of the rule of law is emphasized most frequently. As a significantly important element to the whole construction of the taxation legal system, the VAT legislation must meet and reflect the idea of the rule of law, which is vital to the protection of the right to distribution of relevant agents. Based on the general idea of the rule of law, it is important to stress that “good” laws are indispensable to realize the governance of the state according to the law, and to reach the level of “good governance”. It is only by enhancing legislation, continuously improving legislation, and increasing the quality of legislation that “good governance” can be made possible; the universality, stability, and justifi­ ability of laws be guaranteed; and the continuity, consistency, and predictability

114 Legal protection of distribution rights of the application of law be realized. The abovementioned idea of rule of law also applies to the legislation of VAT. It can be concluded, from improving the legislation of VAT and combining the transformation of VAT that to implement the idea of rule of law, the universality, stability, and predictability of VAT legislation should especially be increased. Therefore, VAT legislation must present the basic principles of VAT and comply with relevant economic regulations and normal regulations of legislation. The characteristic of “neutrality” of VAT should be emphasized with regard to its principles. The comparative surpassing status, i.e. the fact that taxation legislation must reflect taxation principles and taxation regulations, of the VAT legal system should also be emphasized. Such a system should not be altered at will for solving temporal economic or social issues. Only such a VAT system with independence could be applied continuously and widely, and only such a system could be more stable because it reflects the basic principles and relevant regulations. And it may also contribute to the better realization of distribution justice, protecting the taxa­ tion right and interest of various taxation agents. Principles are central. Since the initiation of the overall reform of taxation law in China from the 1980s, the power to legislate for VAT actually belongs to the State Council and its functional departments. Though the efficiency of legislation is higher, which is an advantage, shortages do exist, such as the dispersion of power to legislation and the chaos in legislation.22 Based on economic, social, and legal reasons, from 1994 when the State Council released the Interim Regulation on VAT, the Department of Finance and the State Administration of Taxation had to publish numerous regulations or regulatory documents to explain and imple­ ment the stipulations of the Regulation, which increased the cost for legislation and execution and also the cost of compliance to laws for taxpayers. This is partly due to the fact that VAT is comparatively complicated and the local practical experience is insufficient, yet the lack of systematic comprehension to the princi­ ples of VAT and the absence of the idea of the rule of law are also factors partially responsible for the current situation. In fact, the absence of the idea of the rule of law would directly affect leg­ islation, resulting in the lack of unification, rationality, and scientific accuracy. Problems would frequently emerge and relevant agents would be tired of handling urgent issues. From long-term practice, with the occurrence of changes brought by the transformation of the economy and society, many specific VAT systems remain unchanged seriously affecting the stability of the VAT system and also the universal applicability of the system in terms of many aspects including time, space, and agent. The inconsistency in the application of the system, in turn, directly affects the fairness and the participation to the system and the protection of the distribution rights of taxpaying agents. The legislator did not choose the consumptive VAT system in 1994 not because it did not understand the basic principles of VAT. On the contrary, it was because the government department that actually exercised the power to legislate at that time intended to solve the issue of the “overheating” of the economy. Yet after 15 years in 2009, the direct motive for the comprehensive implementation of VAT

Legal protection of distribution rights 115 transformation was not to solve the issue of the overheating of the economy, rather it was to solve the issue of economy “over-cooling” due to the global economic cri­ sis. As the legislative body, the central government still deemed VAT transforma­ tion as an important tool to conduct macro-regulation and control and to increase domestic demand. The reflection of the basic principle of avoiding duplicate taxa­ tion of VAT is just a coincidence. The idea of the rule of law requires that VAT legislation should not change frequently with the fluctuation of economic circles. VAT should not just be an important tool to deal with the economic condition, instead, the basic principles of VAT should be reflected as the most basic and fun­ damental content in VAT legislation based on its reasonableness, scientific nature, and ability to better protect taxpayers’ rights to distribution. Of course, to empha­ size the idea of the rule of law does not indicate that the function of taxation legisla­ tion to regulate and control is not important. To regulate and control is the intrinsic function of taxation and the shift of VAT from productive to consumptive would, no doubt, encourage enterprises and increase domestic demand. However, because of the fact that the neutrality of VAT is relatively important and in its capacity as an indirect tax, it is more convenient for VAT to transfer the taxation burden. This means it is not appropriate to overestimate the function of VAT itself to regulate and control.23 Based on the above analysis, in terms of the legislation of VAT, the basic principles of VAT should be sufficiently manifested and the VAT legislation should be more scientific and reasonable to better exercise its intrinsic function of resource allocation. Because of the fact that the goals and principles of the legisla­ tion for each taxation are different, the legislation of one single type of tax should not bear multiple goals.24 Therefore, based on the idea of the rule of law in various forms of taxation legislation, the basic principles in this area should be emphasized, and such prin­ ciples should constitute the foundation for the exercise of the functions of taxation in resource allocation or macro-regulation and control. Meanwhile, considering the possibility of economic fluctuation in certain areas, the space for adjustment could be reserved through “legislative authorization” (instead of “authorization to legislation”) to deal with the change in the situation. This is largely beneficial to keep the seriousness and fairness of taxation law and for the steady growth of the economy. 4.2.1.2 The issue of legislative value-orientation Directly relevant to the abovementioned idea of legislation is the value-orienta­ tion of VAT legislation, especially external values including fairness, efficiency, order, and security, which are equally important for the protection of the right to distribution of relevant agents. From the perspective of the economy, VAT as an indirect tax emphasizes more efficiency compared with direct taxes such as income tax. From the perspective of law, the VAT system, as a type of “legal system”, needs to balance various values. Therefore, in VAT legislation, both the value of efficiency and the values of fairness, order, etc., need to be considered.

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In fact, the value-orientation for specific systems of VAT is not entirely the same.

Sometimes, one single system may contain various values which also exist in other types of taxation law systems. For instance, from the perspective of taxation law agents, in accordance with stipulations of the VAT system, various agents in the economic chain, especially sellers and buyers, are taxpaying agents for VAT as long as they engage in “sales” or “activities equalling sales” that reflect the equal treatment to all market agents. Therefore, the value of fairness is emphasized thereby reflecting the “justice in distribution”. Furthermore, VAT taxpayers are divided into normal taxpayers and small-scale taxpayers, both of which have a bearing on the efficiency of levying taxes. Meanwhile, to some extent, an equal tax burden is taken into considera­ tion. While regarding the management of special receipts (Fapiao) for VAT and export tax rebate, the focus needs to be on the order. Thus, it could be concluded that value-orientations including fairness, efficiency, and order are all reflected in specific systems of VAT. Since 2004, VAT transformation experimented first in the northeast regions and then spread to the central regions. It was actually a “semi-taxation prefer­ ential measure” to the abovementioned areas through experimenting, before the implementation of such reforms to the whole nation. Because of the fact that it has a “preferential” nature (Tifu An 2008),25 limitations with regard to regions and industries were set, instead of following a universal application. This is mainly based on the consideration of substantial equality to coordinate the balanced development among different regions. Promoting the transformation of VAT to the whole nation represents the focus on formal fairness and, at the same time, contributes to increasing the efficiency of management. 4.2.2 The legislative precedency and technique of VAT 4.2.2.1 The issue of legislative precedency Academia and market agents have advocated for years for the issue of legislative precedency of VAT. Since VAT is the most important tax which is largely influ­ ential on the distribution of tax interest for the state and citizens, the state should actively promote the legislation and comply with the requirement of the Law on Legislation and in accordance with the strict principle of statutory taxation, and therefore increase the legislative precedency of the VAT system. This has become an increasingly common consensus. Though higher precedency does not necessarily produce a better effect, VAT is a crucially important type of tax with complicated contents and with a wide influence, with significant effect on the property rights of citizens and the taxa­ tion interest of the state. “A benign law is the precondition for good governance”. To increase legislative precedence is not only important for improving the legal system construction of taxation law but it is also beneficial to solve the issue of legal compliance in the field of VAT and to better protect the right to distribution of relevant agents. Emphasizing the idea of increasing the legislative precedence for VAT is not based on narrow or dogmatic preference for certain theories and

Legal protection of distribution rights 117 systems, but instead, constitutes a judgement that considers multiple factors from the perspective of the systematization of legal system construction or the taxa­ tion rule of law system. Both functional departments of the State Council and the specific legislative bodies should continue to increase the legislative precedency of VAT and try to release a high-level Law on VAT.26 In a broader sense, VAT legislation should be multi-level. In addition to the Law on VAT with high prec­ edence, specific regulations and rules should be included. It is due to the fact that VAT is too complicated that the legislation with high precedency should stipulate comparatively stable and abstract rules that reflect basic principles and regula­ tions, including basic issues such as the institution and operation system of VAT system, while regulations and rules with lower precedence should specify the rel­ evant stipulations of the Law on VAT by focusing on specific rules that are close to the reality. Thus, the overall stability of the VAT system could be maintained, and at the same time, flexibility according to various situations could be realized. 4.2.2.2 The issue of legislative technique The issues discussed above including legislative idea, legislative value-orien­ tation, and legislative precedency all involve the right and interest to distribu­ tion by relevant agents. Besides, from the broader legislative technique, to better protect the right to distribution of relevant agents, specific institutional design issues including coordination, justifiability, compliance, and universal applica­ bility of the legislation should be considered, combining the legislative idea and value-orientation. First, just like with all the modern legislations, VAT legislation has to coor­ dinate economic, social, and legal goals in specific institutional design and this should be reflected in specific articles. For instance, from the perspective of the economy, it is the efficiency and outcome of VAT legislation that need to be focused on. The influence of VAT legislation on the operation of the economy, especially the state fiscal revenue and to the citizens’ individual income is impor­ tant. From the perspective of the society, it is the influence of VAT legislation on social development, including social justice and social welfare, and also on social psychology and on the protection of disadvantaged groups that need to be focused on. From the perspective of law, it is the allocation of power, rights, and obliga­ tions of various agents, and the legal responsibility for violation against obliga­ tions that need to be focused on as a way of effectively protecting the taxation law rights and interests of relevant agents. All these values and goals in different aspects call for reflection on specific systems in VAT through certain legislation techniques. For these reasons, it is relevant that coordination in the legislation is considered. In addition to the coordination or systematization of legislation, the reasonable­ ness of legislation is equally important because it indicates, first, the reasonable­ ness from an economic and social aspect. For instance, it indicates how to protect the right to deduction of VAT payers; whether the particularity of VAT specific receipt (Fapiao) should be strengthened, how to keep the continuity of the VAT

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chain, how to protect the neutrality of taxation, how to balance the efficiency and fairness of taxation, etc. Second, the reasonableness on the legal aspect, i.e. how to realize an appropriate, effective, and coordinated legislation. Because of the complexity of VAT, during the 15 years after the implementation of the Interim Regulation on Taxation in 1994, China successively passed numerous amend­ ments which made many of the stipulations in the Regulation invalid in substance. Such a circumstance is an important motivation for legislative improvement and also indicates the insufficiency of the legislative technique. Though the actual effect of quantitative departmental regulations and regulatory documents is sig­ nificant, the issue of inconsistency is predominant. Therefore, it is necessary to coordinate different systems and stipulations. To effectively protect the right to distribution of relevant agents, compliance with VAT laws and legislation needs to be emphasized. The legislation should comply with the regulations and spirit of constitutional law and the requirement of other laws such as the Law on Legislation, and should be in line with economic regulations and relevant principles. Therefore, VAT law should be a benign law that reflects eco­ nomic regulations and scientific principles, balancing the interest of both state and citizens. Only such a law could gain universal compliance by the taxation law agents. To this end, effective systematic arrangement is required to solve the issues of difference in agent status as well as the taxation treatment between normal tax­ payers and small-scale taxpayers.27 Also, there are other special issues that need to be resolved including the significant differences between the nominal tax rate and actual tax rate, duplicate taxation, too many preferential measures, export tax rebate, special receipt (Fapiao) and so on. The above part mainly discusses, in the broad sense, the issue of legislative technique at the macro-level, while from the micro-level perspective, in the nar­ row sense, it discusses the legislative technique, the scientific degree of relevant concepts and terms that need to be focused on. For example, “taxable behaviour” is an important term in VAT law and, in the legislations of different states, the taxable behaviour includes behaviour associated with selling, supplying, transac­ tions, payments, provisions, etc.28 Closely related to these are behaviours that are deemed as sales and mixed sales. To scientifically identify and accurately state the complicated taxable behaviour contribute to the protection of the right to distribu­ tion of relevant agents. 4.2.3 The issue of the allocation of taxpayers’ rights to deduction In the field of VAT, the allocation of various substantial rights is of crucial impor­ tance because it directly affects the distribution of income of relevant agents. The taxpaying agents’ rights to deduction receives the most attention because it directly involves the distribution of substantial rights and interests of both par­ ties: the taxpayer and the tax administration. From a broad view of taxation law, clauses concerning the right to deduction by taxpayers constitute a high propor­ tion. Unfortunately, legal scholars have not yet conducted profound research on such issue. In fact, from an economic point of view, the so-called VAT

Legal protection of distribution rights 119 transformation is a shift from “productive” to “consumptive”. However, from the point of view of law, it represents the expansion of the right to deduction by tax­ payers. Theoretically speaking, after the implementation of consumptive VAT, taxpayers are empowered to deduct the payable VAT with regard to fixed assets.29 In fact, the right to deduction directly affects the scale of the taxpaying obliga­ tion of taxpaying agents. If the VAT system fails to reflect the “neutral” nature of VAT and the requirement of no-duplicate taxation, then the taxpayer right to deduction would be affected, and further, the realization of transactions and the development of the economy would be hindered. Therefore, it is important to grant taxpayers the right to deduction with regard to the representing of taxation principles. In other words, the right to deduction should be expanded through improvements in legislation. The expansion of the right to deduction may result in the relative decrease of the taxpaying obligation of some taxpayers contributing to the lowering of the overall tax burden of market agents, and thus affecting the relevant distribution of interests. Though VAT is an indirect tax and it is easy to transfer, the diminishing of taxpay­ ing obligation would generate a better effect on increasing efficiency in the use of funds, thus further facilitating the transactions and the development of the economy. As an important right of taxpayers, the allocation of the right to deduction is directly linked with the abovementioned legislative ideas and value-orienta­ tions, and the improvement of the VAT legislation should focus on such matters. Through the transformative legislation of VAT, the right of taxpayers to deduc­ tions has expanded, while it is still an important goal to further legislation and to realize sufficient protection of the right to deduction of taxpayers, according to the basic principles of VAT. It is worth noting that the right to the deduction of VAT by taxpayers as well as exercising such a right are complicated. First, the inequality of taxpaying agents would bring the difference in the right to deduction. Normal taxpayers enjoy the “right to direct deduction”, while small-scale taxpayers only enjoy the “right to indirect deduction” under certain circumstances.30 Second, the discontinuity of the VAT chain would result in inconsistency, thereby making the right to deduc­ tion incomplete, and to some extent, affecting the taxpaying obligation of relevant agents.31 Third, the validity of VAT specific receipts (Fapiao) would affect the legality of the exercise of the right to deduction, especially when the VAT spe­ cific receipt (Fapiao) is fake or is obtained by a trustee, or when relevant agents receive invalid receipts in good faith. These circumstances would have different impacts at different levels with regard to the right to deduction by relevant agents. At last, as a special form of right to deduction, the right to export tax rebate is a right to the deduction by taxpaying agents at a certain stage, and the form would be affected by the adjustment to the system of export tax rebate. Each aspect makes the exercise of the right to deduction of taxpaying agents extremely com­ plicated. Therefore, in the VAT legislation, stipulations need to be made concern­ ing the type, agents, scope, and application of the right to deduction. In terms of allocation to the right to deduction, the determination of the amount of output tax and input tax, and the items eligible to deduction are comparatively

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stable, while stipulations concerning the right to export tax rebate are dynamic, constantly changing, and fluctuating with the rate of export tax rebate. Besides, there exists disagreement concerning the reasonableness and legality of the change to the right to deduction, based on different preferences for efficiency or fairness, as well as consideration regarding the stable order of taxation law and the security of the whole economy. In realistic taxation law practice, there are differences in the exercising of rights to deduction for taxpaying agents in different stages and different fields. All these factors mean that legislation should make comprehen­ sive considerations for the better reflection of relevant principles, thus making more prudent and reasonable configuration to the complicated right to deduction, for the better protection of the right and interests of relevant agents, and exercis­ ing the comprehensive function of VAT legal system. 4.2.4  The    issue of the configuration of the power to  administration of taxation levying bodies Closely related to the configuration to the right to deduction, the configuration to the power to taxation administration of the levying bodies is equally important. The right to deduction directly relates to the taxation law right and interest of tax­ payers affecting the distribution of income, while the power to administer directly relates to the distribution of national taxation interest, involving the realization of the right to taxation income of governments at different levels, and further affect­ ing the relationship between central and local governments. Normally, systems relevant to the power to the administration of taxation levy­ ing agents (power to administer agents that levy taxes) in the field of VAT mainly include the system of jurisdiction, the system of power of determination, and the system of the power to tax rebate. From previous VAT legislations, the stipu­ lations and emphasis on the power to administer are relatively abundant while its limitations are relatively insignificant. Though from the perspective of public law, to stipulate more articles concerning the power to administration of levying agents is reasonable, yet without proper configuration and if it fails to establish an organic combination with the taxpaying agents, or if the internal structure of the power system of the levying agents is inappropriate, such factors would affect the performance of the VAT system. In terms of improvements to VAT legislation, the power to jurisdiction, deter­ mination, and tax rebate particularly needs to be further specified and normalized in order to better solve the economic substance and legal judgement issues. The following part will briefly discuss the configuration issues of the power to juris­ diction and determination.    to the power of jurisdiction 4.2.4.1  Configuration Jurisdiction does not only involve the place where the taxpaying agents pay the tax, but it also has an effect on the exercise of power by the taxation levying agents, which further relates to the distribution of interests among governments

Legal protection of distribution rights 121 at different levels and different local governments. The main point of the current configuration of power to jurisdiction is to emphasize the principle of jurisdiction in general while considering the difference in the agents. To this end, in terms of institutional design, taxpayers are divided into two categories, namely domes­ tic transaction taxpayers and export trade taxpayers. The latter should pay tax to the local custom, meaning local custom owns the direct power to jurisdiction. Besides, the domestic transaction taxpayers are further divided into fixed unit and unfixed unit. The former is administered by its local taxation administration, while the latter by the taxation administration where the economic activities (the place of sales or labour) happen. Thus, it could be concluded that the location of the institution and where economic activities take place are significant with regard to the determination of the power of jurisdiction of levying agents. Also, since the location of the institution is more important in the legal sense and it is comparatively more stable, it is most important for the determination of the power of jurisdiction and is the basis for the final verdict. With the improvement of VAT legislation, sufficient considerations should be made concerning the issues of how to unify the power of jurisdiction of VAT and consumption tax. For the principle of jurisdiction, especially for the emphasis on the location of institutions, it is worth considering whether the focus on levying and regulation efficiency is excessive, and whether it sacrifices relevant regions to gain fairness in taxation interests. Since VAT is shared by different levels of government, the fair distribution of VAT income involves multiple horizontal and vertical relationship, including the central and local government, developed regions, and developing regions, and relates to issues including economic devel­ opment and political stability. Therefore, it is not only the efficiency of levying and regulation that should be considered in legislation; deeper issues including fairness also require consideration. Concerning future legislation, the configuration of the power of jurisdic­ tion regarding special transactions, i.e. how to levy VAT on e-commerce, will be tricky in terms of the power of jurisdiction. There have already been many discussions and future legislative improvement needs to gradually solve such issues. 4.2.4.2   The configuration of the power of determination The power of determination is an important power of the levying administration in the process of tax levying and regulation. Relevant laws and regulations have made multiple stipulations concerning this.32 For instance, in accordance with the current Interim Regulation on VAT and its Implementation Rules, if the taxpayer sells commodities or provides services at an unnatural price without a reason­ able cause, or if the taxpayer engages in business operations that are not subject to VAT at the same time, but mixes both in accounting, or the taxpayer engages in mixed sales without separate accounting, the taxation administration should determine the amount of sales based on how the power of determination of taxa­ tion administrations is established.

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Though the power of determination is vital for the prevention of the loss of tax­ ation income and for the protection of the taxation interests of the state, necessary limitations should be applied to avoid the abuse of such power and the violation of the interest of taxpayers. More specific stipulations are required in legislation. Based on current stipulations, the space for the taxation administration to exer­ cise its discretion with regard to the power of determination will lead to many problems. Because such power directly affects the burden of taxpayers in terms of how to “determine” and how to exercise this power, more specific and operational stipulations regarding the standard, procedure, etc., should be made. 4.2.5 Summary To effectively protect the right of distribution of relevant agents with regard to the improvement of VAT legislation, more attention should be paid to the legislative idea and value-orientation, especially the idea of the rule of law and the balance among values including fairness, efficiency, and order. Meanwhile, a legislative precedency and technique need to be raised to constitute a multi-level institutional system of VAT. The legislative technique, both in the broad and the narrow sense, should be constantly improved, on the macro and micro aspects, and the quality of legislation also needs to be improved. Coordination, reasonableness, legality, and applicability should also be enhanced while specific stipulations should be more specific. Besides, the configuration of the basic taxation right of both parties, the levying and the paying, needs to be considered in order to improve the stipulations regarding the right to deduction of the taxpayers and the power of the taxation administration to levy and regulate taxes. The configuration of the basic right or power of taxation should thoroughly reflect the abovementioned legislative ideas, value-orientation, and technique, which is substantial for solving the distribution issues inherent in VAT. In-depth research on the above issues contributes not only to the improvement of VAT as well as other types of tax legislation but also to the protection of the right to distribution of relevant agents, thus better solving relevant distribution issues.

4.3 The consideration to distribution in the real estate tax legislation The improvement of real estate tax legislation is an important issue that has attracted the attention of the general public. It is because the real estate tax involves not only the fluctuation of real estate price and the development of the real estate market but also to the fair distribution in the real estate tax legislation. Since real estate and the real estate tax have become significant factors affecting social distribution, it is vital to strengthen the improvement to real estate tax to prevent the distribution risk and crisis. Though real estate is an important type of property, and property tax is an important type of tax, in the whole taxation system, the real estate tax is not a major type and relevant legislation is not considered as important for a long period

Legal protection of distribution rights 123 of time. In recent years, with the rise of economic and social problems relevant to real estate, the real estate tax has been assigned special missions and expectations from different groups of society. Therefore, the discussion on the levying of real estate tax has become intense. Such fierce discussion is directly relevant to real estate tax legislation. Though the contribution of real estate tax is insignificant in terms of tax revenue,33 it cov­ ers a wide range of affairs, and the relevant legislation directly relating to the interest distribution of relevant agents is complicated. Because of this, opinions are diversified. By going back to basic issues and tracing back to the source, the direction and structure of such legislation can be clarified, reasonable distribution arrangements can be made, and improvements to real estate tax can be promoted. Therefore, the following part intends to discuss three most basic issues that are fundamental and need to be clarified in terms of real estate tax legislation, combining the discussion on theories, institutional practice, and the experiment experience of real estate tax. In other words, we will discuss the purpose, basis, and mode of real estate tax legislation, which are directly related to the protection of the right to distribution and the balance to the distribution of interest. 4.3.1 The purpose of real estate tax legislation The purpose or aim of legislation should first be clarified in order to enact real estate tax legislation. Influenced by the legislative technique of “Interim Regulations on Taxation” in China, the current Interim Regulation on Real Estate Tax does not stipulate the purpose of such legislation, yet it defines the direction and goals for the legislation in terms of the establishment, amendment, abolition, and interpretation to the real estate tax system, which is essential for systemati­ cally strengthening the construction of the real estate tax system. Based on the multi-functions of taxation and taxation law, the purpose of real estate tax legislation especially needs to be clarified. Is the purpose of the for­ mulation and implementation of the real estate tax system by the state to acquire tax revenue, or to strengthen macro-regulation and control? Is it to adjust social distribution, or to maintain economic stability?34 Whatever the aim or the combi­ nation of aims is, specific analysis is needed, combined with the actual function of taxation law. First, if the purpose of the real estate tax is to acquire fiscal revenue, then is it for the central government’s revenue or local governments’ revenue? And if it is the latter, will real estate tax be a major tax of local governments? Could it be a major tax that could solve the current problem of “land finance”, filling the deficit of local government revenue? Consensus in terms of these issues is required. Based on the theory of taxation power and the current binary-taxation system, the income of real estate tax, as property tax, belongs to local governments. Yet under the structure of “separation between the construction and the land”, the real estate tax revenue is far less than the income generated from selling the land. If the current system and institutional restrictions are not changed, real estate tax could hardly become a major tax.35 Meanwhile, the real estate tax system, excluding the

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factor of the land, can hardly fill the deficits of the local fiscal revenue and there­ fore cannot solve the problem of “land finance”. The experiment on real estate tax reform has already proved this.36 Second, if the purpose of real estate tax legislation is to strengthen macroregulation and control, then could real estate tax become an important tool to regulate and control the operation of the economy and exercise the function to regulate and control? Originally, “property is immovable wealth”. So, the regula­ tory function of the property tax through which to affect the economic operation is relatively indirect. Because of the limitations of property tax in regulating and controlling, China has not used real estate tax as an important tool to regulate and control. With the rapid development of the real estate industry and related indus­ tries, and with the over-heating of the real estate market, real estate tax, business tax, and land VAT have begun to act as tools to regulate and control,37 becoming instruments regulating the real estate market. However, macro-regulation and control is not one-dimensional. It is not only necessary when the market is over-heated and real estate prices need to be lowered, but also necessary when the market is over-cooling and needs to be activated. This reflects the “regulatory nature” that combines the active encour­ agement and negative limitation or prohibition thereby meeting the definition of macro-regulation and control. Besides, regulation and control using real estate tax can only function indirectly to a limited extent. Therefore, the result should not be overestimated. After all, it is not the same as administrative measures with more direct results including “limitations on purchase”. Therefore, the influence of real estate tax to real estate price, or the function of regulating and controlling the real estate market, should not be overestimated or relied on.38 Third, if the purpose of the real estate tax is to regulate social distribution or maintain economic stability, then we must admit that the achievement of these economic or social goals is based on the fulfillment of the income goals or regu­ lation and control goals. If real estate tax cannot effectively adjust to the income distribution of different agents and cannot reduce the gap between different types of real estate owners, then the fulfilment of the aim to adjust social distribution is difficult. If the aim of regulation and control cannot be effectively realized, then the aim to stabilize the economy is difficult to achieve. After all, among the four aims of the macro-economy, to stabilize prices (especially the real estate price) is an important factor directly impacting the stability of the macro-economy. In conclusion, though the aim of the real estate tax is possibly (and could be) varied, the function of levying real estate tax in realizing these aims is limited and cannot be relied upon. Real estate tax is only a type of property tax and the most direct way to strengthen real estate tax is to facilitate the improvement of the taxa­ tion law system. Real estate tax legislation is only a part of the local tax legisla­ tion. To comprehensively solve the local tax problems to realize the economic and social goals, i.e. distribution, regulation, and control, etc., the real estate tax sys­ tem alone is insufficient and requires close cooperation among different taxation law systems, between the taxation law system and other types of legal systems. This is the only way to facilitate the effective realization of such multiple goals.

Legal protection of distribution rights 125 4.3.2 The basis for real estate tax legislation The basis for real estate tax legislation directly relates to the foundation of the legislation and the legitimacy of the system, the legislative agent, the power of legislation, the authorized legislation, and the principle of statutory taxation. The same goes for the abovementioned purpose of legislation, such issues should also be clarified before legislation. The basis for legislation conducted by different legislative agents is different. The basis for the legislation of real estate tax is directly related to the legislative agent and the distribution of the power to legislate (i.e. the power to initiate the tax and the power to legislative amendment). Article 1 of the current Interim Regulation on Real Estate Tax does not specify the purpose or basis of such leg­ islation. Though it is common for various “Interim Regulations” on taxation, it was mostly related to the legislative authorizations from the National People’s Congress and its Standing Committee in the 1980s. On September 7, 1984, the State Council presented the Proposal for Authorizing the State Council to Reform the Industry and Commerce Taxation System and to Publish and Experiment Relevant Taxation Regulations (Draft)[(84) State Council Letter No.126]. On September 18 of the same year, the Standing Committee of the National People’s Congress passed The Decision to Authorize the State Council to Reform the Industry and Commerce Taxation System and to Publish and Experiment Relevant Taxation Regulations and Drafts, which mainly stipulated that [the National People’s Congress] decides to authorize the State Council to, dur­ ing the process of reforming the industry and commerce taxation system and the ‘profit to taxation’ for state-owned enterprises, formulate relevant taxation regulations, publish such regulations in the form of draft, and amend such regu­ lations according to the experiences from the experiments, and propose to the Standing Committee of NATIONAL PEOPLE’S CONGRESS for approval. This is the famous “Decision to Authorization” in 1984. It was made specifically for taxation legislation and it aimed to solve the “profit to taxation” reform of state-owned enterprises, industry and the commerce taxation system at the first stage of economic institution reform.39 At that time, the State Council, in its proposal, had already mentioned that the real estate tax would be a type of local tax,40 therefore the Decision to Authorization in 1984 is usually deemed as the basis for the Interim Regulation on Real Estate Tax in 1986. Yet as a “law”, the Decision was abolished in 2009.41 Under such circumstances, is the basis for the Interim Regulation on Real Estate Tax essentially absent? Meanwhile, what will be the legislative basis for further real estate tax legislation? These questions need to be answered. It is worth noting that after less than one year from the release of such a Decision, on April 10, 1985, the National People’s Congress passed a Decision on Authorizing the State Council to Formulate Interim Regulations Concerning

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Economic Institution Reform and Opening-up, which extended the authorization to the whole field of reform and opening-up, instead of limiting it to taxation. Meanwhile, in terms of the form and technique of legislation, it began to empha­ size on formulating “interim regulations”, instead of “publishing experimental regulations in the form of drafts”, which are more progressive compared to the Decision to Authorization in 1984. Considering the fact that the Decision to Authorization in 1984 has been “cov­ ered” by the Decision to Authorization in 1985, and relevant taxation legislation had been completed, in 2009 the Standing Committee of the National People’s Congress abolished the Decision to Authorization of 1984. Since the Decision to Authorization of 1985 is still valid, it is reasonable to conclude that the cur­ rent taxation legislation by the State Council should be based on the Decision to Authorization of 1985. It is because the scope of this Authorization is wider including the field of taxation law amendment or taxation system reform. In addition, the Interim Regulation on Real Estate Tax is not marked “draft” or “experimental”, indicating that this Regulation is based on the 1985 Decision to Authorization. However, given that the issues involved during the process of reform and opening-up are numerous and the field involved is broad, the 1985 Authorization is virtually a “blank authorization”. According to such a decision, if the real estate tax legislation or amendment to real estate tax system is deemed as part of the reformation, and if various types of events relevant to the reform should be con­ sidered as “reform”, then the State Council could continuously own the power to legislate with regard to relevant events that assist in deepening reform. Real estate relates to the lives and basic rights of citizens. So, levying a tax on real estate directly impacts the property rights of citizens. For such taxation legis­ lation, the long-term, general, and broad authorized legislation should be replaced by legal reservation, which is required by the strict principle of statutory taxation. The Law on Legislation does not only stipulate affairs in Article 8 that should only be governed by laws, but Article 11 also stipulates that “if the conditions are ripe for the enactment of national law, the National People’s Congress or the Standing Committee thereof shall enact a national law in a timely manner. Upon enactment of the national law”, the administration should “give in the power to legislation to the legislative body”. Therefore, China should focus on the reasonableness of authorized legislation, which is numerous, and also on the issues of “blank authorization” and “authori­ zation transfer” which violate the requirement of authorized legislation. These do not only violate the stipulations of Article 10 of the Law on Legislation,42 but also harm the stability of the foundation for taxation legislation, and which leads to the deficiency of the basis making it more obvious in the field of local taxation leg­ islation. Though the Interim Regulation on Real Estate Tax reserves some space for the local governments to exercise the power to legislate on taxation in terms of the determination of taxation basis,43 there are still problems including whether the local governments should be allowed to conduct real estate tax reform experi­ ments and to make stipulations concerning taxation elements during the process

Legal protection of distribution rights 127 of experiments; whether the local governments should be entitled to adjust the taxpaying agents and scope of tax levying (for example, whether to levy tax on owners of non-profit self-residing houses); and whether the local governments are entitled to adjust the taxation foundation and rate (which constitutes “transfer authorization”). To strictly abide by the principle of statutory taxation, without authorization, not even the central government should or could make stipulations concerning taxation elements, let alone local governments. Thus the legislative basis for real estate tax legislation is extremely important and directly relates to the legitimacy of the legislation. In China, there is a need to focus on the issue of the legitimacy of authorized legislation and local experiments in the field of real estate tax. To explore the change of real estate tax legislation, China has conducted real estate tax system reform experiments in Shanghai and Chongqing. Scholars have paid much attention to the issue of the legislative basis for these experiments. In fact, the difference in experiments conducted in different areas, the difference between areas under and not under such experiment, and the difference between areas with different experiments have led to the unification of the legal applica­ tion and are against the principle of fair taxation in practice. Meanwhile, from the perspective of the principle of statutory taxation, scholars have put forward doubts against the legality of the real estate tax experiments claiming that the leg­ islative basis for the experiments is lacking and the State Council cannot transfer the authorization concerning real estate tax legislation. It is fair to say that these opinions are worthy of our attention for real estate relates to the fundamental rights of citizens and the experiments concerning real estate taxation should be extremely prudent. At the very least, continuous or frequent experiments should be avoided because of the maintenance of the stability and unification of funda­ mental rules.44 4.3.3 The legislative mode for real estate tax The real estate tax involves a wide range of affairs and a different arrangement of elements, so the allocation of legislative power would constitute different legisla­ tive modes. For such purpose, the following part will discuss the issue of legisla­ tive mode of real estate tax, mainly from the perspectives of taxpaying agents, tax levying objects, the basis for the calculation of tax, and relevant legislative agents. 4.3.3.1  The    choice on the mode of taxpaying agents: for-profit or non-profit Does real estate tax target for-profit or non-profit agents? This is a crucial choice for the mode of legislation. From the current Interim Regulation on Real Estate Tax in China, both for-profit and non-profit agents are taxpaying agents. However, through the system of tax-exemption, the levying only targets for-profit agents. Based on the “theory of taxability”, the precondition for taxation is the nature of income and profit. Only for-profit or operational incomes are suitable for the levying of tax. Therefore, for real estate tax, it is appropriate to distinguish

128 Legal protection of distribution rights business and non-business operational real estate. To levy tax on business opera­ tional real estate is normally done without question, and is a long-term system in China. While for governmental branches, the third sector, individual residential or non-business operational real estates, for which there is no direct economic earning, the tax is exempted according to current regulations. This fits the “theory of taxability” claiming that there is “no taxation without economic earnings”.45 Besides, the understanding of real estate earnings is another issue. For instance, does it refer to the economic gains (i.e. operational profits, rent profits) result­ ing from owning real estate, or to other types of gains (i.e. residing, reputation) resulting from owning such real estate? Is it the realized, substantial profit, or is it potential profit?46 These questions would all affect the legislation on real estate tax. Although many states have already levied a tax on individual self-residing real estate, the theoretical foundation or basis for taxation may differ from one another. In general, the Interim Regulation on Real Estate Tax in China targets agents owning business operational real estates, and the tax on agents owning self-resid­ ing real estate is exempted. In terms of defining the nature of business operation or for-profit, it is easy when determining business operations such as house renting, while different opinions exist concerning whether leaving real estate properties idle for a long period of time is a for-profit activity. In fact, if the goals to regulate and control are not considered, it may be more appropriate to levy tax when the earning is realized. Besides, contrary to the taxation on for-profit earnings, the reasons for multiple taxation preferential measures in the real estate tax system are usually based on considerations to “non-profit” contributions. Whether the nature of the agent is for-profit or non-profit would affect the rea­ sonableness of the levying of real estate tax. Yet, from the fundamental or original meaning, the levying of real estate tax by the state is because the state provides protection to the ownership of the real estate, thereby guaranteeing the right of survival of citizens. Meanwhile, because real estate is considered as “immovable property” and could be a steady source for taxation, it is common for different states to levy real estate tax for a long period of time. However, the self-residing non-profit real estate is a basic necessity. Individual residents may possess, utilize, and benefit from the real estate, yet when such real estate is for self-residence, the realization of earning (profit) is different from “income”, and therefore the rate for real estate tax should not be high. It should not constitute an important source for state fiscal revenue, but rather as a source for local fiscal revenue to a certain extent. 4.3.3.2 Choice of the mode of taxation object: simple or compound From the perspective of taxation object, legislation on real estate taxation could be divided into the mode of simple object and the mode of compound object. The former indicates the legislative mode that only levies a tax to “real estate”, while the latter levies compound tax toward “real estate”, “land”, and so on. Relevant to these two modes is the question as to whether China should establish a simple

Legal protection of distribution rights 129 system of “real estate tax” by improving the current system, or should it integrate other types of systems, thereby forming a unified “real estate and land tax” sys­ tem? Different opinions exist concerning this issue.47 Based on the special land system in China, even when the ownership of the land remains unchanged, there is still a need for deeper research regarding whether and how to integrate the real estate tax system and land tax system. The choice of the mode of the taxation object directly affects the foundation of taxation and involves the right and obligation of taxpayers and the interest of the state. Choosing the mode of compound object requires that the different values of estates in different periods and areas should be considered. For that, once the value of the land is contained (especially land with decades of history), the taxation foundation would be largely different compared with the mode of simple object. The simple object mode levies tax on the real estate and the land respectively, while when levying real estate tax, the factor of land is involved. This scenario may constitute a serious duplication of taxation. Currently, there are many types of tax in the field of real estate including business tax, income tax, property tax, etc. Under the system of “separation between real estate and land”, levying real estate tax instead of real estate and land tax would be much simpler. From the dimension of time, there is another simple mode option that consists in only levying tax on real estate that is bought after the legislation of the new law, namely the increment mode or the non-retrospective mode. Correspondingly, there is another type of compound mode – levying tax also on the real estate that was bought before the release of the new law. This is often referred to as the total mode or retrospective mode.48 The choice among the abovementioned modes also has a significant impact on the interests of taxpaying agents and on the real estate tax legislation. Thus, it could be concluded that applying the simple or compound mode not only involves the integration of types of tax, but also the adjustment to the taxa­ tion foundation, for the integration or separation of objects directly affects the taxation foundation. Since the object is directly related to both taxpaying agents and to the taxation foundation, it is also necessary to view the issue of legislative mode from the perspective of the basis for the calculation of tax. 4.3.3.3 The choice of the mode as the basis for the calculation of tax: quantity or price From the perspective of the basis for the calculation of tax, the choice between quantity mode or price mode would directly influence the legislation and levy­ ing of the real estate tax. Though these two modes relate to the abovementioned modes or objects, they have independent values because even if the mode of sim­ ple object is applied, there are still problems associated with the choice between the two different modes or the basis for the calculation of tax. Generally speaking, the quantity mode emphasizes that the levying of tax should be based on the quantity, i.e. the acreage of real estate. The price mode levies tax according to the value of the real estate. The quantity of the real estate

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is relatively stable, while the price is constantly changing. The choice between these two modes (or simultaneously applying both modes) in future real estate tax legislation would affect the determination of the tax foundation and the market expectation of the public. Relatively speaking, purely calculating the tax according to quantity (i.e. the acreage) would avoid complicated evaluation49 and frequent dynamic adjustment, making it easier and lowering the cost for levying. Under the quantity mode, for the realization of fairness or other values, different areas could, according to their specific conditions, adjust the rate or amount of the taxation, instead of adjusting to both foundation and rate of taxation. This makes it easier for the administra­ tion and taxpayers to comply with the new law. Besides, under the price mode, the economic value of the object is more emphasized. It could better reflect the thought of “taxation according to capability” and it seems fairer. Yet, if the owner has not “realized” the value of the real estate or if the price of real estate rises when the owner could not or is not willing to sell such real estate, then within a certain period, the burden borne by the owner may rise. Therefore, it is more reasonable that the owners bear such tax burden when such real estate is sought given that this matches with the income that is actually “realized”. Based on the experiments on the reform of the real estate tax system, the Chongqing mode emphasizes the value and the levying of tax on the luxurious consumption of real estate. The Shanghai mode emphasizes the amount and the acreage, and the levying of taxes on the over-consumption of real estate, These modes fall under the quantity mode. Besides, relevant to the aforementioned dimension of time, the price mode of Chongqing levies tax also on past real estate in stock. The scope of taxation includes both past and newly bought real estate. The Shanghai mode only levies a tax on newly bought, excessive real estate. The Shanghai mode is easier because it does not affect the real estate that is bought before the implementation of the system. Meanwhile, it complies with the legal principle of non-retrospective and the application of taxation law. 4.3.3.4 Choice on the mode of legislative body: parliament or government Should the legislation of real estate tax insist on the principle of “exclusive to parliament”, should it be enacted by the National People’s Congress, or should it be dominated by the government, therefore, enacted by the State Council? As dis­ cussed earlier, in previous cases, the State Council is the main agent enacting the taxation legislation in China, while the National People’s Congress mainly author­ izes the State Council to legislate, constituting a legislative mode that is essentially dominated by the government. For that, the government normally emphasizes the administrative goals and the local governments value more local interest, mean­ while, the governments are “captured” by interest groups. According to public choice theory, sometimes the public interest of the society cannot be guaranteed, especially when the interests of governments, at different levels, conflict with each other. In fact, it is partly because of this that the goals of macro-regulation and control against real estate in China cannot be effectively realized.

Legal protection of distribution rights 131 For this reason, the mode of “exclusive to parliament” is preferable. Yet fur­ ther investigation is needed concerning whether such mode could avoid the prob­ lems that would emerge under the mode of “government dominance”. Besides, to understand the principle of “the local laws shall apply concerning immovable properties”, in a broader sense, it could be concluded that the place of immovable property, such as real estate, is significant in determining the relevant rules, espe­ cially in terms of the evaluation of houses and land. Because of the difference in the level of economic development, the difference in real estate prices is signifi­ cant. Thus, it is necessary to preserve space for local governments to exercise the legislative power in terms of taxation when determining the amount or basis for the calculation of taxation so as to better protect substantial fairness. 4.3.3.5 The choice for modes and the timing and cost for legislation Nevertheless, when choosing the legislative mode for real estate tax, the timing and cost of legislation should not be ignored. In terms of the timing of real estate tax legislation, it should be understood that the taxation legislation involves the interests of various agents, and strongly affects the feelings of the individual residents. Therefore, the legislation should both comply with the principle of statutory taxation and consider the requirement of the principles of fairness and appropriate tax burden. When the market agents bear a relatively heavy tax burden and a high living cost, and the living pressure is high, it is not appropriate to increase the tax burden of taxpayers. Thus, when choosing the legislation mode, it is important to consider that the tax burden gen­ erated from the non-profitable self-owned properties of residents should not be increased; rather, the simple object mode and quantity mode may be more prefer­ able. From the perspective of “structural tax reduction” and increasing the domes­ tic demand, the tax exemption system concerning this type of real estate should be maintained. Given that considerable taxation relating to real estate already exists in China, taxation types and burdens concerning real estate should be limited and restrained, not blindly expanded. The consideration of the timing of legislation actually relates to the cost of such legislation. The real estate tax legislation should focus on the total cost after the legislation, including economic, social, and political costs, instead of the nar­ row legislation cost. Therefore, for real estate tax legislation, a comprehensive cost-benefit analysis is necessary and the aforementioned purpose of legislation should be considered. It should be clear what kind of goals could be achieved through real estate tax legislation. In practice, the total amount of real estate tax income in China is not high and the percentage is minimal and far from supporting the local fiscal demands. Meanwhile, further estimation is required to figure out to what extent and how long it will take to realize the so-called, macro-regulation and control aims, including smoothing the real estate price and repressing oppor­ tunistic investments. Besides, the levying of the real estate tax would affect the evaluation of the legitimacy of the government and may involve issues as political and social cost, which all need significant attention. After all, “a sound taxation

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system is characterized by the low cost for management and implementation” (Oates 2012).50 4.3.4 Summary The previous part discussed three fundamental issues concerning real estate tax legislation that directly relate to the goals, directions, foundations, institutional structure of the legislation; the legality and reasonableness of the whole legisla­ tion; and the distribution of interests among relevant agents. It further outlined the necessity to reach consensus in terms of these issues during the legislation process for real estate tax. Among the three fundamental issues, the purpose for real estate tax legislation, and the interrelations among the institutional functions, values, and principles of real estate tax need to initially be clarified in order to guide the entire legisla­ tion process. Meanwhile, real estate tax is only one type of property tax and the function of the real estate tax system could exercise in solving various socialeconomic problems is limited and should not be overestimated. Though real estate tax legislation is a significant component in the whole property tax legislation, it is insufficient to resolve the multiple complicated and realistic problems, including fair distribution or decreasing the distribution gap or problems related to the real estate tax system or even the whole taxation law system. The legislation basis as the foundation of the legislation of real estate tax directly affects the legality of such legislation. Thorough comprehension of the issues existing in the field of authorized legislation is indispensable. Since the legislation of property tax (including real estate tax) directly involves the property right of citizens, the principles of legislative power exclusive to the parliament or statutory taxation should be maintained because it is better than conducting com­ mon authorized legislation for long periods, let alone “blank” authorization or transferring authorization. This will make the foundation or the basis of the whole taxation legislation more solid. The legislation mode for real estate tax directly affects the agent structure of the legislation and is relevant to the reasonableness of the legislation. The choice of the relevant modes with regard to agent, object, and tax foundation would especially affect the scientific accuracy and taxpayers’ compliance of such legislation. As for the choice for the mode of legislative agent, it will affect the precedence of the legislation and the protection of the interests of relevant agents. Whatever legislation mode is chosen, the timing and cost of legislation should be considered for the better construction of the entire real estate tax system. In general, as an important property tax, real estate tax directly influences the property right of citizens and the distribution of income of relevant agents. The legislation must strictly comply with the three fundamental principles of legal compliance, fairness, and efficiency. Each issue, among the three fundamental issues that are most important, requires further investigation given that this would be valuable reference and universally applicable experience for real estate tax

Legal protection of distribution rights 133 legislation and even for the whole taxation law legislation, and further, for the systematic rule of law construction.

4.4 The issue of the binary system and the protection of local fiscal revenue The binary system of taxation is the most important system through which the central and local governments distribute fiscal revenues. However, the current binary system is commonly considered deeply problematic. In other words, though it solves the past problem of “strong branches, week trunk”,51 the local fiscal revenue is seriously affected, and significant issues including land finance, local debt, etc., subsequently emerge. Therefore, the core issue to solve the prob­ lem between central and local governments is to solve the dominant problems existing in the current binary system and effectively guaranteeing the fiscal rev­ enue of local governments. 4.4.1 Background and problem In terms of the deepening and breakthrough of the whole reform of the state, the reform to finance and the taxation system has always been of far-reaching signifi­ cance. At present “business tax to VAT” as a major reform in the taxation area, has attracted considerable attention from all groups and the relevant issues and influences of such system change have been thoroughly understood. Yet at the same time, the research and discussion on the significantly important reform on the binary system of taxation seem relatively silent. Therefore, there is a need for further analysis and discussion from different perspectives by academia. The binary taxation system relates to the success or failure of the reform of the tax system in China, and of the whole fiscal institution. Scholars have conducted significant research and arrived at a consensus in terms of the advantages and disadvantages of such a system,52 laying significant foundations for continuous research on the issue of binary taxation system. In recent years, due to the atten­ tion to “land finance” and local debt risks, less attention has been paid to the improvement of the binary taxation.53 Yet the binary taxation system is linked to wide areas meaning that unlike the implementation of “business tax to VAT”, reform in this area has been slow. That notwithstanding, this issue should be viewed from a broader perspec­ tive. As a vital component in the whole distribution system, the binary taxa­ tion system connects the distribution of fiscal and taxation power of different levels of governments and involves the “primary distribution” and “secondary distribution” of the governmental system. It directly impacts the public econ­ omy and largely affects the private economy. Therefore, the reform requires more intense design at the macro level. Otherwise, the implementation of vari­ ous taxation reforms including “business tax to VAT” will surely be hindered. Besides, the improvement of the binary taxation system also links with market

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reform, shifts government functions, thereby strengthening the supervision of the legislative organ and promoting the reform of the judicial system which is actively promoted by the state. Without the effective and orderly implementation of the reform of the binary taxation system, other significantly important reforms would be affected to different degrees making it difficult to realize the benefits of such reforms. Considering this, inherent difficulties must be overcome. Approaches to the improvement of the system should be researched from different perspectives and they should target significant problems relevant to the reform of the binary taxa­ tion system. Based on the nature of the “system”, it is necessary to conduct dis­ cussions and research from alegal perspective. Meanwhile, considering the fact that the binary taxation system involves numerous legal issues, it is necessary, mindful of the fact that the status of sharing tax is gaining ground in China, to bring forward the special type of “sharing binary taxation system”, and to discuss an approach for the legal improvement that targets existing issues. As a result, the following part discusses the formation and actual performance of “sharing binary taxation system”, and through the analysis of the structure of relevant taxation power, the legal causation and relevant legal issues will be revealed. Furthermore, it analyzes the important issues and relevant approaches for improving the “sharing binary taxation system”, and highlights the interrela­ tions between the construction of a local taxation system and the improvement of a binary taxation system. 4.4.2 The formation of the system and the relevant taxation power structure 4.4.2.1 The formation of the “sharing binary taxation system” Under the structure of binary taxation system, types of taxation are normally cat­ egorized as central tax, local tax, as well as sharing tax (by the central and local governments). When the binary taxation system was first introduced, most of the taxes are central and local, while the sharing tax was relatively less common. Yet with the development of the practice of binary taxation system, many local taxes later became sharing taxes making the sharing tax more prominent from the perspective of the number of types of tax and the percentage of taxable income. Such a binary taxation system could be described as a “sharing binary taxation system”. Judging from the amount of types of taxes, in the field of commodity tax, VAT and business tax have long been considered as sharing taxes (at the begin­ ning stage of the implementation of binary taxation system, it was stipulated that for business tax, the proportion that is collectively submitted by the head­ quarters of banks and insurance companies belongs to the central government, and the rest belong to the local governments). In recent years, with the imple­ mentation of “business tax to VAT”, more items of business tax have become sharing taxes because they are transferred into VAT. In the field of income tax, the corporate income tax and individual income tax have both become sharing

Legal protection of distribution rights 135 taxes (corporate income tax that is collectively submitted by headquarters of banks belongs to the central government, and the rest is “shared between central and local governments”). Besides, resource tax, security transaction stamp duty, city maintenance, and construction tax have already been considered as sharing taxes. Thus, it could be concluded that the most major taxes have been catego­ rized as sharing tax. Judging from the taxation income, the percentage being constituted by the abovementioned sharing taxes is significant. Many taxes are major taxes that provide revenue. The taxation income brought by VAT and corporate/individual income tax constitute over 60% of the overall taxation income. From both the importance and the proportion, the sharing tax has exceeded pure central tax (i.e. consumption tax and customs) and local tax (i.e. land tax, real estate tax, deed tax, and vehicle and vessel tax) transforming sharing tax into the main form in the framework of the binary taxation system, and thus making the “sharing” charac­ teristic prominent. The “sharing binary taxation system” in China is not distributed equally. The portion being acquired by the central government is normally higher. For exam­ ple, apart from the types of tax which directly constitute the income of the central government,54 the distribution of VAT income is 75% for the central and 25% for the local governments. For income tax, the distribution is 60% for the central and 40% for the local governments. As for security transaction stamp duty, it is 97% for the central and 3% for the local governments. These figures indicate that the obvi­ ous characteristic is that the central revenue constitutes a higher percentage within the shared income, or in other words, the central government gains more benefits. Thus, the so-called “sharing” does not mean co-ownership, but a type of “owned by shares”. Strictly speaking, “sharing tax” should be called “dividend tax”. Meanwhile, the “sharing binary taxation system” in China emphasizes the sharing between central and local governments, but, in reality, it dost not totally integrate all levels of governments given that it succeeds in “dividing the income” between central and provincial governments. Lower governments are not included, therefore the income of these governments lacks protection from the system. For these obvious flaws, economic scholars have had numerous discourses,55 while the research conducted by legal academia is relatively insufficient. Therefore, it is quite necessary to expand the investigation from the perspective of the taxation power structure. 4.4.2.2 The taxation power structure of “sharing binary taxation system” The legal causation and prominent characteristics of the abovementioned “shar­ ing binary taxation system” could be described from the perspective of taxation power structure or taxation power configuration. After all, the distribution of the taxation power to legislate, levy taxes, administer, benefit, etc., has always been the core issue of the binary taxation system. Appraising the realistic distribution of powers to taxation would contribute to clarifying the causation for the shift, with bias, of a binary taxation system in China to a “sharing” system.

136 Legal protection of distribution rights From the configuration of power to taxation legislation which is fundamental, China employs a centralization mode which consists in legislating the central and local tax at the state level. Sharing taxes constitute a major proportion in the over­ all taxation revenue, but the relevant legislative power has never been distributed to local governments. The centralization of taxation legislation would indeed con­ tribute to the realization of state reason and goals with regard to macro-regulation and control, it would guarantee stability, and it would increase the ability of the central government to gain fiscal revenue. However, it would impact the taxation power of the local government. For this reason, China has provided the local government with limited powers to legislation concerning some taxation elements through several hidden authorizations56 that could contribute to objectively pro­ tecting the right, the interest, and the enthusiasm of local governments. Directly relevant to the centralization of the legislative power to taxation is the fact that, in terms of the power to levy and administer taxes, apart from central taxes, sharing taxes including VAT are mainly levied and administered by state tax administrations even though China has two sets of taxation administrative institutions, namely the state and local. This situation biases the configuration of power to tax levying and administration. Such an arrangement may contribute to the acquisition of important taxation revenue, prevent local protectionism, and effectively handle the relationship between central and local governments. Yet, with the rising number of sharing taxes, it has become more complicated for the new sharing taxes (which are originally local taxes) to be levied. In this light, both the past history and future development should be considered.57 In addition, with the increasing of sharing taxes, which should be levied and administered by state taxation administrations, and the decreasing of numbers and proportions of local taxes, at least from the perspective of legal economics, a cost-benefit analysis should be conducted to decide whether it is necessary to keep the independent local taxation administrations. The abovementioned taxation legislative power and the power to tax levying and administration would directly impact the power to benefit of taxation, while the component that attracts the most attention from the current binary taxation system is the distribution of the benefit of taxation income. As previously men­ tioned, the central government owns a bigger proportion, therefore the bias and difference are obvious. It is an important characteristic of the binary taxation sys­ tem in China, and it reflects a prominent problem of the current system. The most obvious problem brought by the above configuration to the power to taxation is the asymmetry of power-obligation or imbalance of power-duty, especially the asymmetry of the benefit to taxable income and obligation for the local governments to spend. And the lower the level of government is, the more severe the issue of asymmetry becomes. According to the original sys­ tematic arrangement, the transfer payment system could offset such a problem. However, in reality, the transfer payment system is incomplete, which intensifies the imbalance of the power-duty of the local governments. Local governments are compelled to explore other sources of income, resulting in “land finance” and local debt issues, and the increasing of fiscal, legal and political risks. In fact,

Legal protection of distribution rights 137 without the change of governmental functions, and without the reduction of the unnecessary functions of the government, these issues would constantly increase. For this reason, when improving the binary taxation system, the distri­ bution of the power to impose taxes regarding the rights and interests of agents that affect the relationship between central and local governments must be rea­ sonably adjusted. 4.4.3 Prominent issues and approaches to improvement of current systems The formation of “sharing binary taxation system” in China is closely linked with the political and economic factors in specific historical periods, and with the level of the development of the rule of law. From the perspective of the law, the factors that affect the formation of such a system are multi-dimensional, the most promi­ nent of which include norms, ideas, and principles. To expand the analysis from these three interrelated levels would not only contribute to discovering and sys­ tematically listing the prominent issues of the current system, but also to clarify the relevant approaches for the improvement of such system. 4.4.3.1 Observation on the level of norms The binary taxation system is a vital system arrangement of the state in the field of public economy, and the system construction and function to regulate are sig­ nificant. Therefore, the classification of taxes and the ownership of income among central and local governments are specifically stipulated by laws in many coun­ tries. Some even make explicit stipulations in constitutional law bringing it to the level of “economic constitution”.58 Currently, China has not yet comprehended the binary taxation system from the level of “economic constitution”. Though the binary taxation system affects the income distribution of the whole country and the relationship between state and citizen, especially the relationship between central and local government, the Constitution of China has not yet made any stipulations concerning the binary taxation system. Since 1983, China has amended the Constitution many times, however, any contents with regard to the fiscal and taxation system have not been included in the Constitution. This is partly due to the fact that the constitutional norm in China is brief and prudent, while the immature and instability of binary taxation system are also reasons resulting in such a circumstance. When the 1982 Constitution was first released, the taxation system in China had not been instituted. It was solely through the taxation system reform in 1984 that the industry and commerce taxation system was first established. Then the taxa­ tion law reform in 1994 further improved the overall taxation system. Since of ownership of taxation income for many taxes in binary taxation system was not adjusted, and the allocation of relevant power to taxation remained unchanged, the whole taxation system is unstable and it is difficult to manage. At the same time, the decisions at the political and the economic levels have hindered the legislation on the taxation system objectively resulting in the lack of completion

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of the taxation system law in China. At present, in the field of taxation system law, there is not one single law, and even a decent administrative regulation is absent. It has been over 20 years since the State Council released the Decision on Implementing the Reform of Binary Taxation Fiscal System, and it still is the most important regulatory document with the highest effectiveness concerning the binary taxation system. The development of a binary taxation system has broken through many stipulations of the Decision and therefore generates conflict in the legal basis. It is therefore necessary to pay special attention to the legality of the “sharing binary taxation system”. Considering the characteristic of constitutional norms in China and the fact that the legislation on binary taxation system is slow and insufficient, it is not realistic to incorporate stipulations concerning the binary taxation system into the Constitution. The legislation regarding the binary taxation system is lacking in China, and the current stipulations are relatively ineffective and impracticable leading to the frequent occurrence the “conflict of norms” or violations against the norms in system adjustment. For example, based on the Notice on Printing and Distributing the Scheme on Reform to Income Tax Revenue Sharing (Guo Fa [2001] No. 37), corporate income tax and individual income tax completely become sharing tax, which makes the Notice in conflict with the Decision. Though the Notice is the new regulation, the previous Decision is more fundamental. Another example is that the security transaction stamp duty has become a sharing tax and the proportion of the distribution has constantly changed, a phenomenon that, to a certain extent, violates the current system.59 Without formal legislation, some system adjustments seek to establish their legal foundation by stating that the publishing is “decided by the State Council” or “with the approval of the State Council”,60 yet strictly speaking, such behaviours lack legality. To solve these issues, one of the most important approaches towards the improvement of the current binary taxation system is to strengthen the legislation, provide a solid legal basis, and ensure that the framework for the separation of powers is legal. Meanwhile, current regulations need to be clarified and integrated to guarantee their coordination or consistency. In terms of the level of legisla­ tion, based on formal and practical needs, higher levels of scientific and system­ atic rules should be established. At least, legislation by the National People’s Congress and its Standing Committee are indispensable (Bifeng Ye 2007).61 This is also the internal requirement of the economic constitution. 4.4.3.2 Review on the level of idea It is quite easy to find the flaws of legislation at the level of norms. To further review such legislation from the level of idea, we will find out that the existence of such issues is directly related to the lack of ideas about the rule of law. In fact, from the initial establishment of the framework of the binary taxation system to the specific expansion of the practice, the idea of the rule of law has always been lacking. Most people understand that, originally, the binary taxation system was gradu­ ally implemented through respective negotiation between the State Council and

Legal protection of distribution rights 139 each local government. Of course, it is not appropriate to judge such actions according to the current standard. However, with the development of the rule of law of this country, especially with the establishment of the strategy of “governing the country according to laws”, the practice of a binary taxation system deserves to reflect the idea and thinking of rule of law, otherwise put, the stability and predictability of the system would be insufficient, and the opportunistic activities of relevant agents will increase. In recent years, the number of sharing taxes has been changing, and the proportion of the distribution between central and local government has been adjusted, dynamically reflecting that the uncertainty of the binary taxation system in China is prominent, and this is against the idea of the rule of law. Besides, the implementation of the binary taxation system in China (especially the change in the number and proportion of sharing taxes) seems to be a process with continuous trying and experiments. However, this type of experi­ ments, to some extent, reflects that the idea of the rule of law is insufficient. In fact, in the field of finance and taxation, not all affairs need to be “experimented”. From the perspective of the uniformity of the rule of law, unnecessary “experi­ ments” should be avoided otherwise the seriousness and compliance to taxation law would be severely affected.62 Because of the lack of ideas about of rule of law, the systematic thinking and design for the future development of “sharing binary taxation system” in China are still absent resulting in the prominence of uncertainty or unpredictability of the system. In fact, during the game between central and local government, the public usually cannot know what types of taxes or what proportion will be changed into sharing taxes. Also, it is difficult for the local governments to guarantee their right to taxation incomes. All these are obviously against the spirit of the rule of law. In order to solve these abovementioned issues, during the process to improve the “sharing binary taxation system”, the idea of the rule of law must be practised and the rule of law thinking needs to be emphasized. For this purpose, the over­ all level of rule of law of the binary taxation system must be enhanced, and the distribution of power to taxation, of taxation income, and the separation of tax types must be effectively realized through raising the quality and level of legis­ lation, by clarifying systems and rules. With regard to the substantial aspect of the distribution of power and duty, the issue of “asymmetric structure” between central and local government concerning the distribution of power to taxation and finance must be overcome, so that the “ambiguity” of the power to taxation of local agents could be solved. The status, power, and duty of local governments under provinces needs to be clarified making them genuine agents of the binary taxation system. Therefore, the stability and predictability of binary taxation sys­ tem could be raised. According to the idea of the rule of law, the focus should be on the reasonable­ ness and legality of the “sharing binary taxation system”, and the amount of taxa­ tion by the state should be decided by the legal stipulations and level of economic development. Also, the distribution of taxable income among different levels of governments should correspond to the demand for providing public goods while the right to taxation income should match the obligation to expenses. In past years,

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the State emphasized the need to “accelerate the reform to finance and taxation system, completing the system where the fiscal ability and function of central and local government could be matched”.63 However, simply emphasizing the match­ ing between fiscal ability and function might not be proper for these two concepts do not belong to the same level and without independent configuration to the power to taxation or finance stipulated by laws, the fiscal ability through which local governments could provide public goods cannot be effectively guaranteed. Besides, under the guidance of the idea of rule of law, the overall income struc­ ture of the state and the relevant proportions should be investigated by analyzing the interrelations between the system of distribution and system of government incomes, as well as the interrelations among affiliated systems of the binary taxa­ tion system. This could constitute the fundamental basis for the improvement of the system based on which the reasonableness of binary taxation system could be continuously increased, for the better protection of macro-regulation and control and of local development. Meanwhile, since the change of the binary taxation system is still frequent and the transfer payment system lacks legislation,64 the issues of violation of regulations and the lack of rules should be solved through specific legislative procedure. This means the legality of the current binary taxa­ tion system could be enhanced, both formally and substantially. 4.4.3.3 Investigation on the level of principle The abovementioned idea of the rule of law will become basic principles that are followed by binary taxation systems of different countries. These principles include the principle of statutory tax, the principle of fairness, the principle of efficiency, etc. However, from the practice of the binary taxation system in China, the fulfilment to these principles is quite insufficient.65 In accordance with the principle of statutory taxation, the power, the obliga­ tion, the duty of various agents along with the changes that are relevant to binary taxation system should be explicitly stipulated by the law. However, from the initial establishment to the formation of “sharing binary taxation system”, each system adjustment, especially when relevant local taxes are changed into sharing tax, and the proportion of distribution between central and local governments are changed, is not decided through complete legislative procedure, let alone formal laws or administrative regulations as its basis. The reasonableness and legality are problematic, violating the basic principle of statutory tax. From the broad sense of the principle of statutory taxation, not only the power to impose taxes between state and citizen should be governed by laws, but the power to impose taxes among different levels of governments should also be strictly stipulated by laws. Therefore, the levying of taxes by both central and local government, as well as the basis for the determination of the sharing of taxation income should be governed by the law given that this could contribute to solving the issues of leadership of the administrative branch and the lack of rule of law in the “sharing binary taxation system” in China thereby facilitating the fulfilment of “governing the country according to law”.

Legal protection of distribution rights 141 According to the principle of fairness, the arrangement of the binary taxation system should be reasonable, especially the distribution of power to taxation. Such power should abide by the principles of moderation and proportion, ensuring that the central and local government both gain what they deserve. Meanwhile, the expenses of different levels of government for fulfilling their functions or duties should match their incomes and should ensure that their power corresponds to their duty. Yet, under the framework of the “sharing binary taxation system” in China, the proportion that one level of government could gain usually does not match the duties it bears. This issue is more significant for the governments at the lowest level. Thus, the reasonableness and fairness of this system would naturally be doubted, and the activeness and provision of public goods of the local govern­ ment would be affected. The realization of social fairness would also be affected. According to the principle of efficiency, the implementation of a binary taxa­ tion system should contribute to boosting the efficiency of the public economy and facilitate the development of the private economy. From the perspective of fiscal federalism, each level of government is of great value, and to enhance the activeness of both central and local government through effective distribu­ tion of power to taxation, taxation types, and taxation income would increase the efficiency for the provision of public goods. Yet, without proper distribution of power and income, in which the central government benefits more, the active­ ness and capability of the local government would be severely affected, and the efficiency of governance and service of local governments would be decreased. The deficiency and various negative influences of the current binary taxa­ tion system in China are directly related to the failure to strictly comply with the abovementioned three principles. Therefore, it is necessary to improve the system according to these principles. For example, though “sharing binary taxation sys­ tem” solves the issue of “strong branch, weak stem”, it makes the finance of some local governments difficult to operate resulting in the issue of “land finance” and local debt problems and increases the local fiscal risks. Therefore, the principles of statutory taxation and fairness should fully be upheld. Furthermore, during the process to improve the binary taxation system, various taxation rights, including the right to taxation income, should be protected. Meanwhile, the solution to the binary taxation system should be considered comprehensively by combining the amendment and improvement of the budget system, the state debt system and the transfer payment system. Principles of statutory tax and efficiency should be strictly followed to ensure the efficiency and performance of transfer payment and the issue of state debt. 4.4.4 The current binary taxation system and local taxation system construction Under the framework of the “sharing binary taxation system”, because the adjust­ ment to taxation types and distribution proportions may generate a huge impact on local revenues, to ensure the realization of functions of local government, it is urgent to improve the local taxation system by enhancing the construction of the

142 Legal protection of distribution rights local taxation system. This involves the issue of improving current laws concern­ ing current binary taxation system. Academia has already conducted multiple research on the types of taxes that should be categorized as a central tax and as a local tax. Most of the research emphasizes the determination of tax ownership according to the nature of such a tax. However, different to such theoretical discussion, the practice of binary taxa­ tion system in China emphasizes the categorizing of types of tax based on various standards, i.e. the amount of revenue, the industry, and the affiliation relationship of agents, which are not unified, to label many taxes as sharing tax. Given the decrease of pure local tax and the percentage of the relevant revenue, the concepts of “to establish local tax system” and “to seek for the main type of tax of local tax” have dominated discussions regarding the construction of local tax system.66 One major goal to strengthen the construction of a local tax system is to raise the local revenue to ensure the effective provision of local public goods. For this purpose, the sharing taxation system has already been adjusted in railway indus­ try taxation, resource tax, etc.,67 yet it is still far from meeting the huge local demand. Therefore, to find and strengthen the major tax of local government tax has become a significant approach to establish a local tax system. Yet from current practice, one single tax, like real property tax, could hardly bear such a burden. The increase of local taxation revenue should not only rely on multiple types of tax, but also on the rise in the proportion of distribution of sharing tax. Therefore, apart from considering local taxes, sharing taxes should also be considered in terms of local tax system construction. Coordination between the legislations on various taxes should also be considered in addition to legislation on single taxes such as real property tax, land property, etc. It is also crucial to ensure coordina­ tion between legislation on one single tax and improvement to the binary taxation system in order to determine a proper distribution proportion that local govern­ ment could gain in sharing tax. Correspondingly, during the process of “business tax to VAT”, the question of ensuring local revenue has received constant attention. With the constant “expansion” of VAT and the cancellation of business tax, the distribution of VAT between central and local government should not remain at 3:1. After all, the majority of the revenue of business tax originally belongs to the local gov­ ernment. Besides, though land tax, real property tax, deed, etc., cannot become the main tax for local taxation authorities, in the long run, and with the changing functions of the local government, the local government cannot bear the duty to lead the economic development. Consequently, it will cease to become a major “economic agent”, and with the establishment of uncorrupted government, pub­ lic government, government of the rule of law, the expenses of the local govern­ ment could be reduced and naturally the fiscal pressure for local government would reduce. Till then, the local government may effectively solve the issue of income by levying various immovable property taxes, by raising the distribution proportion in sharing tax, or by utilizing the legislative power empowered by law to impose a local tax. The overall construction of the local tax system would also reach a new level.

Legal protection of distribution rights 143 4.4.5 Summary In the binary taxation system practised in China, with the expansion of the sphere of sharing tax, there has been a decrease in pure central or local tax as well as the relevant revenue, thereby creating the “sharing binary taxation system”, a situa­ tion during which the sharing tax is the main part. Yet, the so-called “sharing” is not co-ownership, rather, it is a distribution according to certain proportion with the central government owning a major part of the distribution. This has resulted in a situation where the proportion of revenue does not match the duty to expense for different levels of government. The consequence is “land finance” and a debt crisis of the local government. This issue can be resolved through legal improve­ ments to the “sharing binary taxation system”. We have to admit that the “sharing binary taxation system” once helped to solve two issues of “low proportion” that had troubled the government finance in China and impacted the enhancement of the capacity of the central government to macro-regulation and control. Yet, to comprehensively guarantee that both the central and the local government could better exercise their duties and that the relevant separation of power is reasonable and legal, the current binary taxation system needs further improvement to achieve distribution justice. The taxation power structure analysis of “sharing binary taxation system” may contribute to determining its legal cause. Meanwhile, it would facilitate the revealing of the existing issues of norm, idea, and principle levels. In other words, the insufficiency of legislation resulting from the lack of ideas about the rule of law, failure of strict compliance to principles of statutory taxation fairness, and efficiency. To solve these problems, legal improvements to the “sharing binary taxation system” are necessary under the guidance of the idea of the rule of law. In particular, legislation should be strengthened and the level of legislation raised in order to realize “separation of tax according to regulations” and “separation of tax orderly”. Besides, the distribution of power to taxation should abide by the principle of statutory tax, enhancing its predictability and stability. The princi­ ple of fairness should also be met so as to reflect the correspondence of power and obligation of government and render the separation more moderate, fair and reasonable. Also, the principle of efficiency is indispensable to better exercise the activeness of central and local governments, to raise the performance of the utilization of fiscal fund, and to promote the comprehensive development of the economy and society. To strengthen the construction of the local tax system is closely relevant to legal improvements to the current binary taxation system. How to classify cen­ tral, local, and sharing tax is relevant to the improvement of the binary taxation system and to the construction of the local tax system and local taxation revenue. Currently, every single local tax alone can hardly guarantee the local revenue; therefore, raising the proportion of the local government in sharing tax appears to be a more plausible choice. Yet, for the long run, the government function must be changed and the revenue and expense of different levels of government should be reduced. Meanwhile, a systematic design for the overall binary taxation system

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and local tax system is required. The relationship between the central and local governments regarding fiscal power should be adjusted according to the law so as to promote the coordinated development of the economy, society, and the rule of law of finance and taxation.

Notes 1 Discussions concerning distribution are important in development economics, devel­ opment sociology, and development politics. See Peigang Zhang and Jianhua Zhang. (2009). Development Economics. Beijing: Peking University Press, pp. 63–93; Jirong Yan. (2010). Development Politics. The 2nd Edition. Beijing: Peking University Press, pp. 47–49. 2 With the emphasis on legal problems existing during the process of development, and the change of idea in legal research, “development law” would become a rising field, and correspondingly, the right to development would become an important area in “development law”. In the area of jurisprudence, issues including the right to devel­ opment, law and economic development have become the basic themes of “law and development research”. See Jianzong Yao. (1998). Introduction to Research to Law and Development. Changchun: Jilin University Press, pp. 138–144. 3 This may contribute to understanding the categorization to the right to development from the perspectives of agents, behaviour, and results. Specifically, it may help us to understand why in economic law research, the right to development of the state and citizens, individuals and groups, and the right to encourage development and the right to self-development should be distinguished. 4 Both the UN Charter in 1945 and the Declaration of Human Rights in 1948 reflect the idea of the right to development. The Declaration on Social Progress and Development in 1969 also brought forward the principles, aims, methods, and meas­ ures for development, having laid a vital foundation for the refinement of the right to development. 5 In the early 1970s, Keba M’baye, who had acted as the Supreme Justice of the Supreme Court of Senegal, brought forward the concept of “right to development” for the first time, in his speech entitled “The Right to Development as a Human Right”. In 1986, the UN Congress passed many significantly important documents including The Declaration on the Right to Development, repeating that the right to development is an important component of human rights. 6 For example, Xinhe Cheng. (2001). Sustainable Development: Theoretical Evolution and Institutional Innovation of Economic Law in China. Academic Research, (2), p. 67; Dahong Liu. (2005). On the Idea of Development of Economic Law: Research Paradigm based on System Theory. Legal Forum, 20(01), p. 53. 7 The promotion to development by economic law is through a series of important norms, constituting the “economic law with the function to promote development”. See Shouwen Zhang. (2008). On Economic Law with the Function to Promote Development. Journal of Chongqing University (Social Science Edition), 14(05), p. 97; Haitao Jiao. (2009). On the Function and Structure of Economic Law with the Function to Promote Development. Political Science and Law, (8), p. 77. 8 Xigen Wang. (2008). Research on the Global Rule of Law Institution of Right to Development. Beijing: China Social Science Press, p. 123. 9 In the past “the right to economic development of developing countries” was empha­ sized more, yet after the 2008 economic crisis, the recession and debt crisis in Europe and the US remind us that the right to economic development is also important for developed countries. In the new historical era, it is also worth researching whether the right to economic development should expand.

Legal protection of distribution rights 145 10 In the past, the right to economic development is divided into the right to individual development and to collective development from the perspective of human rights. Some scholars believe that if the agent of right to economic development is the group, then the group is the nation; when the agent is an individual, then the group means every social member. See Xigen Wang. (2002). Basic Human Rights in Rule of Law Society: Research on Legal Institution of the Right to Development. Beijing: People’s Public Security University of China Press, pp. 88–89. 11 Joseph Stiglitz. (2011). Freefall: America, Free Markets, and the Sinking of the World Economy. Translated by Junqing Li. Beijing: Mechanical Industry Press, pp. 164–166. 12 For the specific discussion on such power to structural adjustment, see Shouwen Zhang. (2011). Economic Law Thinking on “Dual Adjustment”. Law Science. (1), p. 22. 13 IMF emphasizes that the most important factor maintaining the stability of the econ­ omy is to control inflation. Besides, to reduce the deficit of the government is also important. These two aspects are directly related to the right to economic development. See Joseph Stiglitz. (2009). Development and Development Policy. Translated by Mo Ji. Beijing: China Finance Press, pp. 111–112. 14 Department of Finance and State Administration of Taxation. (2011). Experiment Scheme to Change Business Tax to VAT, Finance Taxation No. 110. 15 Chapter 32 of the Outline of the Twelfth Five-year Plan of Civil Economic and Social Development of the PRC. 16 The UN Congress A/Res/41/128. (1986). Article 2, Clause 3 of the Declaration on the Right to Development. 17 The UN Congress A/Res/41/128. (1986). Article 8, Clause 1 of the Declaration on the Right to Development. 18 Shouwen Zhang. (2009). The Meridian that Runs through the Research of Economic Law in China: from the Perspective of Distribution. Politics and Law Forum, 27(06), pp. 122–135. 19 Shouwen Zhang. (2011). Fiscal and Taxation Law Adjustment to Distribution Structure. China Legal Science, (5), pp. 19–31. 20 The State Council amended the Interim Regulation on VAT on November 5, 2008 to explicitly declare that the VAT would be transformed from productive to consumptive, and the amended Regulation came into effect on January 1, 2009 across the whole nation. 21 Qicai Gao. (2006). Modern Legislation Ideas. Nanjing Journal of Social Sciences, (1), pp. 85–90. 22 The regulatory documents concerning VAT are as many as hundreds, which not only affects the unification of VAT system, but also increases the complicity of the system, affecting the compliance to taxation law. 23 Though the administration of regulation and control focuses on the huge tax reduction effect resulting from VAT transformation, as well as the regulation and control effect, it is not generated from the function to regulation and control intrinsic to VAT. See Fangchun Zhao. (2006). Primary Investigation to Strengthening the Function to Macroregulation and Control of Turnover Tax. Modern Finance and Economics – Journal of Tianjin University of Finance and Economics, 26(11), pp. 24–28. 24 In recent years, China has frequently hoped that a certain tax legislation could achieve the goals of distribution, regulation, and control, and even environmental protection. For instance, the vehicle and vessel tax, the real property tax legislation, etc. 25 Tifu An. (2008). Thinkings on the Promotion of VAT Transformation Reform in the Whole Country. Fiscal Supervision, (10), p. 3. 26 In 2004, based on the legislation scheme of the 11th Standing Committee of the National People’s Congress, to stipulate specific laws on specific type of tax such as VAT has been listed as the First-category legislation items. Therefore, the Law on VAT will come soon which is significantly important for raising the level of legisla­ tion of VAT.

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27 The small-scale taxpayers in China constitutes a large proportion in all VAT taxpay­ ers. The difference in agent status and level of tax burden would affect many aspects. Therefore, in improving the legislation, such difference should be addressed. The “business tax to VAT” already reflected such focus. Besides, the frequent change of the actual rate brings the difference between the formal and actual rate, affecting the applicability of taxation law. 28 The specific terms to describe “supply” in VAT laws are different. Some translate it as “payment”. See Xiaoqiang Yang. (2008). China Taxation Law: Principles, Practice and Integration. Jinan: Shandong People’s Press, p. 155. Besides, some translate it as “provision”. See Victor Thuronyi. (2006). Comparative Tax Law. Translated by Yi Ding. Beijing: Peking University Press, pp. 321. Currently, China divides the “taxable behaviour” of VAT into selling goods and providing labour. 29 Some deem that after VAT transformation, VAT is still not completely consumptive VAT. See Peiyong Gao. (2009). VAT Transformation Reform: Analysis and Prospect. Taxation Research, (8), pp. 36–39. 30 Small-scale taxpayers are not entitled to direct deduction, instead it is only under certain conditions can they exercise the deduction with the assistant of the taxation administration. Therefore, the right to deduction is a type of “indirect right to deduc­ tion”. 31 If the tax is exempted for one stage, the deduction in the following stage would be affected. Therefore, to maintain the integrity of the deduction chain is more important. 32 For example, in the Law on Taxation Levying Management and its Implementation Regulations, as well as Interim Regulation on VAT and its Implementation Regulations, the right to determination is stipulated. 33 From the perspective of fiscal revenue, the real property tax revenue constitutes only a minor proportion in the whole taxation income. However, if the levying is extended to the field of self-residence properties, it will then generate huge impact on the distribu­ tion of personal income. 34 The real estate industry is treated as the pillar of the national economy, and it has a huge impact on various groups, therefore the change to relevant taxation institution needs to consider various factors. See Guoqiang Ma and Jing Li. (2011). Aims and Phases of Real Estate Tax Reform. Reform. (2), pp. 130–132. 35 Many scholars have explained from different perspectives why real estate tax cannot become a major tax and cannot become the main source for local revenue. See Zhiyong Yang. (2012). Aims of Real Estate Tax Reform from the Public Perspective. Taxation Research, (3), pp. 3–8. 36 The real estate institution reform experiment in Shanghai and Chongqing indicates that the taxation income generated through these two modes is both very limited, therefore real estate tax can hardly become the main tax of local tax. 37 China once tried to affect the real estate market through adjusting business tax and land VAT, through which business tax and land VAT, which had been neglected in macroregulation and control, began to take the responsibility to affect the development of industry and to stabilize the market. 38 Some scholars believe that real estate tax can hardly adjust the income distribu­ tion effectively, and can hardly control the real estate price. See Sheng Li. (2012). Positioning of the Function of Real Estate Tax. Taxation Research, (3), pp. 13–16. 39 According to this decision, the State Council published six taxation regulation drafts, namely, product tax, VAT, salt tax, business tax, resource tax, and state-owned enter­ prise income tax. In 1993, the State Council explicitly stated that such six drafts were abolished. 40 The Department of Finance has already formulated four regulations (draft) for city maintenance and construction tax, real estate tax, land usage tax, and vehicle and vessel tax. These taxes are temporarily maintained and will be levied in the future.

Legal protection of distribution rights 147 41 This Decision to Authorization has been abolished by the Decision concerning Abolishing some Laws on June 27, 2009 by the Standing Committee of the National People’s Congress. 42 Article 10 of the Legislation Law in China stipulates that “an enabling decision shall specify the objective and scope of the authorization” which means blank authorization is forbidden. Meanwhile, “the enabled body may not re-delegate its authority to any other body”. 43 Article 3 of the Interim Regulation on Real Estate Tax stipulates that the provincial government is entitled to determine the amount of deduction of the remaining value of real estate, therefore local governments own the substantial power to legislation in determining the tax foundation. 44 For a relevant analysis, see Shouwen Zhang. (2000). The “Experiment Mode” of Taxation Legislation in China: Taking VAT Legislation Experiment as Example. Law Science, (4), pp. 61–68. 45 For a relevant analysis, see Shouwen Zhang. (2000). On the Taxability in Taxation Law. Jurists Review, (5), pp. 12–19. 46 For discussions on whether such income should be taxable, see Richard Posner. (1997). Economic Analysis of Law. Beijing: China Encyclopedia Press, pp. 635–641. 47 In the “Decision to Reform” in 2013, it has already been put forward that “the real estate tax legislation should be accelerated, and the reform should be promoted. The reform to resource tax should be reformed, and the environmental protection fee should be changed to tax”. It could be concluded that the next step of tax institution construc­ tion is changed from “real estate tax” to “real estate and land tax”, which is a significant change. 48 The increment mode or the non-retrospective mode could gain more support compared with total mode and retrospective mode, in terms of legal principle and social psychol­ ogy. In real estate tax reform experiments this is also proved. 49 The evaluation to the basis for the calculation of tax is difficult. See Hongri Ni. (2012). Process and Suggestions for the Real Estate and Land Tax Reform. China Taxation, (6), pp. 56–57. 50 Wallace Oates. (2012). Fiscal Federalism. Translated by Fujia Lu. Shanghai: Yilin Press, p. 118. 51 “Strong branches, week trunk” is a metaphor indicating that the capability of the central government to gain fiscal revenue is weak, while that of the local govern­ ment is comparatively strong. Under such distribution system, the capability to con­ duct macro-regulation and control, to execute, and to establish legitimacy would be affected. 52 For instance, Shangxi Liu. (2012). Advantage and Disadvantage of Binary Taxation System. Review of Economic Research, (7), pp. 20–28; Feizhou Zhou. (2006). 10 Years’ Binary Taxation System: Institution and Influence. Social Sciences in China, (5), pp. 100–115; Kang Jia and Kun Yan. (2005). Mid-term and Long-term Thinkings on Improving Fiscal Institution Reform under Provincial Level. Management World, 21(08), pp. 33–37. 53 For instance, Xiulin Sun and Feizhou Zhou. (2013). Land Finance and Binary Taxation System: An Empirical Explanation. Social Sciences in China, (4), pp. 40–59; Zenghua Han. (2011). Primary Discussion on the Relationship between Binary Taxation System Reform and Debt Risk of Local Government in China. Modern Finance and Economics, 31(04), pp. 23–29. 54 For example, the VAT in the import belongs to the central government. The corporate income tax paid by the headquarters of banks also belongs to the central government. 55 For discussions on the solutions to relevant issues, see Kang Jia and Jingming Bai. (2002). Solving the Difficulties in County and Village Finance, and the Innovation in Fiscal Institution. Economic Research Journal, 37(02), pp. 3–9.

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56 In business tax, stamp duty, and land usage tax systems, there are stipulations providing that provincial government could determine the rate in the relevant jurisdiction within the legal scope. 57 For instance, The Notice to Distribute the Reform Scheme of Income Tax Revenue Sharing published by the State Council made such considerations with regard to the adjustment in the levying body. 58 For instance, in the Constitution of the Federative Republic of Brazil, Title VI “Taxation and Budget” makes specific stipulations on the power to tax levying of federal, state, special district, and city. In addition, in Section VI “Tax Revenue Sharing”, specific stipulations are made concerning the distribution of various taxation incomes. 59 Some scholars believe that the security transaction stamp duty is a tax for security transaction, instead of the traditional stamp duty. However, if it is a new type of tax, then the State Council is not entitled to levy it. This involves the issue of basis for ini­ tiating new tax. If it is traditional stamp duty, then we have to face the issue of how to understand the adjustment to the items of stamp duty and whether the local stamp duty should be transformed to a sharing tax. 60 For example, the Reform Scheme for the Sharing of Income Tax which came into effect on January 1, 2002 stipulates that “the State Council decides to reform the current method that divides the income tax according to the affiliation of enterprises. Instead, the corporate income tax and individual tax is shared according to a fixed proportion between the central and the local government”. 61 Bifeng Ye. (2007). Attempt of Economic Constitutional Law Research: Constitutional Interpretation to the Power to Decide Binary Taxation System. Journal of Shanghai Jiaotong University (Social Science Edition), 15(06), pp. 5–14. 62 For a relevant analysis, see Shouwen Zhang. (2013). The “Experiment Mode” of Taxation Legislation in China: Taking VAT Legislation Experiment as Example. Law Science, (4), pp. 59–66. 63 The “Decision to Reform” in 2013 does not mention the matching of fiscal capability and power. Instead, it states that “the institution where the power and responsibility to expense corresponds with each other should be established”, which means power and responsibility to expenses of the central government should be enhanced. National defense, foreign affairs, and national security are central affairs, while social security, construction, and maintenance of major projects are common affairs. The relation­ ship should be cleared. Regional public affairs are local affairs. The responsibility to expense should be distributed between central and local government according to the responsibilities. 64 To solve the problem that the transfer payment system lacks legal support, the Law on Budget, amended in 2014 added clauses concerning transfer payment. However, these clauses are mostly principles and specific laws on transfer payment are needed. 65 Some scholars, from the perspective of fiscal federalism theory, deem that the “shar­ ing” distribution of taxation power is against the principles of fairness and efficiency. See Hongyou Lu and Feng Gong. (2007). Normal Analysis to the Distribution of Power to Taxation among Governments in China. Economic Review, (3), pp. 56–60. 66 For relevant research, see Xiaoping Kuang and Ying Liu. (2013). Institutional Change, Power to Taxation Configuration and the Reform to Local Tax System. Research on Financial and Economic Issues, (3), pp. 77–81; Kang Jia. (2013). The Distribution of Power after the Reform of Fiscal Institution in China. Reform, (2), pp. 5–10. 67 For instance, the Notice concerning Adjusting the Distribution of Taxation Income from Railway Transportation Corporations stipulates that business tax, city construction and maintenance tax, and education fees paid by railway transportation corporations became local revenue, instead of central revenue. The corporate income tax is shared between central and local governments by the proportion of 60:40.

5

Legal response to distribution crises

Distribution systems within various legal systems including economic law have a huge impact on preventing distribution crises, and only by strengthening the regulation by distribution systems can the distribution risk be better prevented and solved. Once a distribution crisis happens, the response to it should strictly follow the stipulations of the law. In fact, the problems in the legal response to distribu­ tion crises are all worth researching. Taking the distribution system in economic law as an example; the following part intends to illustrate prominent problems in the process to handle a crisis, and the importance to strengthen theoretical research and system construction. Based on such efforts, the chapter illustrates how to resolve distribution risks and crises by effectively regulating taxation under the framework of “binary structure” and taking the taxation regulation in the economic law field as an example.

5.1 The economic law response to distribution crises 5.1.1 The emergence of the issue In the present age, development is the most important theme for all countries. The development of a country must follow objective laws constantly focusing on their comprehensiveness, coordination, and sustainability to prevent and resolve various crises including distribution crises.1 This is how the benign operation and effective development of the economy and society could be realized. Meanwhile, the development of one country needs the quantitative provision of public goods, meaning that the support of the national public economy is indispensable and eco­ nomic law regulation is necessary. The level of the rule of law of economic regu­ lation directly affects the comprehensive and coordinated development between the economy and society, influencing the realization of the welfare of the people and their human rights. It could thus be concluded that, in terms of the develop­ ment of one country, it is not only vital to focus on coordination and validity but also on the interrelation between the rule of law in economy and the welfare of the people. From the coordination and validity of development, how to prevent and solve the economic and social crisis is undoubtedly a constantly important issue. As a

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type of distribution crisis, the international financial or economic crisis of 2008 was a burst of multiple problems accumulated during the process of economic operation. It severely affected the development of the economy and triggered cri­ ses in the political, social, and legal fields. In the face of a crisis, it is through brave and wise action as well as comprehensive measures geared towards specific problems that the perils can be eliminated and the crises solved. To handle the economic crisis, many countries employed numerous economic policies, among which the fiscal policy and currency policy were prominent. For instance, the employment of fiscal policy tools including budget expense, taxa­ tion reduction, national bond increase, and government procurement, makes fiscal policy the most prominent contributor in dealing with crises. The implementation of these policies, however, cannot exist without effective protection from eco­ nomic law, hence the interrelation between crisis handling, economic rule of law, and the welfare of the people, etc. In fact, based on the principle of statutory taxation, in many fields including budget, taxation, and national bond, the laws should be strictly obeyed, even dur­ ing severe crises. For this reason, in the process of dealing with crises in many countries, adjustment to economic law is emphasized and economic legislation has to be improved. At the same time, because of the urgency to deal with the crisis, violations against the spirit of rule of law may also occur, thereby laying potential dangers to the construction of an economic law system. Without a timely amendment, it may transform into a crisis for the development of economic law affecting the development of economic law. Therefore, the following section analyzes the economic policies and economic measures that China used in dealing with the crisis including a discussion of the legal issues, the issue of effective development of economic law, and emphasizing that in dealing with crisis there is a need to focus on the effective development of the economy2 on the reasonableness and on the legality of the system arrangement for solving the crisis (especially the economic policies and relevant legislation). All of these measures to resolve the crisis are required to abide by the spirit of the law. It is solely through this that the aim of economic law is better fulfilled. Besides, dealing with the crisis would facilitate the effective development of economic law and pro­ mote the deepening of economic law research. On the other hand, the deepening of economic law research would benefit the effective development of economic law, which would contribute to the prevention and resolution of the distribution crisis. 5.1.2 Unlocking the main economic measures dealing with the crisis During the process of dealing with the distribution crisis, including financial cri­ sis and fiscal crisis, many countries widely employed fiscal measures, taxation measures, and financial measures, especially the budget and tax reduction. In China’s case, the main fiscal and taxation measures dealing with the economic crisis in 2008 mainly included the budget, taxation, national bonds, government procurement, transfer payment, etc. The following section further analyzes these measures.

Legal response to distribution crises 151 1 The budget. After the emergence of the crisis, China restarted positive finan­ cial policies by increasing the budget expenses in order to solve the short­ age of effective demand through the investment of government public fund. China planned to invest four trillion within two years. This attracted wide attention both at home and abroad, given that it was a direct and vital measure to deal with the crisis akin to the 700 billion dollars economic stimulus plan in the US. 2 Taxation. The taxation measures employed to deal with the crisis were numer­ ous. Examples include 1. Tax rate adjustment. To encourage the development of the capital market, the state decreased the security transaction stamp duty to 0.1%3 while, in order to increase taxation revenue and guide the consump­ tion, the consumption tax rate for liquor and cigarette was increased. Besides, the state also adjusted a series of “quasi tax rate”, for example, in the field of VAT, the rate for small-scale taxpayers was decreased to 3%, and at the same time, the rate for export tax rebate was increased to encourage exportation.4 2. Adjustment to the tax base. Consumptive VAT was applied and the items or scope for deduction adjusted for corporate income tax. At the same time, a “fee to tax” was applied to reform the sector of refined oil.5 3. Taxation preferential measures. A large amount of tax reduction or exemption were applied, including the exemption to interest tax for personal bank deposit.6 3 National bond. The national bond has long been an important measure to deal with economic fluctuation.7 In 2007, China decided to issue a special national bond worth 1.55 trillion yuan. Besides, in the 4 trillion investment plan, a sig­ nificant proportion of the fund came from the issuing of the national bond. In the process to deal with the economic crisis, the national bond played a vital role to offset the deficit8 and to increase domestic demand. 4 Government procurement. Public procurement by the government directly affects the interest of numerous market agents and the prosperity and revival of the market. Employing the procurement measure is relevant to the rights and interests of micro-agents, and to the national interest and national econ­ omy. To a certain extent, it could exercise the function of macro-regulation and control. In government procurement, whether domestic commodity has priority (including the scale, proportion, and quantity of domestic commod­ ity) is not only an important issue in domestic law, it also involves the coor­ dination between international economy and laws.9 5 Transfer payment. Government procurement and transfer payment are both important forms of budget expenses, yet the nature and field of each are different. With regard to dealing with a crisis, apart from the government procurement directly affecting market agents, transfer payments are indispen­ sable because they have a significant impact on the survival of residents and consumer spending. Therefore, transfer payments in the field of social secu­ rity and subsidies is an important measure in dealing with crisis and in stimu­ lating consumption. The Chinese government has invested huge amounts in social security. For example, in the field of medicine alone, the government put forward a plan to invest 850 billion yuan. Besides, the rise of the level of

152

Legal response to distribution crises coordination of pension and the expansion of the social security scope both require significant investment by the state.

These measures are all direct fiscal and taxation measures. In fact, many policy tools in economic law are directly or indirectly relevant to fiscal and taxation measures. For instance, to deal with the crisis, China put forward a scheme to adjust and revive ten industries.10 The publishing of these schemes seemed to be policy or regulation measures, yet the support by fiscal and taxation measures is important. Even currency measures need to coordinate with fiscal measures. From the above, it can be concluded that both fiscal and taxation measures are extremely important in dealing with a crisis. The section above briefly laid out the measures employed by China. The meas­ ures can be said to be multiple and they include basic measures, such as budget­ ary, taxation, and assistive measures. These measures include direct economic measures and indirect economic measures integrated within other economic poli­ cies. Therefore, they require comprehensive and objective analysis and evalu­ ation for their specific employment and the effect to solve the crisis of various economic measures. When the principle of statutory tax is emphasized, the implementation of these economic measures requires confirmation and protection by the law. The pro­ cesses to employ these measures are the same processes to implement economic law. Therefore, through the determination and implementation of these measures, the achievement of economic law system construction is presented. Meanwhile, the issues existing in economic law regulation are exposed contributing to explor­ ing the basic approach to the future improvement of economic law systems. 5.1.3 Existing problems in the construction of the economic law system in China exposed by the crisis Through examining the economic measures employed in order to deal with the crisis, the prominent problems existing in the construction of an economic law system in China can be found. Currently, there are many problems in the field of constructing an economic law system in China, yet the following problems are especially prominent and are worthy of our attention. 5.1.3.1 The legislation institution The problem of the institution of economic law legislation is a problem with a long history that has been discussed frequently over the years. Still, it is a significant topic, the core of which is the allocation of legislative power. According to the strict principle of statutory taxation and the requirement of exclusiveness of the law and parliament, legislative power should mainly be exercised by the legisla­ tive body, and the government can only exercise partial legislative power through the authorization of laws or the legislative body. At the same time, it should not be the most influential owner of legislative power. Even considering the requirement

Legal response to distribution crises 153 of realistic macro-regulation and control or in dealing with urgent crises, empha­ sizing a “dynamic” principle of statutory taxation, the limitation of the legislative power by the government still cannot be ignored.11 It is solely through this power that the principle of statutory taxation in economic law can keep its core content while developing with the change of the circumstance. Furthermore, this is the sole approach through which such a principle could deal with urgent issues in economic life and meet the basic requirements of the spirit of the rule of law. Judging from the various measures employed to deal with the crisis, the gov­ ernment is in a prominently advantaged position with regard to economic legisla­ tive power. This is relevant to the fact that, in history, the government has owned too much legislative power, and that, in reality, the need to immediately deal with the crisis is urgent. For instance, matters including taxation reduction or exemption, adjustment to the taxation basis or rate, and amendments to taxation elements should all be conducted in accordance with the principle of statutory taxation. However, because of the dual influence of historical and realistic fac­ tors, these issues, in practice, are normally handled by the State Council or even its functional departments. Therefore, though it is, to some extent, economically reasonable to employ these measures to handle the crisis, some measures do not comply with the spirit of the rule of law and to the stipulations of the laws. Therefore, they should not be effective in the long term and should not become a common practice. Through resolving problems with regard to the institution, clearly identifying and allocat­ ing the legislative power of relevant agents, and ensuring that the exercising of power is in accordance with the law, the development of economic law itself can be better promoted. 5.1.3.2 The exercise of power The economic measures employed during the process of handling the crisis involve the exercise of many types of power including the power to budget, the power to adjust the budget, the power to adjust the tax base and rate, the power to decide on taxation preferential measures, the power to issue the national bond, the power to regulate and control the government procurement, the power to transfer payment, the power to issue currency, and the power to industry adjustment. The allocation of these powers has been stipulated in legislation, however, in practice, there might exist issues including exceeding the powers and abuse which may result in the insufficient, incomplete, late, or untimely exercise of power by some agents. For example, in the abovementioned 4 trillion-yuan investment plan, the cen­ tral government should increase its expense by 1.18 trillion, which makes the originally balanced budget imbalanced resulting to the sharp increase of the defi­ cit of the central government and requiring a huge amount in the form of adjust­ ments to the budget. From the perspective of the major investment plan or the budget adjustment, the budget should be approved by the Standing Committee of the National People's Congress according to its power to adjust budgets due

154 Legal response to distribution crises to the fact that the investment plan is massive and it involves budget adjustments amounting to 1.18 trillion within a period of two years. However, the reality is that the release of the investment plan and the adjustment to the budget is decided only by the regular meeting of the State Council and without the approval of the Standing Committee of the National Congress. The problem, in terms of the exer­ cise of power, is obvious. It is also the reason why such a 4-trillion investment plan was seriously criticized immediately after its release. In fact, if the Standing Committee could exercise its power to approve budget adjustments sufficiently and in a timely manner, such a vital measure to deal with the serious crisis would be more legalistic and would be respected. The 4-trillion investment plan is closely linked to the exercise of power over national bond issuance. After all, when the deficit sharply increases because of the expansion of budgetary expenses, the national bond inevitably becomes an important approach to offset the deficit. As early as 2007, China decided to issue a special bond worth 1.55 trillion. Because of the large scale and the long period (which covers many years), the Standing Committee of the National People's Congress specifically discussed and approved it,12 thereby allowing it to meet the requirement of the exercise of power to national bond issuance. Normally, according to the statutory national bond principle, all the national bonds should be approved by the national legislative bond and the government should not exceed its authority to make the decision at its own discretion because it would be against the basic spirit of constitutionalism. This endeavour would guarantee better supervision regarding whether or not the country is dealing with a crisis situation. The 4-trillion investment plan is also closely linked with the power to procure­ ment regulation and control. The purpose of the massive investment plan was to increase the domestic demand, adjust the economic structure, and recover the economy. An important form to realize the investment plan is government pro­ curement. The preference of government procurement and the priority of domesti­ cally manufactured commodity would influence the sales of products in different industries, different regions, and different countries. It will also affect the recov­ ery of the economy. Therefore, the power to procurement regulation and control is also vitally important. The 4 trillion investment plan was only one of the measures to deal with the crisis and relieve the distribution conflicts in China. It involved many economic law issues, especially the issue of the exercise of power, which requires deeper investigation. For example, in terms of the abovementioned power to approve the adjustment budget, stipulations by the Constitution and Law on Budget are extremely clear. Yet, in practice, the power owned by the agent may be void or such agent cannot fully exercise such power. Another example is that the power to approve the issuance of national bonds should be exercised by the legislative body, and it has been exercised by the legislative body in the past. However, in the event of a crisis, the exercise of this power seems to be hindered. As for the power to procurement regulation and control, it has not been treated as a relatively inde­ pendent power, therefore a macro or comprehensive mechanism is still lacking.

Legal response to distribution crises 155 All these deficits are likely to generate negative effects on the crisis relief or the development of the economy. Besides, the taxation measures employed to deal with the crisis, including the so-called structural tax reduction, VAT transformation, adjustment to con­ sumption tax, taxation arrangement in industry adjustment, and revival scheme involve important powers in economic law including the power to approve taxa­ tion preferential measures, the power to determine the tax basis, and the power to adjust the taxation item and rate. There have already been basic stipulations concerning the exercise of these powers in relevant taxation laws, yet in terms of implementation, there are still problems. These powers, as previously men­ tioned, are mainly exercised by the State Council and its functional departments. Though it facilitates the timely response to newly emerging problems in the eco­ nomic field, this situation is far from the requirement of the spirit of the rule of law. In addition, the crisis brings factors that would contribute to the decrease of taxation, while the demand for taxation income rises, the problem of taxation levying and administration becomes increasingly prominent. Therefore, limita­ tions to the exercise of power to taxation levying and administration should be made. Various agents should actively exercise these powers of economic law as their statutory function. Such agents should neither abandon nor abuse such power. The basic goals of the rule of law in the economy can only be achieved through performing their duties, complying with stipulations, being subject to supervision, coordinating with each other, and exercising the powers according to the laws. 5.1.3.3 Transparency The degree of transparency directly influences the right to information of relevant agents. For instance, fiscal transparency affects the right of citizens and taxpay­ ers. The transparency of economic legislation and execution has always been fol­ lowed closely by the public because it is directly connected to the basic rights of relevant agents. The basic transparency in the economic field needs to be kept, both in times of crisis and non-crisis times.13 In reality, the transparency of economic legislation in China urgently needs to be improved. The fiscal and taxation legislation involves the basic property rights of citizens and directly affects the interest of the state, society, and individuals, which means prudence must be exercised when handling it. Fiscal and taxation legislation should reflect the coordination and balance of the interest between the state and citizens. If the fiscal and taxation legislation is understood as an “agree­ ment”, in the broad sense, between the state and citizens, then such “agreement” would be of profound influence. Therefore, it must be transparent. Specifically, the public should acquire the reason and background for such legislation. Meanwhile, the formation of the basic contents of fiscal and taxation legislation should acquire opinions widely and thoroughly coordinate the interests of different parties. It is by so doing that legislation can better reflect the will of the people and the state, and be equipped with stronger execution and operability.

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During the process to deal with the crisis, China also paid attention to the trans­ parency of economic legislation. The opinions of the public were collected during the process of refined oil “fee to tax” reform. The period of opinion collection was short and it was deemed as formalism. However, even such “formalism” is vague in legislation. The amendment to interim regulations for VAT, consumption tax, and business tax was conducted without opinion collection. In other taxation leg­ islation fields, such cryptic behaviour is also very common.14 The weakness in the degree of transparency for economic legislation would affect the execution of relevant laws, making the basis and performance of such execution doubtful. Meanwhile, the transparency of economic law execu­ tion is also a problem. The lack of transparency in the amount, direction, and performance of transfer payments, and the issue of overtaxing due to the crisis attracted public attention. As for some of the long-standing problems, such as the lack of transparency in budget expenses, they have been basically solved after many years’ efforts.15 Increasing the transparency of economic execution and the strength of supervision by various parties would subsequently solve many prob­ lems in the execution of economic law. China has already implemented The Regulation on Government Information Disclosure which, to some extent, encourages the transparency of legislation and execution. According to this regulation, a large amount of information should be disclosed in accordance to the laws,16 and “disclosure should be the norm and con­ fidentiality should be the exception”, which would, without any doubt, facilitate the further development of the level of rule of law. 5.1.3.4 Procedural protection Procedural protection is indispensable to the separation of the power to legisla­ tion and the exercise of power, and also to the increase in the degree of transpar­ ency and expansion of public participation. The importance and modernity of economic law require the integration of substantial law norms and procedural law norms. Therefore, economic legislation would involve significant procedural law norms. Nonetheless, the issue of procedural protection is still prominent. For instance, during urgent circumstances such as economic crises, there should be emergency procedures for the government to conduct regulation and control. These procedures should spell out under what circumstance such proce­ dure should be initiated, by which agent, and which agents should be responsible for bringing forward the urgent budget expense scheme, approving, executing, scrutinizing, etc. Also, how the committee should be formed and how discussions and decision making should be conducted are issues that need procedural protec­ tion. The release of the abovementioned 4 trillion investment plan also involves the issue of procedural protection.17 Without a clear procedure to conduct the investment, the degree of corruption would rise, seriously affecting the perfor­ mance of the investment of these funds. Besides, the exercise of power to regulation and control by various agents also requires the protection of the procedure. It is necessary for the regulation and

Legal response to distribution crises 157 control of the issuance of national bonds, the adjustment to tax foundation and rate, the determination of taxation preferential measures, and the implementa­ tion of transfer payment. Yet the implementation of macro-regulation and control still lacks open and specific procedural arrangements, resulting in the absence of legally backed comprehensive regulation and control. The economic rule of law can hardly be realized when the discretion of people instead of laws is common. The abovementioned procedural protection directly affects economic legisla­ tion and execution, and the exercise of power to regulate and control. That means it would further affect the transparency of regulation and control. If every stage in the construction of an economic law system could be in accordance with open and specific procedures, the transparency of finance and taxation would be naturally increased. Meanwhile, relevant arrangements have to be made in terms of pro­ cedural protection due to the fact that the transparency of regulation and control directly involves the right to information, to participation and scrutiny by the pub­ lic, to the protection of the constitution, and to the rights of fiscal and taxation law. It is perceptible that procedural protection is vital for better economic legisla­ tion and execution, for the effective exercising of power to regulation and control by various agents, for increasing the transparency of regulation and control, and for protecting the rights of the public. Only through substantially increasing the level of procedural protection can the development of economic law be better promoted. 5.1.3.5 The issue of legal awareness and rule of law ideas With the gradual improvement of the state rule of law system, the legal awareness and rule of law ideas have continued to witness significant and vital progress. However, it is also necessary to review the deficits with regard to legal awareness and rule of law ideas by combining the existing problems in the process to deal with crises. For example, during the process to exercise various powers to regulation and control, the public should be equipped with relatively strong legal awareness. It is especially important that the staff of state institutions have a strong awareness of legal issues. Correct legal awareness is vital for the formation of the rule of law ideas. In order to realize the goals of regulation and control, it is essential to guarantee that all the actions are taken in accordance with the law and all the regulation and control are integrated into the routines of the rule of law. If the interest of the departments, regions, and the state could be unified when exercis­ ing power to regulation and control, the rights and interests of various agents could be balanced, and the overall effect of economic law regulation and control would be improved. In conclusion, the problems concerning the construction of an economic law system also existed before the occurrence of crises. Some problems became more prominent during the process of dealing with the crises. The distribution and law crisis could be avoided if the economic legislation system could be constantly improved, if the issue of allocation and exercise of

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power to regulation and control could be solved, if the degree of transparency could be constantly enhanced, if the procedural protection could be strengthened, and if the legal awareness and rule of law ideas could be increased. To sum up, the distribution crisis could be effectively solved through the strengthening of economic law regulations.

5.2 Crisis response and the development of economic law 5.2.1 The crisis response requires the promotion to the “effective development” of economic law The “effective development” of economic law is a vital topic worthy of our atten­ tion.18 As an indispensable department in the legal system of a state, economic law should gain effective development for the overall construction of the rule of law and for the response to distribution problems and crises. The previous section discussed specific problems affecting the development of economic law by com­ bining economic measures employed to deal with crises. On such foundation, it is necessary to further clarify the internal requirement and important value of the “effective development” of economic law with a view to achieving better promo­ tion to economic law regulation, better solutions to distribution problems with higher efficiency, and preventing and resolving distribution crises. In terms of “effective development”, the “effectiveness” on one hand empha­ sizes that economic law has to comply with objective regulations, the will of the people, and the spirit of the rule of law for it to be legal and valid. On the other hand, it emphasizes that the development of economic law has to focus on the entirety of economic law, considering the internal coordination within the eco­ nomic law system, valuing the sustainability of economic law, and thus making the development of economic law more efficient and fruitful. With regard to the aspect of “effective development”, the “development” emphasizes not only the increase in quantity but also the rise of quality. Therefore, it is not simply that the more economic law legislation, the better; instead, the abovementioned problems should be solved, including first, the coordination of legislation institutions. The allocation of power to legislate should be coordinated and the various legislative agents should exercise their power to legislate accord­ ing to the laws that would contribute to the internal harmony and unity of the economic law system. Second, the allocation of power should be harmonious and appropriate. Only when various powers, especially the power to macro-regulation and control, are allocated appropriately and the relevant agents exercise their power thoroughly and promptly can the goals of economic law be achieved. Third, the degree of transparency of economic law should be increased. Transparency reflects the communication among relevant agents and it is only through effective output and feedback, and the strengthening of systematic input, that the sustain­ able operation of economic law system can be realized. Fourth, procedural pro­ tection should be reinforced. Without procedural protection, the formulation and implementation of economic law would be out of order and in conflict with the norms. Meanwhile, under procedural protection, the operation of economic law

Legal response to distribution crises 159 would be more efficient and produce more beneficial results. Fifth, legal aware­ ness should be increased and the idea of the rule of law should be strengthened. The legal awareness and the idea of the rule of law are vital to the solution to these problems, which directly affect the effective development of economic law. Based on the internal requirements of “effective development”, the achieve­ ments and deficits of the construction of economic rule of law in many aspects could be analyzed. For example, in recent years, the State Council and its func­ tional departments have formulated a significant number of economic laws. Meanwhile, economic law norms also exist in other laws. The economic legis­ lation is voluminous. However, the quantity of legislation does not necessarily indicate the development of economic law or the “effective development” of economic law. The legislation is not sufficiently systematic, and structure, hierar­ chy, function, and coordination are lacking. Legislation in high precedence is not common and some important pieces of legislation are still absent. Coordination among laws, on different levels or the same level, is not enough, and the intersec­ tion, overlapping, contradiction, and conflict among them are common. There is still ample space for the economic law system to exercise its overall function. The existence of these problems indicates that the effective development of economic law still needs to be undertaken. Promoting the effective development of economic law is of great value in many fields including the economy and law. The effective development of economic law would contribute to the effective development of the economy, especially the publishing of macro-regulation and control measures according to the law. The effective exercise of the power to macro-regulation and control would facilitate solving distribution problems, preventing and resolving economic crises. During the process to deal with economic crisis (especially financial crisis and fiscal crisis), economic law itself would gain further development. On the other hand, the effective development of economic law itself promotes the completion and improvement of the economic law system, making the operation of economic law fit the fundamental spirit of the rule of law. Therefore, it would contribute to solv­ ing the potential crisis and realizing the goals of the rule of law. To promote the effective development of economic law, it is crucial to high­ light the relationship between the quality and quantity, and the form and essence. In terms of the relationship between quality and quantity, the quality of legisla­ tion should be increased, instead of partially emphasizing on the quantity of leg­ islation. In terms of the form and essence, legislation should reflect the spirit of the rule of law, ensuring that economic law is legal and valid, instead of merely equipping economic legislation with the appearance of laws. If the legislation is against the spirit of the rule of law, the rise in the quantity of such legislation would only increase the negative effects. To promote the effective development of economic law, there is a need to con­ stantly increase the quality of legislation and the level of execution of economic law as well as its “entirety, coordination, sustainability”.19 The whole picture of economic law should be considered regarding its development. It is only based on the entirety of the economic law system that the issue of coordination could

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be better handled. Also, it is the sole approach likely to achieve the completion of main laws. Under such circumstances, different legislations would be mutually complementary instead of being in conflict with each other, thereby forming a joint force. Meanwhile, it is by reflecting the spirit of the rule of law, the demand of the people, and objective economic regulations that economic law can be sus­ tainable and can gain effective development. 5.2.2 Crisis response calls for the deepening of economic law theories As mentioned earlier, it is only through continuously solving distribution prob­ lems, and preventing and resolving distribution crisis that the coordinated and effective development of the economy and society can be better promoted, thereby making sure that all the economic measures employed during the process to deal with the crisis are protected under economic law. In fact, the effective develop­ ment of economic law and the increase of the level of economic rule of law would contribute to preventing and resolving economic crisis as well as further deepen research in economic law theory. Meanwhile, the deepening of economic law the­ ory research would further facilitate the effective development of economic law, raise the level of economic rule of law, and help to better prevent and resolve eco­ nomic crises. Given their relevance to crisis response, it is necessary to strengthen the following theoretical research: 5.2.2.1 Risk prevention and control theory From the perspective of risk prevention and control, economic law is an important law to prevent and control risks. The reason why economic law could prevent and control the risks in the functioning of the economy and society is that it has spe­ cific functions, and the department laws in economic law are all capable of pre­ venting and controlling risks. For example, in the economic law system, finance and taxation law could properly distribute wealth among states, corporations, and individuals by ensuring the effective distribution of income, thus protecting the economy and promoting social justice. Through the effective allocation of resources and through effective macro-regulation and control, the benign opera­ tion of the economy and society would be encouraged. By balancing fairness and efficiency, basic human rights could be protected, the development of various agents including corporations could be enhanced, and the coordinated and stable development of the economy and society would be realized. This would also pre­ vent and resolve risks including economic and social risks. Besides, not only the entirety of finance and taxation law has the function to prevent and control the relevant risks during the operation process of economy; specific finance and taxation law systems could also prevent finance and taxation risks, including budget risk, taxation risk, state bond risk, procurement risk, and transfer payment risk. In fact, just as private economy agents, the state, as the agent of the public economy, also needs to prevent risks and crises. The financial risk of the state is

Legal response to distribution crises 161 directly connected with an oversized budget expense, debt burden, tax burden, or insufficiency of taxation income. Therefore, it is vitally important to resolve the issues including the deficit, the reliance on debt, the unfairness of the tax burden, and the unsustainability of tax levying. Regarding system construction, transfer payment and the scale of government procurement, along with the scale of taxa­ tion and bond issuance should especially be considered. Through the optimization to taxation law, state bond law, charging law, etc., a benign “give and take” or “obtain and use” relationship can be established. Based on the abovementioned theoretical understanding and realistic require­ ments, combining the amendment to the Law on Budget and the formulation of the Law on National Bond, and combining the release of many taxation laws, it is necessary to further strengthen systems, including budget balancing, budget adjustment, deficit and scale of debt control, etc., so that the drafting, reviewing, and execution of the budget and the issuance and collection of national bonds could be more complete. Besides, due to the fact that the endeavour to levy tax and the fairness of tax affect tax levying by the state, the compliance of citizens, and the taxation risks that may be incurred, it is necessary to further emphasize the reasonableness and the legality of the taxation law system while focusing on the theory of taxability in taxation law. 5.2.2.2 Information revealing theory As it is widely known, the current risk to society is directly relevant to the insuf­ ficiency and uncertainty of information. To resolve the risks brought by the uncer­ tainty of information, the system of information revealing or information publication needs to be established in many legal fields in order to protect the right to informa­ tion of various agents, including the right to information of taxpayers, investors, consumers, and administrators. Therefore, the information revealing theory should be studied for crisis response and relevant economic law regulatory issues.20 Information revealing in economic law includes the release of information by the state to citizens and information reporting by citizens to the state. The core is the issue of the right to information of the state or citizens. Normally, it is the right of citizens that is emphasized. For instance, in the field of budgetary law, the right to information concerning the budget has always been discussed. Besides, in terms of the right of taxpayers, normally the right to information by taxpayers is treated as a fundamental right.21 The right to information concerning the issu­ ance and use of national bonds, transfer payment, government procurement, and government charge is equally worthy of our attention. Apart from the abovementioned rights, to enhance the administration, the state also needs to acquire relevant information. That is why in many systems, the right to information of the state is also stipulated. Agents specifically, including enterprises and individuals, should report their economic activities, income, and other relevant conditions so that the state may make judgements concerning taxa­ tion, fee-charging, bond issuance, etc. At the same time, there is a need to make arrangements regarding fiscal expenses.

162 Legal response to distribution crises It is worth noting that the stipulations to the right to information of citizens are usually made from the perspective of rights, while the right to information of the state is, in many cases, stipulated from the perspective of the obligation to provide information to the citizens. For example, the right to information of taxpayers in current taxation law in China mainly includes the right to know the taxation laws and regulations and taxpaying procedures. Specifically, it includes the length of time, approach, stages and required documents, the determination of the taxable amount and the legal basis, facts and calculation methods for taxation administration decisions, ways of relief when a dispute arises and the relevant requirements, etc. Corresponding to the right to information is the obligation to provide infor­ mation of taxpayers, including the obligation to provide information in a timely manner. In other words, apart from providing information through taxation regis­ tration and taxpaying reports, the taxpayers should also provide other information including the change of business operation status, disasters, etc. Besides, taxpay­ ers should also report other taxation-related information, including the informa­ tion concerning transfer pricing, illustrations about the conditions of taxation arrears to mortgagees and pledge holders, reports about the merging or separation of enterprises, statements about all bank accounts, reports about the disposal of property, etc. In fact, the right to information of all agents cannot be realized without com­ plete information revealing. For this reason, it is necessary to strengthen the study to the substantial system and procedural system concerning information reveal­ ing in economic law as a way of comparatively refining systematic information revealing theory. 5.2.2.3 Change of circumstances theory The financial crisis or economic crisis resulted in major changes of circumstances which not only severely affected the performance of private contracts, but also made the originally balanced income and expense imbalanced. This means the crisis had an impact on the implementation of the state budget. Therefore, the practice of legal theory concerning a change of circumstances is not limited in pri­ vate law areas. Efforts should be made to clarify the employment of such theory in public law areas including economic law and to refine the change of circum­ stances theory in economic law fields. The economic law problems brought forward by the change of circumstances are, in many aspects including the budget adjustment, a change of budget expense priority, minor adjustments to the taxation system, the issuance of special national bonds, the improvement of regulation and control procedures, etc. These prob­ lems are relevant to many important fields of economic law and form essential content to economic law system construction that requires further and extensive research. To research the change of circumstances theory and system in the economic law field, many factors need to be considered. These factors include the scale

Legal response to distribution crises 163 of the circumstances, the unpredictability of the change, and the scope of com­ prehensive circumstances. They also include the elements of change of circum­ stances that should be listed based on the self-sufficient nature of economic law that the substantial law is closely linked with procedural law, and the problems such as the changing procedures, adjustment to rights and obligations, and the distribution of duties, so that the economic law theory can be further completed.

5.2.3 Summary During the process of crisis response, the economic measures indeed have spe­ cial importance. However, protection by economic law is indispensable for the exercise of its function. For such purpose, the issues of legislative institution, exercise of power, transparency, procedural protection, legal awareness, and the idea of the rule of law should be handled well and the reasonableness and legal­ ity of the economic law system should be constantly improved. It is by so doing that the effective development of economic law can be promoted and the relevant problems in economic, social, political, and legal areas solved, and various crises, both existing and potential, prevented and resolved. Crisis response is closely connected with the effective development of eco­ nomic law. On the one hand, the crisis provides a vital opportunity for the effective development of economic law, while on the other hand, the effective development of economic law provides significant legal protection for the effective develop­ ment of the economy and society, contributing to the prevention and resolution of crises including distribution crisis. Both crisis response and effective development of economic law require the deepening of economic law theories. Meanwhile, the deepening of research to economic law theory would further promote the level of economic rule of law, facilitating the effective development of economic law and the resolution of dis­ tribution problems. Therefore, it would contribute to the prevention and resolu­ tion of distribution risk and crisis. From the interrelation between the effective development of economic law and economic law theory research, there is a need to reinforce research in risk prevention and control theory, information revealing theory, and changes of circumstance theory, given that these have dire conse­ quences vis-à-vis the promotion of comprehensive development of economic law theory. In general, by analyzing the economic measures and legal problems aimed at solving the economic crisis, we can deeply understand the necessity of strengthening economic rule of law and promoting the effective development of economic law to better solve distribution problems and encourage the benign operation of the economy and society. Meanwhile, the effective development of crisis response and economic law demands the deepening of economic law theory research, which would facilitate the guidance capability of economic law theory and result in better solutions to the crisis through economic law regulations.

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5.3 The distribution regulation to “binary differentiation” As is mentioned before, in terms of crisis response, China, as well as many other states, employs measures of macro-regulation and control to prevent and solve distribution crises by formulating the regulation and control in the field of distri­ bution (“distribution regulation and control” in short). Theoretically, such regula­ tion and control are also regulatory, meaning, in the broad sense, they constitute regulations. It is especially important to emphasize distribution regulation and control as a way to effectively solve the problem of “binary differentiation”, which is the only way to better prevent and solve distribution crises. From the past experience of relevant states, the development of the economy and society in China has reached a fundamentally important historical period, and the conflicts in economic and social life have become increasingly promi­ nent. Macro-regulation and control and market regulation have been increasingly important. In such circumstances, issues that are worth discussing include how to reveal the prominent distribution problems existing in economic and social areas and to solve such problems through distribution regulation and control; how to prevent and solve distribution risks and crises; and what problems should be solved in terms of distribution regulation and control. Academia and the industry have had a serious debate over fiscal, taxation, and financial regulation and control, and many opinions have already been shared widely. Yet, regarding the distribution problems that various regulations and con­ trol measures aim to solve, new perspectives should be taken. In particular, new problems in terms of distribution regulation and control call for our attention.22 For such purpose, the following part intends to bring forward and discuss the issue of “binary differentiation” existing in the field of distribution, and to further reveal relevant differentiation in distribution, thereby laying the foundations for the solv­ ing of distribution regulation and control problems. 5.3.1  “Binary    differentiation” is a prominent  problem in the economic field in China There are many difficult problems existing in the process of the development of a market economy in China, among which “binary differentiation” is without any doubt an extremely prominent problem. “Binary differentiation” results in the for­ mation of a series of binary structures and it further intensifies the “non-balance” in China’s economy. The so-called “binary differentiation” emphasizes that during the development process of the economy and society, in some economic areas there exist two poles that are distinctly opposite to each other and they gradually move apart from each other. The extreme presence of “binary differentiation” is “polarization”, which is the most serious problem in the non-balance structure and which has the tendency to damage harmony. For instance, in the field of social distribution, there exists a polarization between two groups, with high and low income respectively. The polarization of income is an issue that attracts the attention of the public. If such a

Legal response to distribution crises 165 problem cannot be properly solved, higher distribution risks or crises will emerge. Another example is that in terms of the economic scale, there exists polarization between large and medium-small size enterprises, for the income and capability of distribution vary enormously.23 Among these polarizations, in general, people comparatively focus more on the polarization between advantaged and disadvan­ taged agents in terms of the economy, the developed areas and left-behind areas in terms of space, and the sunrise and sunset industries. The issues resulting from these “polarizations” are exactly the most difficult issues during the development process of the market economy in China. Meanwhile, they are also the problems that affect the benign operation and coordinated development of the economy and society in China. The “binary differentiation” reflects the distinct in the economic capability of the relevant economic agent which causes the gap in distribution. Such differ­ entiation is not only an economic issue but also, to some extent, a social and even political problem, directly affecting the realization of basic human rights and the stability of the state. Therefore, the issue of binary differentiation emerging from the developing process of the market economy in China must be seriously addressed. Various “binary differentiations” in economic areas would form all kinds of binary structures, for example, urban and rural areas, developed and underde­ veloped areas, public and private sectors, groups with high and low income, etc. These issues are all related to distribution issues. The binary structure of the urban and rural areas attracted the interest of Arthur Lewis, the representative of devel­ opment economics, as early as in the 1960s.24 Today, the binary structure of urban and rural areas and the related distribution problems are widely known, and the state is focusing on the solution to such problems. Besides, similar to the binary structure of urban and rural areas, there also exists the binary structure of developed and underdeveloped areas, resulting from the imbalance of local economic development, which creates a series of eco­ nomic, societal, and constitutional problems. Furthermore, the issue of the gap between the rich and poor, which is within the binary structure of people with high and low income, and the relevant eco­ nomic and social fairness are fiercely discussed topics. These problems reflect the imbalance and incoordination in the development of the market economy in China and constitute a direct reflection of distribution imbalance. In general, the binary structures resulting from various “binary differentiation” are all related to distribution problems. The relevant problems reflect the non-harmonious factors in the development of the market economy in China, and the lack of coordina­ tion in the operation of economy and society, where distribution risks and crises exist, thereby affecting the sustainability of the development of the economy and society. Therefore, from the perspective of preventing and solving distribution crises, promoting the stable development of economy, and establishing harmoni­ ous society, the issue of “binary differentiation” has to be solved, especially the distribution differentiation or distribution gap as well as the problem of unfair distribution.

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5.3.2 Distribution regulation and control are indispensable in resolving “binary differentiation” The “binary differentiation” problems in the economic area are the reflection of the imbalance of economic development. To solve the issue of imbalance, the effective distribution regulation and control is indispensable, while within the distribution regulation and control, the taxation regulation and control is, without any doubt, crucially important. For that, the taxation regulation and control could be applied to a wide sphere and, because it is direct and effec­ tive, it is indispensable in solving various binary differentiation issues. These factors make it significantly representative of comprehensive distribution regu­ lation and control.25 The following section will illustrate this through several examples. First, in terms of the binary structure of economic space, during the process to solve the binary structure between urban and rural areas, how to promote the development of agriculture, the rise of farmer income, and the construction of villages are the vital tasks for taxation regulation and control. Considering these elements, as early as in 2006, the state decided to abolish the agricultural tax which had some effects on increasing the income of farmers. Yet it was far from enough. There are many factors hindering the ability to increase the income of farmers many of which cannot be resolved through taxation. At least, the coor­ dination of other systems is required. Therefore, taxation regulation and control should combine with other types of regulations and control measures, and only through such coordination and joint efforts could the relevant problems be better solved. Besides, in terms of promoting the development of agriculture and the con­ struction of villages, with regard to distribution regulation and control, the system construction is insufficient though there are already some laws and regulations. In fact, the following relevant questions are all worthy of research:how the devel­ opment of agriculture should coordinate with other industries, how the indus­ try could repay agriculture, how to effectively solve the “binary differentiation” between traditional and new-emerging industries, how to prevent the decline of the fundamental status of agriculture, and what distribution regulation and control could do in terms of these aspects, etc. It is only through the strengthening of rel­ evant institution construction that the issue of binary structure between urban and rural area can be better solved.26 Second, consistent to the issue of binary structure between urban and rural areas, the solution to the binary structure between economically developed and left-behind areas (or “binary structure between the east and west”) also requires taxation regulation and control. To some extent, the taxation preferential measures contributed to the current status of the developed areas, while the backwardness of some regions, apart from the differences in natural resource, is partly due to the lack of taxation preferential measures, etc. Therefore, in order to achieve coordi­ nated development among regional economies, China implemented many strate­ gies including the “West Development Program”, the “Northeast Revitalization”,

Legal response to distribution crises 167 and the “Rise of Central China”. Taxation regulation and control and taxation preferential measures are both indispensable during the implementation process of each strategy. Third, in terms of social distribution, economic development brings to light the problem of unfairness in social distribution caused mainly by primary distribution of the market. It was once expected that secondary distribution by taxation regula­ tion and control could achieve distribution justice. This caused a serious debate regarding the amendment of the Law on Individual Income Tax. Though this law has been amended many times it is still far from the expectations of the people in terms of the strength of regulation and control and the function. Therefore, since the issue of unfairness in social distribution still exists, the voices advocating for taxation law reform and other reforms to strengthen the capability to regulation and control of the taxation law would not cease.27 Fourth, in terms of regulation and control in specific industry or market, taxa­ tion regulation and control are definitely indispensable. Without the development of certain industries such as real estate and energy, economic problems or even economic crisis may emerge. Similarly, the security market, insurance market, and land market are all vital areas that may bring prominent economic problems. Appropriate and effective taxation regulation and control should be conducted according to the specific conditions of these industries and markets. It could be concluded that taxation regulation and control is vital both from the perspective of economic agents and regions as well as the relevant market and industry. It is an important measure that could be widely applied and could have direct effects. Therefore, when the state tries to solve various “binary differentia­ tions”, especially in solving distribution problems or responding to distribution crises, based on the functions and analyses of benefit and loss of various regula­ tion and control measures, the taxation regulation and control usually is directly chosen. 5.3.3 Positioning to taxation regulation and control should be appropriate In recent years, when facing prominent problems in economic life, taxation is usually the first measure that is employed. The state utilizes the leverage of taxa­ tion to solve the “mountain of problems” when the economy is either over-heated or over-cooling and requires macro-regulation and control. Taxation is also use­ ful during the implementation process of the “West Development Program” or “Northeast Revitalization”, and either in the capital market, real estate market, or other important markets to eliminate obstacles that block the development of the economy and society. Such an approach has existed for a long time and it is sometimes strength­ ened. For instance, in order to solve the various “binary differentiation” problems emerging during the development process of the economy and society in China and to eliminate the unfairness in social distribution in an attempt to create a “harmonious society”, the Law on Individual Income Tax was amended.28 When faced with the unfair treatment of domestic and foreign-invested enterprises, the

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people expressed the hope to unify the laws of corporate income tax on domes­ tic and foreign enterprises.29 When faced with problems of imbalance in the regional economic development, people hoped to solve such problem through tax reform, therefore the VAT transformation experiment, which was later expanded, emerged.30 Even regarding the regulation and control of the real estate market, it is the taxation measure that was applied.31 As for the capital market that is directly related to the distribution of wealth, the adjustment through taxation is indispen­ sable. Taxation and taxation law play a fundamental role in the development of the economy and society in China today. “To adjust the taxation” has already been a consensus and “prohibition through levying taxation” and “promoting through tax reduction or exemption” have been widely used. Under such circumstances, it is necessary to deeply investigate taxation regulation and control, and the appro­ priate positioning to it. Based on such thoughts, the government and the public sometimes expect that taxation measures will always bring positive results;32 this makes taxation and taxation law bear heavy expectations and hope. The significance of taxation and taxation law to the state and citizens is increasingly known by the people who believe that their implementation could resolve any problem in real life includ­ ing the tricky distribution issues. However, is this really the case? Judging from taxation adjustments, in order to promote the development of the capital market in China, the number of taxation adjustments that are beneficial to the capital market is high. They include the adjustment to security transaction stamp duty and the taxation reductions and exemptions to equity exchanges. Unfortunately, all these measures have failed to bring the capital market out of the low valley. In fact, just the same with other types of distribution regulation and control measures, taxation regulation and control is just an external force, an external factor that could only exercise limited influence. Its limitations are noteworthy, meaning that an appropriate positioning to taxation regulation and control should be done. On one hand, the positive functions of taxation regulation and control should be admitted, and on the other hand, performance should not be exagger­ ated. Taxation and taxation law regulation and control, as external factors and forces, usually cannot solve the fundamental problems in each area.33 Based on the current situation where the function of taxation law is overestimated, an appropriate positioning to the taxation regulation and control targeting on “binary differentiation” should also be done as a means of providing a better solution to distribution issues and a better response to distribution crisis. 5.3.4 Basis for distribution regulation and control There should be a legal basis for any distribution regulation and control measure, which is the only way to promote the solution to distribution problems. Taking taxation regulation and control as a highly representative example, the specific taxation regulation and control measure in order to solve distribution problems is varied. However, the basis is mainly taxation policies and laws. Generally speak­ ing, taxation policies are more flexible, are distinct from each other, and are easy

Legal response to distribution crises 169 to change, while taxation laws are principles, are more universally applicable and stable, meaning that only the stable and effective taxation policies and policy tools can be absorbed by the taxation laws and become vital elements of taxation law. In this sense, taxation policies and taxation laws are both internally consistent and different. Taxation policy is a vital precondition for taxation legislation, while taxation legislation is vital in protecting the effective implementation of taxation policy. Taxation policy targets emergencies. It could be applied in order to solve the prominent issue of “binary differentiation” in economic and social life and the response to distribution crisis. Taxation law should be long term and it should be made to establish a long-term institution, which is fundamental for the constant solving of “binary differentiation” problems and preventing the occurrence of distribution crisis. In accordance with the principle of statutory taxation, many taxation policies, especially the policies that are relevant to the substantial rights and obligations of taxpayers, should be promoted to law. Therefore, taxation reg­ ulation and control must be based on taxation laws, both in terms of substantial content of taxation regulation and control and of the relevant procedure. It is very important to clarify such relationships to guarantee the effects of taxation regula­ tion and control. Whether taxation regulation and control could achieve actual effects relies on the legality of the basis for taxation regulation and control and the reasonableness of taxation policy and laws. Therefore, only taxation regulation and control with reasonableness and legality can gain effectiveness and the support of citizens and acquire higher legality and effective compliance by the people. However, despite all these factors, based on the consideration to maximize the interest, market agents who are specific taxpayers may conduct various games including evading taxes. As a consequence, when emphasizing the legality and effectiveness of the basis for taxation regulation and control, the non-cooperative game of market agents should also be considered. Judging from reality, in some areas, “binary differentiation” problems such as the expansion of the distribution gap are still worsening, sometimes even distribu­ tion regulation and control is applied and relevant problems are not solved fully. For this reason, it is necessary to consider whether such problems could be solved through distribution regulation and control, identifying the factors or reasons that hinder the resolution of these problems, and which limitations of regulation and control are worthy of note.

5.4 The actual performance and legitimacy of distribution regulation and control 5.4.1   Reasons affecting the performance of distribution regulation and control The limitations of distribution regulation and control affect actual performance. The reasons could be divided into internal and external factors. The limitations of the various distribution regulation and control measures themselves are the internal factors, while the deficit of the distribution system of the state, the lack

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of legal awareness, and games among various agents also largely affect the actual performance of distribution regulation and control. These constitute the exter­ nal factors affecting the performance of distribution regulation and control. Both types of reasons should be researched profoundly. The following part takes taxation regulation and control as an example to illus­ trate that for the limitations of taxation regulation and control measures, increas­ ing consensus has been achieved through previous research, and if the external factors affecting the actual performance of taxation regulation and control are integrated, then the reasons affecting the actual performance of taxation regula­ tion and control could be concluded as the following aspects. First, from the function of taxation, the function to distribute income may sometimes conflict with the function to macro-regulation and control. To gain income is, after all, the most fundamental and primary function and the govern­ ment always raises the level of the legal compliance as it attempts to gain more income in order to realize its economic and social functions. While in terms of taxation regulation and control, the common practice of using taxation prefer­ ential measures may generate taxation expenditure of the state while decreasing taxation income. Therefore, when the state is facing fiscal pressure and the gov­ ernment expects higher income, some taxation regulation and control measures that may affect the income of the government would be limited. Second, from the scope of taxation regulation and control, the agents directly affected by taxation regulation and control generally are limited to specific tax­ payers, namely agents bearing specific taxpaying duties within a certain period. As for agents without such obligation, since they are the fish that escape the net of taxation, such regulation and control would not generate a direct outcome for them and this will limit the performance of taxation regulation and control. Third, from the principle of taxation regulation and control, the principle of fair taxation is equally important. When conducting specific taxation regulation and control activities, the following issues have to be considered: how to bal­ ance horizontal and vertical fairness; and how to balance formal and substan­ tial justice and genuinely achieve the taxation according to capacity. Taxation regulation and control should directly reflect the relevant taxation policies, and while “there would be no policy without discrimination”, taxation regulation and control through discrimination, leading people to chase the interest and avoid the harm. During the process of discrimination, it is not easy to correctly acknowledge the condition, avoid the actual unfairness of the tax burden, and ensure fair competition among market agents. Therefore, inappropriate taxa­ tion regulation and control may have a negative impact on the operation of the economy. Fourth, from the perspective of taxation game, numerous and complicated games exist between the agents charged with regulation and control and agents being regulated, i.e. the tax levying agent and taxpaying agent.34 On one hand, the agents being regulated may conduct the games or reactions, and their behaviour might be cooperative or non-cooperative. They may comply or refuse to comply with taxation regulation and control. If the agents being regulated ignore taxation

Legal response to distribution crises 171 regulation and control, especially when such agents choose to avoid paying tax through illegal methods, the actual performance of taxation regulation and control would be compromised. Fifth, from the perspective of the agents who regulate and control, there also exists huge limitations. Especially under the current circumstances where the problem of lack of information is deteriorating, the agents who regulate and control usually cannot promptly and comprehensively acquire the information concerning market agents. The limitation of the rationale of the government is more prominent and the capability of perception concerning taxation regulation and control is affected further influencing the actual performance of taxation regulation and control. Therefore, it is a big challenge for the agents to regu­ late and control, given that it is hard to conduct such regulation and control at the appropriate time and space in order to better promote the stable growth of the economy and the benign and coordinated development of the economy and society. Because of the limitations of taxation regulation and control, actual perfor­ mance is affected. Consequently, in terms of the ability of taxation regulation and control, appropriate positioning is required in solving distribution issues. It is not reasonable to deny the function of taxation, while the tendency to believe that taxation could solve any problems should also be avoided. 5.4.2 The legitimacy of distribution regulation and control As discussed above, during the process to deal with “binary differentiation” prob­ lems including the distribution gap, there is no distribution regulation and control measure that is workable for all circumstances, and the actual performance relies on factors from various aspects. The legitimacy of distribution regulation and control is also an important factor affecting the performance of distribution. That explains why it is necessary to discuss the issue of legitimacy. Normally, the legitimacy of distribution regulation and control35 includes the legitimacy from legal, economic, social, and political aspects. The legal legiti­ macy is the one which is the most direct and which attracts the most attention. If a certain distribution regulation and control behaviour lacks legitimacy, its effec­ tiveness would be doubted and decreased under the current circumstance where the rule of law is emphasized. Therefore, from the perspective of legitimacy, the distribution regulation and control could be divided into regulation and control that is with and without legitimacy. Legally speaking, legitimate distribution regulation and control should be con­ ducted by the agents with the power to regulate and control and according to the law. Therefore, if an agent does not possess the power to regulate and control, the regulation and control conducted by such agents would be illegitimate. It could be concluded that the power to regulation and control is vital in ensuring legitimacy. Formally, since distribution involves the basic rights of various agents, the power to distribution regulation and control comes from explicit authorization stipulated by the law. When the definition of the law is limited to written laws, the

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establishment, allocation, and exercising of power to regulate and control should be reflected by written laws of the state. With the development of the economy and society, the economic and social functions of the state are increasingly expanding, and its powers are also increas­ ing.36 This situation has an effect on the emergence and development of the rel­ evant power to regulation and control. As a vital function of the modern state, distribution regulation and control is a typical public good that cannot be provided by individual agents. From the perspective of meeting the need for the public good of citizens, distribution regulation and control is an obligation, instead of power, of the state. According to the public good theory, the power to distribution regulation and control should be exclusive to the state. Though within a given period and space, human reason is limited and the problem of “government failure” should not be ignored, the function of the state, especially in terms of solving distribution prob­ lems and dealing with distribution crisis, should not be underestimated. After all, the solution to distribution problems and the distribution crisis response are the results of market failure, and, compared with other agents, the state possesses more legitimacy in exercising distribution regulation and control at the economic and social levels. This is also partly due to the monopoly of the state to the legisla­ tive power concerning distribution regulation and control. In fact, since the initiation of reform and opening-up, especially since the deci­ sion to establish a market economy system, China has always focused on distribu­ tion regulation and control and on relevant legislation. The macro-regulation and control legislation have been raised to the constitutional level.37 Meanwhile, goals or contents of macro-regulation and control are also added in some important laws that involve distribution to ensure that distribution regulation and control is legitimate. Relevant to legitimacy, distribution regulation and control can also be divided as effective and ineffective. The legally ineffective distribution regulation and control might be effective economically. This highlights the issue of choice espe­ cially in times of conflict. Many would argue, especially from a legal perspective, ineffective distribution regulation and control should be abandoned despite the fact that it is economical. Yet, from a pragmatic point of view, some may believe that economically effective regulation and control, despite its legal ineffective­ ness, is necessary and beneficial. This leads us to the main question of economic legitimacy. The economic legitimacy of distribution regulation and control relies on its economic reasonableness, and it is essentially the “compliance to objective eco­ nomic regulations”. To a certain extent, the direct goal of distribution regula­ tion and control is to solve the significant problems emerging in the distribution area. If a certain distribution regulation and control behaviour complies to eco­ nomic regulation and achieves positive performance, relieving or solving the issue of imbalance in distribution, then such regulation and control behaviour is reasonable and has the tendency to further acquire the support of market agents or the social public, thereby gaining its legitimacy. Therefore, even when some

Legal response to distribution crises 173 regulation and control behaviours are against the realistic legal stipulations, they are deemed reasonable and would gain understanding and support. For example, China once raised the rate of export tax rebate in order to deal with the financial crisis and the policy reduced the burden of exporting enterprises. Though such policy lacked a legal basis, it achieved positive results in terms of the economy and gained support from the public.38 The reason is that the laws made by the state are always behind realistic eco­ nomic activities, which are constantly changing and developing. Whether the laws can meet the requirement of real economic and social life is important in judging the vitality and effectiveness of such laws. Most of the economic reforms or distribution regulation and control conducted by different countries violate the framework of current legal stipulations and sometimes they are even against con­ stitutional laws. However, due to its reasonableness in the economic aspect, such violations against the constitution are called “benign violation against the con­ stitution”. Different conceptions to such “benign violation against the constitu­ tion” or “benign violation against the laws” exist. Nevertheless, such phenomena should be as limited as possible in the field of distribution regulation and control. With the increasing of the level of rule of law and the deepening of people’s rec­ ognition, the improvement of relevant laws could gradually solve such problems. Amendments to constitutional law and the frequent amendments to relevant legal norms in China all reflect the conception and efforts in this area. Distribution regulation and control that is economically reasonable and legiti­ mate would contribute to the solving of distribution problems and would prevent and resolve distribution crises, thereby promoting the benign operation and the coordinated development of the economy and society, thereby achieving legiti­ macy in the social and political fields. Therefore, institutional protection of distri­ bution regulation and control, with economic reasonableness or compliance with economic regulations, should be provided in order to legitimize such regulation and control. The compliance of such regulation and control would increase and the expected goals of distribution regulation and control would be realized. The brief discussion on the issue of the legitimacy of distribution regulation and control indicates that the legitimacy of distribution regulation and control does not only mean that it should formally meet the stipulations of relevant laws, but also that it should reflect the legitimacy in economic and social areas. Legal legitimacy itself is not enough for distribution regulation and control. Only regu­ lation and control that meets economic regulations, fits the condition of the state and citizens, and aims at protecting social public interest and basic human rights is genuinely legal with valid regulation and control and therefore is of higher legitimacy. 5.4.3 Summary The previous discussion mainly highlights the following opinions: “binary dif­ ferentiation” is the prominent problem in the economic field in China, and it is a vital reason for the prominent distribution problems, and distribution regulation

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and control is indispensable as a response to “binary differentiation”. Though taxation regulation and control is important in distribution regulation and con­ trol, appropriate positioning to it is necessary. The basis for various distribu­ tion regulations and controls is mainly policies and laws, and legitimacy would directly affect the actual performance of distribution regulation and control. The reasons for the performance of distribution regulation and control include inter­ nal and external reasons, and the limitations of distribution regulation and control itself are the internal reasons that are often closely connected to the external rea­ sons. The legitimacy of distribution regulation and control involves legitimacy in various aspects including the law, economy, and society, and is a vital ele­ ment affecting the actual performance of such regulation and control. Ensuring the legitimacy of distribution and control is also a vital task for distribution law system construction that contributes to the promotion of the benign operation and coordinated development of the economy and society under the framework of the rule of law.

Notes 1 Habermas believes that the present social science provides a systematic concept for crisis, identifying crisis as the continuous disorder of system integration. See Jürgen Habermas. (2000). Legitimation Crisis. Translated by Beicheng Liu and Weidong Cao. Shanghai: Shanghai People’s Press, p. 4. 2 Crisis, after all, only exists within a limited period of time. Therefore, the response to crisis must consider long-term issues. The long-term, consistent, continuous, and effec­ tive development cannot be sacrificed for solving crisis. A popular consensus has been reached that crisis shall act as an opportunity for the way of economic growth to change and as a way for economic structure to be optimized. 3 On September 18, 2008, the Department of Finance and State Administration of Taxation announced that from the next day the way to levy security (stock) transaction stamp duty will be changed. Originally both parties were levied 1% for the purchase, in heritage or Hansel of the share (both Type A and Type B). After that, the levying would be imposed only on one party, and the buyer is not subject to such tax. 4 On October 21, 2008, the Department of Finance and State Administration of Taxation published the Notice concerning Raising the Rate of Export Tax Rebate for Certain Commodities, declaring that the rate of export tax rebate for 3,486 types of commodi­ ties including textures, cloth, and toys will be raised, constituting around 25.8% of all commodities. 5 In December 2008, the National Development and Reform Commission and Department of Finance jointly promoted the reform to the tax/fees for refined oil. Six items of fees including the road maintenance fee were changed into refined oil consumption tax. Such reform has been implemented on January 1, 2009. In November 2014, the State raised the rate of such tax and cancelled the consumption tax on vehicle tyres, etc. 6 The State Council announced that from October 9, 2008, the individual income tax on deposit interests was eliminated. 7 Especially in 1998, when the deficit raised sharply due to the financial crisis and the flood, China started to increase the issuance of national bonds to deal with the eco­ nomic fluctuation and to raise the domestic demand. 8 To deal with the economic crisis in 2008, the planned deficit for 2009 reached 950 billion, among which the deficit of the central government was 750 billion, an unprecedented amount. The scale of deficit resulted to the pressure to the issuance of

Legal response to distribution crises 175 9

10

11

12

13

14

15

16

17 18

the national bonds. Meanwhile, problems such as the reasonable scale for national bond issuance and the issuance of local bonds attracted wide attention. The government procurement involves many industries and fields, therefore the law on government procurement is closely related to many industry laws and there is coordina­ tion with many laws including law on railway, law on road, law on construction, law on national defense, etc. Meanwhile, in the context of economic globalization, interna­ tional coordination concerning government procurement among WTO members is also crucial. The implementation of the “Scheme for Adjustment and Revitalization” of ten indus­ tries, namely steel, vehicle, electronic products, textures, logistics, non-ferrous metal, equipment manufacture, petrochemical, light industry, shipbuilding, is directly or indi­ rectly relevant to fiscal and taxation policies. Fiscal and taxation policies played a vital role in the industry structure adjustment in the abovementioned ten industries as well as related industries. As discussed above, on June 27, 2009, the Standing Committee of the National People’s Congress passed the Decision to Abolish Certain Laws, having abolished the Decision to Authorize the State Council to Reform the Industry and Commerce Taxation System and to Publish and Experiment Relevant Taxation Regulations and Drafts, despite the fact that Decision on Authorizing the State Council to Formulate Interim Regulations Concerning Economic Institution Reform and Opening-up was still valid. This expanded the power of State Council to Taxation legislation and lacks necessary limitation on the power to legislation concerning finance and taxation. According to the Decision to Approve the Department of Finance to Issue Special National Bond to Purchase Foreign Exchange and to Adjust the Limitation on the Balance of National Bond of the End of 2007 of the Standing Committee of the National People’s Congress, the Department of Finance issued a special RMB national bond worth 1.55 trillion. This was the largest special national bond since 1949 and it aimed to solve the excess of liquidity in the financial field. OCED states and international organizations such as IMF pay huge attention to fiscal transparency and emphasize on regulating transparency through many types of legis­ lation. See International Monetary Fund. (2001). Fiscal Transparency. Beijing: The People’s Press, pp. 6–10. Correspondingly, the Decision on Several Major Issues concerning Comprehensively Promoting the Rule of Law (“Rule of Law Decision”) of the Central Committee of the CPC in 2014 especially emphasized the phases of public participation and expert discussion which contributed to making the legislation more scientific and democratic, thereby making the legislation reflect more the requirement of the reality. In recent years, China has been improving the transparency of public expenditures and has achieved positive results. Besides, the Law on Budget amended in 2014 especially emphasizes the transparency of budget. The Decision of Rule of Law in 2014 provides more requirement on transparency. All these factors lay vital foundations for the trans­ parency of economic law regulations. On January 7, 2009, attorney Yan Yiming in Shanghai submitted applications to the Department of Finance and Development and the Reform Commission for information disclosure, including the application for disclosing fiscal budget and final account, and the progress of the 4 trillion economic stimulus scheme, which reflects the attention to fiscal and taxation transparency. In recent years, China has formulated the regulation on governmental investment man­ agement, in which the decision-making procedure is the vital component. The effective development of economic law is directly related to the effective regula­ tion of economic law to the field of distribution, while the effective development of the economic law system also requires the effective development of economic law theories. For relevant discussion, see Shouwen Zhang. (2005). On the “Effective Development” of Economic Law Theory. Studies in Law and Business, 22(01), pp. 10–14.

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19 From the perspective of systematic analysis, “effective development” and “scien­ tific development” are internally consistent. To be “comprehensive, consistent and sustainable” is vital to scientific development in every field. Only through scientific development can development be effective. This is also the basic requirement for the construction of future economic rule of law institution. 20 From that viewpoint, the information level is also an important level for economic law research. Meanwhile, enhancing research on information theory and institution would also contribute to the development of information law. In fact, in information law the­ ory, there are many factors consistent with economic law theory. See Shouwen Zhang and Qingshan Zhou. (1995). Information Law. Beijing: China Law Press, pp. 56–70. 21 Both China and some other countries value the right to information of taxpayers, which is the foundation for taxpayers to exercise their rights. For this purpose, the State Administration of Taxation has declared that the right to information is the first right in the Announcement concerning the Right and Obligation of Taxpayers published on November 6, 2009. 22 Distribution regulation and control is the prominent nature of policy and law. When combined with specific fields or objects, particular problems would emerge regarding the positioning, direction, and degree of regulation and control. This makes it a persis­ tent problem. 23 The expansion of the income distribution gap is a vital problem for the public, given that it affects the harmony and stability of society. The voice for reducing the distribu­ tion conflicts through relevant policies and laws has been increasing and, because of that, the distribution gap has become huge. Similarly, to solve the gap between large enterprises and medium and small-scale enterprises, China has published important laws including Law on Promoting Medium and Small-scale Enterprises and Antitrust Law, which is necessary for promoting fair and effective competition between large enterprises and medium and small-scale enterprises. 24 Correspondingly, the issue of distribution is not only an issue of “development eco­ nomics”, but also an issue of “development law”. 25 In terms of taxation regulation and control to fair distribution, particular problems including the accumulation and burden of taxation need to be solved. See Qingwang Guo. (2012). Several Deep-level Problems concerning the Fair Income Distribution of Taxation. Finance & Trade Economics, 33(08), pp. 20–27. 26 Binary structures such as urban and rural areas, the east and west regions, and the domestic and foreign will lead to the formation of a series of binary structures in the institution, while the binary structure at the level of economy-institution is the foun­ dation and precondition to conduct distribution regulation and control. For a relevant discussion, see Shouwen Zhang. (2004). Reconstruction of Economic Law Theory. Beijing: The People’s Press, pp. 37–47. 27 From this sense, compared with traditional regulatory laws, the taxation law norms with prominent nature of regulation and control would be easy to change, which would generate new problems in the field of taxation. For relevant analysis, see Shouwen Zhang. (2002). The Periodical Change of Macro-regulation and Control Law. Peking University Law Journal, 14(06), pp. 695–705. 28 The fierce discussion on the amendment to the Law on Individual Income Tax reflects the expectations of the people. Yet the issue of unfair distribution is complicated and taxation measures alone cannot solve this problem. The limitations of taxation law, and even the whole legal system, should be admitted. 29 The unification of two sets of taxation systems had been postponed, indicating that the participation of parties of interest would make things more complicated. After the implementation of the unified Law on Corporate Income Tax, the actual perfor­ mance and new emerging problems have been seen. See Haiyong Wang. (2009). Effect, Problems and Suggestions to the Implementation of Law on Corporate Income Tax. Taxation Research, (02), p. 31.

Legal response to distribution crises 177 30 It is not difficult to find out in the discussion on the merits and faults in the experiments of taxation reform in the northeast region regarding regional economic development that taxation regulation and control also has multiple limitations. 31 From 2005 to the present, how to regulate and control the real estate market through taxation measures has always been a hot topic and it is closely connected with the regu­ lation and control to relevant markets including the capital market. 32 Many years ago, scholars discussed this issue. See Qiren Zhou. (2005). Experts’ Reasons for their Preference for Taxation. The Economic Observer, August 1. In fact, the general public may also have a preference for taxation, constituting the unreason­ able expectation to taxation regulation and control. 33 In fact, both taxation regulation and control and taxation law adjustment are limited by subjective and objective conditions. See Shouwen Zhang. (2016). Treatises on Fiscal and Taxation Law. The 2nd Edition. Beijing: Peking University Press, pp. 107–109. 34 In macro-regulation and control, two types of agents are involved, the agent to regulate and the agent to be regulated, constituting the subject-object binary structure in the regulation and control relationship. In specific taxation levying, a binary structure of the levying agent and the taxpaying agent is formed. The game and relevant legal regu­ lations are mainly conducted between these binary agents. 35 Legitimacy is a concept with complicated meaning. In this article, the meaning of the concept is mainly limited to the meaning of compliance to legal norms or regulations and of being supported and admitted by the social public. 36 Wagner’s law and other scholars’ research have constantly proven this point. The rise of the percentage of governmental fiscal expenditure in the GDP also proves this issue. 37 For example, Article 15 of the Constitution of PRC stipulates that “the state practices a socialist market economy. The state shall enhance economic legislation and improve macro-regulation and control”. Therefore, macro-regulation and control is lifted up to the level of constitutional law, and the issue of the relationship among market economy, economic legislation, and macro-regulation and control is brought forward. 38 The adjustment to the rate of export tax rebate as a taxation regulation and control behaviour has to be based on laws, and the illegal regulation and control without a suf­ ficient legal basis should be prohibited. The frequent change of the rate would, to some extent, be against current laws, and would generate negative influence on the right to request for tax rebate, affecting the stability and predictability of taxation law.

6

Conclusion

The distribution problem is complicated, and we must pay attention to potential distribution risks that prevent the emergence of distribution crises. To solve com­ plicated distribution problems, different distribution systems need to be employed, especially the important distribution system within economic law. For this pur­ pose, this book observes distribution systems from the perspective of economic law and emphasizes on analyzing existing problems in the distribution systems within economic law field based on the discussion of the relationship between distribution systems within economic law and distribution systems within other fields of law, and reflects on the approach to its improvement.

6.1 Basic understanding of this book This book treats the whole distribution system as one system and believes that to solve distribution problems based on a systematic distribution system would contribute to the development of the economy and society. Therefore, this book brings forward the analytical framework of “institution-distribution-develop­ ment”. Based on such a framework, this book focuses on the internal and external relationship among distribution systems within the economic law field and on relevant distribution differences from the perspective of economic law. It empha­ sizes the fact that distribution rights and interests of relevant agents should be effectively protected in order to substantially solve the distribution problems, effectively prevent distribution risks, and respond to distribution crises. Thus, the logical line of “internal and external relationship-distribution difference-distribu­ tion right and interest-crisis response” throughout the whole book is formed. Based on the above framework and following the above logical line, the fol­ lowing basic understandings are formed: 1 Distribution systems in economic law are vital to the solution to distribu­ tion issues, while distribution systems in economic law alone are far from being sufficient in solving distribution problems. Therefore, comprehensive regulation through various laws should be addressed and, at least within the legal system, coordinated regulation between economic law and other depart­ mental law should be strengthened. This would contribute to promoting the

Conclusion

179

coordination among distribution systems of different types (including differ­ ences in precedence and nature), thus achieving an effective distribution reg­ ulation. Besides, even among distribution systems of the same type, mutual coordination is also important, given that it is through this means that the comprehensive function of the distribution system can be better exercised. 2 Emphasizing the coordination among distribution systems is also due to the fact that there exists a contradiction between unity and difference among dis­ tribution systems. On one hand, from the perspective of the rule of law, dis­ tribution systems, as a type of “system”, should be unified. Yet, on the other hand, distribution systems, as a system of “distribution”, should consider the differences existing among distribution agents and subjects, thereby reflect­ ing different treatment and substantial justice. Both the difference outside the unified distribution system and the unity of the differentiated system arrange­ ment should be considered in order to ensure the realization of the spirit of fairness and the rule of law. Meanwhile, the unity and differences within distribution systems should be viewed dialectically under the framework of the rule of law. 3 If the coordination among distribution systems is lacking, or if the alloca­ tion of power concerning distribution is not reasonable, various problems, in terms of economic law regulation, would emerge. This would result in a situation where practical distribution problems would be difficult to solve, and distribution risks would occur leading to distribution crises. Therefore, the distribution right and interest of relevant agents – distribution agents and distribution subjects – should be protected according to the law. 4 The rule of law should also be emphasized during the process of crisis response and the target should be the emerging distribution crisis. Specific measures and specific system arrangements should both comply to the statu­ tory principle including the principles of fairness and efficiency in order to avoid the emergence of new crises, especially the “rule of law crisis”, during the process of dealing with crises. The formation of such basic understanding is closely relevant to various distribu­ tion systems in the economic law area. However, based on the special importance of fiscal and taxation law in dealing with distribution problems, including pre­ venting and solving distribution crises, this book illustrates the importance of dis­ tribution systems and important issues in economic law, taking fiscal and taxation law as the vital representative of economic law. It emphasizes that distribution problems should be better solved, distribution risks should be prevented, and dis­ tribution crises should be dealt with by improving relevant distribution systems.

6.2 Thinking beyond the distribution system This book, mainly from the perspective of economic law, discusses relevant problems concerning distribution systems. Though distribution systems in eco­ nomic law are vital to solving distribution problems and preventing and solving

180

Conclusion

distribution risks and crises, the distribution system does not only exists in eco­ nomic law. In fact, large numbers of distribution systems also exist in constitu­ tional law and other types of laws. For this reason, this book conducts extended research to distribution systems relevant to economic law, focusing on the issue of coordinated regulation of distribution systems of economic law and constitu­ tional, civil, and commercial law, and emphasizes that the goals of distribution regulation and control should be achieved through constant improvement to rel­ evant systems, even within the economic law system itself. Based on distribution orientation, the distribution system in the economic law area would contribute to solving resource allocation, especially the distribution of income and wealth. When distribution crises occur, the crisis should be effec­ tively solved through self-adjustment. Therefore, various distribution systems in the economic law area should be able to effectively solve distribution crises and prevent economic fluctuation, thereby weakening the periodicity of the economy through constant regulation and control to distribution, equipping economic law with the prominent function of distribution regulation and control. The distribution regulation and control function of economic law is based on the internal structure of economic law originating from economic measures that have been legalized. Various regulation and control measures within economic law are vital tools affecting distribution at the macro and micro levels, thereby providing the possibility to realize the distribution of regulation and control func­ tion of economic law. Therefore, the issue of market failures, such as the dis­ tribution gap, the unfairness in distribution, and distribution imbalance should be solved through economic law. Also, it is not only secondary distribution that economic law should influence; primary or “third” distribution should also be regulated. It is solely through exercising direct influence on the abovementioned distribution that the function of economic law to distribution regulation and con­ trol be better exercised. Correspondingly, the focus of the improvement of the economic law system is not only the area of secondary distribution but also other distribution stages which are also important problems that should be focused on in improving the distribution system. From an economic law system improvement perspective, the distribution crisis is not only an economic crisis. To some extent, it is also a legal or rule of law cri­ sis. If the allocation of rights by the laws fails to effectively solve the issue of fair distribution, then unfairness and injustice would inevitably cause an imbalance in distribution, and further result in social and political crises. Different disciplines of social sciences could discuss this phenomenon from different perspectives given that the distribution crisis resulted from the unreasonableness of the distri­ bution system. Yet, from the perspective of economic law, a framework should be laid for the smooth functioning of the economy that would guarantee fairness and reasonableness of distribution through the distribution system in economic law. It should be an economy that showcases justice in distribution that is capable of preventing the occurrence of distribution crises and economic fluctuation – some­ thing that should be emphasized by every state.

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Index

4-trillion investment plan 153–4 2008 financial crisis 47n49, 105, 150 abolition of taxes 38–41 agent binary structure 13–14 agricultural tax 38 allocation of taxation power, collective taxpaying 86–8 asymmetric structure 139 authorized legislation 25 Beard, Charles A. 13 benign law 116 benign violations 26 binary differentiation 164–9 binary structure 14 binary system of taxation 133–4, 143; improvement of current systems 137– 40; local taxation system and 141–2; sharing binary taxation system 134–5 budgets, distribution crises 151 business tax to VAT 41–2, 69, 71–3, 108, 133, 142 change of circumstances theory 162–3 changes, in taxation law 33–5 Charter of the United Nations 101 choice for modes and cost of legislation, real estate tax legislation 131–2 choice of mode as basis for calculation of tax, real estate tax legislation 129–30 choice of mode of legislative body, real estate tax legislation 130–1 choice of mode of taxation object, real estate tax legislation 128–9 Chongqing, calculating real estate tax 130 civil right bills 14 collective taxpaying 82–4, 90–1; aims of 85–6; allocation of taxation power 86–8;

exception to principle of independent taxation 88–9; transfer pricing and loss transfer 91–2 collective-sharing systems 98n72 competition 10–11; fair competition 109, 111 complex branches 84 compound object, real estate tax legislation 128–129 configuration to the power to administration of taxation levying bodies 120 consistency 18 consistency of distribution systems 6–7; economic dimensions 9–12; internal consistency 8–9 Constitution of the People’s Republic of China (PRC): Article 3 Clause 1 64; Article 15 22, 97n48, 177n37; Article 15 Clause 1 10, 22; Article 15 Clause 2 10, 23; Article 15 Clause 3 10, 23; Article 56 64 constitutional foundation, for economic law 21–24 constitutional law 28; coordinated development of 20–21; coordination with economic law in development process 26–28; economic dimensions 9–12; influence on economic law 12–16; promotion of development through development of economic law 24–26; relationship to economic law 8–9 constitutional law economics 7 constitutional law violation 19 constitutionalism 19 consumptive VAT 42 coordinated development of distribution systems 19–29

Index coordination: between economic law and constitutional law in development process 26–8; institutional coordination 33–5; internal coordination see internal consistency; of taxation law system 38–43 cost of legislation, real estate tax legislation 131–2 crisis 174n2 crisis response and, development of economic law 158–63 currency 107 Decision on Authorizing the State Council to Formulate Interim Regulations Concerning Economic Institution Reform and Opening-up 125–6 Decision on Implementing the Reform of Binary Taxation Fiscal System 138 Decision to Authorization 1984 53, 66–7, 125, 126 Decision to Authorization 1985 53–5, 59, 61, 66, 71, 72, 126 Decision to Authorize the State Council to Reform the Industry and Commerce Taxation System and to Publish and Experiment Relevant Taxation Regulations and Drafts 125 Decision to Reform (2013) 147n47, 148n63 Declaration of Human Rights in 1948 144n4 Declaration on Social Progress and Development in 1969 144n4 Declaration on the Right to Development 102, 108, 110 deduction 82 determination, power of 121–122 development 102 development law 101, 111–112 development of economic law, crisis response and 158–163 deviation 97n61 differences outside, unified distribution system 49–61 differentiated distribution, unified regulation to 61–74 differentiated treatment 67 discriminated distribution 67 distribution 1; protection of the right of economic development 101–112 distribution crises: economic law development 158–63; economic law response to 149–58

195

distribution law 1 distribution of interest 100–1 distribution regulation, binary differentiation 164–9 distribution regulation and control 168–73 distribution risks 1 distribution systems 1–2; coordinated development of 19–29; economic dimensions 9–12; internal consistency 7–9; internal coordination 36–43; internal differences in 74–81; mutual completion 29–36 duty of tonnage 65 economic constitution 9, 14, 19, 22 economic constitutional law 7–8 economic constitutional norms 7 economic development, right to 101–12 economic dimensions 7–12, 26 economic law 1–3, 28, 102, 105, 110; constitutional foundation for 21–4;

coordinated development of 20–1;

coordination with constitutional law in development process 26–8; crisis response and 158–63; economic dimensions 9–12; influence of constitutional law 12–16; promotion of constitutional law development through the development of economic law 24–6; relationship to constitutional law 8–9; response to distribution crises 149–58; right to economic development 103–4; risk prevention and control theory 160–1 economic law agents 106 economic legislation 50 economic measures, unlocking to deal with crisis 150–2 economic norms 17 economic structure, 105 economic system reformation and opening up 54 effective development of economic law 158–9 efficiency of: legislative experimentation 57–8; taxation law 59–60 exercise of power, distribution crises 153–5 expansion of tax collection powers 68; VAT 142 experiment models, VAT 52–3 experimentation 49–51; future of 60; legislative experimentation 53–5; taxation legislation 58–60; VAT 51–3

196

Index

extension experiment 57–8 external effects, of changes to taxation law and institutional coordination 33–5 fair competition 109, 111

fairness 68, 90; binary system of taxation

141; legislation experiment 59–60;

legislative experimentation 55–7 Federal Commerce Commission 24 fiscal revenue 110 flexible methods 18 for-profit, real estate tax legislation 127–8 fourth type of power 11

GDP (gross domestic product) 110

Gini coefficient 111 good governance 37, 113, 116 government, choice of mode of legislative body 130–1 government procurement 175n9; distribution crises 151

Human Rights Committee 109

improvement of current systems, binary system of taxation 137–40 income tax 30 income tax legislation 50

inconsistency 18

independent taxation 88–9

influence of constitutional law and economic law 12–16 information revealing theory 161–2 institutional construction 82 institutional coordination, external effects of the change of taxation law 33–5 institutional law 24; stipulations 18 Interim Regulation on Corporate Income

Tax 82 Interim Regulation on Real Estate Tax

123, 125, 126, 128 Interim Regulation on Taxation 118

Interim Regulation on VAT 51–2, 113,

121–2 Interim Regulations 54 internal consistency, economic nature of distribution 8–9 internal coordination, among identical distribution systems 36–43 internal differences in, distribution systems 74–81 internal limitations, Law on Corporate Income Tax 79–81

Interstate Commerce Act 1887 24–5 Interstate Commerce Commission 24 judicial verdict 27 jurisdiction: collective taxpaying 89–90; power of 120–1 land finance 124, 136 Law for Individual Income Tax 42 law of distribution 110

Law on Budget 161 Law on Corporate Income Tax 74–81, 86 The Law on Facilitating Medium and

Small-scale Enterprises 104–5 Law on Individual Income Tax 167 Law on Legislation 59, 66, 71, 116,

118, 126 Law on National Bond 161 Law on Personal Income Tax 67 Law on Tax Collection 62, 64 Law on Taxation Collection Management 72 Law on Taxation Regulation 34 Law on VAT 117 laws of the economy 10

legal awareness, distribution crises 157–8 legal precedency theory 22 legal protection, right to economic development 106–8 legal systems, consistency in distribution systems 6–7; economic dimensions 9–12; internal consistency 8–9 legality of legislation experiment 53–5, 58–9

legislation, taxation 50

legislation experiment, fairness 59–60 legislation idea, VAT 113–14 legislation institutions, distribution crises 152–3 legislative experimentation: efficiency of 57–8; fairness 55–7; legality of 53–5, 58–9 legislative precedency, VAT 116 legislative technique 117–18 legislative value-orientation 115–16 legitimacy, distribution regulation and control 172–3 level of idea 138–9 level of principle, binary system of taxation 140–1 Lewis, Arthur 165 limitations: of Law on Corporate Income Tax 79–81; to quantification of duty

Index 78–9; of subjective quantification 77–8; of unification of Law on Corporate Income Tax 75–7 local fiscal revenue 133–4 local taxation system, binary taxation system and 141–2 loss transfer, collective taxpaying 91–2 low-lying land effect 56 macro-regulation and control 10–11, 25,

28, 106–7, 115; binary differentiation

164; real estate tax 124 Magna Carta 13, 15 market agents 106 market economy 10, 14 market economy system 22, 25 market failure 19

M’baye, Keba 144n5 merging taxes 39–40 micro-economy 25 moderation 68–9 mutual completion among distribution systems 29–36 national bond, distribution crises 151

national factors 81; collective taxpaying

82–4 National People’s Congress 55, 66,

125, 130 neutrality of taxation 34 neutrality of VAT 114 non-judicial verdicts 27 non-profit, real estate tax legislation 127–8 normative dimension 27 Notice on Printing and Distributing the

Scheme on Reform to Income Tax

Revenue Sharing (Guo Fa [2001]

No. 37) 138 over-cooling the economy 115

overheating of the economy 114 ownership 31 parliament, choice of mode of legislative body 130–1 performance of, distribution regulation and control 169–73 personal income tax 67 Planning Outline for the Twelfth Five-

years 108

power, distribution crises 153–5 power of determination 121–2

197

power of jurisdiction 120–1 power of tax reduction 62–3 power to administration of taxation levying bodies 120 power to regulate 105

price of real estate 129–30 price transfer, collective taxpaying 91–2 principle of difference 75, 83 principle of differentiation 110 principle of independent taxation 88–9 principle of moderation 68 principle of proportion 96n39 principle of taxation efficiency, Law on

Corporate Income Tax 80

private law 30 private ownership 14 private property rights 32–4 private-owned enterprises 109

procedural protection, distribution crises

156–7 productive VAT 42 promoting development of economic law 159–60 property 124 property protection rights 13 property rights 30–1; public versus private

32–3 proposal for taxation reduction 36–7 Proposal for Authorizing the State Council

to Reform the Industry and Commerce

Taxation System and to Publish

and Experiment Relevant Taxation

Regulations (Draft) [(84) State Council

Letter No126] 125 protection: of local fiscal revenue 133–44; of property rights 31; of right to distribution, VAT transformation 112–22; of the right to economic

development 101–12 public ownership 14 public procurement 151

public property rights 32–4 quantification of duty, limitations to 78–9 quantity of real estate 129–30 rate differences, Law on Corporate Income

Tax 78 rate of security exchange stamp duty 96n38 real estate 100

real estate tax legislation 122–3; basis for 125–7; choice for modes and cost

198

Index

of legislation 131–2; choice of mode as basis for calculation of tax 129–30; choice of mode of legislative body 130–1; choice of the mode of taxation object 128–9; for-profit or non-profit 127–8; purpose of 123–4 reducing taxes: exercising tax reduction power in accordance with the laws 65–9; statutory power to reduce taxes 63–5; structural taxation reduction 61–2 regulation 10, 22, 25; distribution

regulation and control 168–73;

macro-regulation and control see

macro regulation and control; taxation

regulation and control 167–8 Regulation on Agriculture Taxation 38, 66 Regulation on Government Information

Disclosure 156 Regulation on VAT (draft) 53 Regulations for VAT 51

relationships, constitutional law and economic law 8–9 right constitution 14 right to decision making 105

right to deduction 118–20 right to development 144n5 right to development-promotion 112 right to direct deduction 119

right to distribution, VAT transformation

112–22 right to economic development 100,

145n10; protection 101–12 right to indirect deduction 119

right to promote development 104 right to self-development 104, 112 right-obligation structure 10

risk prevention and control theory,

economic law 160–1 rule of law 18, 139–40 separation of “two kinds of right” 32–3 Several Instructions concerning

Encouraging and Guiding the Healthy

Development of Private Investment 109

Several Instructions concerning

Encouraging, Supporting and Guiding

the Development of Non-public

Economy Including Self-employed

Business and Private Business 109

Shanghai mode, calculating real estate tax 130

sharing binary taxation system 134–5, 143; level of idea 138–40; level of principle 140–1; taxation power structure 135–7 Sherman Anti-trust Act 1890 24 simple object, real estate tax legislation 128–9 social distribution 167 special receipt (Fapiao) 116, 118 special taxation measures 62 Standing Committee of the National

People’s Congress, 18, 38, 51, 53, 66 State Administration of Taxation 82, 87–8 State Council 18, 39, 66 state-citizen property rights 13 state-citizens 104 statutory power to reduce taxes 63–5 statutory taxation 65, 90 Stiglitz, Joseph 105 stipulations, taxation 65 structural taxation reduction 37, 39–41, 43, 61–2, 66, 68–9, 72–4; VAT see VAT subjective quantification, limitations of 77–8 systematic duplicate taxation 41 system-distribution-development 1–3 tax expense 87 tax preferential measures 79 tax reduction elements 65, 67 tax reduction power 62–3; exercising in accordance with the law 65–9; VAT 69–72 taxation 14–15; distribution crises 151; real estate tax legislation see real estate tax legislation; special taxation measures 62; statutory power to reduce taxes 63–5; structural taxation reduction see structural taxation reduction taxation according to capability 130 taxation adjustment, coordination of taxation law system 38–41 taxation law 30, 60–1; collective taxpaying

82; external effects 33–5; external

effects of change and institutional

coordination 33–5; fairness 59–60;

treatment differences in regard to

corporate groups 84 taxation law adjustment 30–1 taxation law system, coordination 38–43 taxation legislation 50; experimentation 58–60

Index taxation levying bodies 120 taxation management 81

taxation offset 82 taxation policy 169 taxation power, collective taxpaying 86–8 taxation power structure, sharing binary taxation system 135–7 taxation preferential measures 151, 166–7 taxation reduction 42; proposal for 36–7 taxation regulation and control 166–8, 170 taxes, merging 39–40 taxpayers’ rights to deduction 118–20 theory of taxability 127–8 theory of taxation power 123 Three Determination Program 18

timing for legislation, real estate tax

legislation 131–2 transfer payment 151

transitional experiments 57–8 transparency, distribution crises 155–6 trans-territory 84 treatment differences in regard to corporate

groups, taxation law 84 trial legislation pattern 25 triangle-relationship 21 types of distribution systems, coordinated development of 19–29

199

unification of Law on Corporate Income Tax 74–5 unified distribution system, differences outside 49–61 unified regulation to differentiated distribution 61–74 United Nations: Declaration of Human

Rights in 1948 144n4; Declaration on

the Right to Development 108, 110,

144n4; UN Charter in 1945 144n4 US Constitution 13; Article 1 Clause 8

94n11, 96n45; Article 1 Clause 10

95n32 usurious loans 109

value-orientation of VAT legislation 115–16 VAT 42, 51–5, 57–8, 151; business tax to VAT 69, 71–2, 108, 133, 142; legislation idea 113–14; sharing binary taxation system 134–5; tax reduction power 69–72; VAT transformation 112–22 VAT legislation 117–18 VAT Specific Receipt (Fapiao) 56,

117, 119 VAT transformation 69–70, 72–3; right to distribution 112–22