How real is the tax burden

The debate on the tax burden is growing among Chinese as they become more conscious about being taxpayers. A recent Chinese Academy of Social Sciences report has added vigor to that debate by saying that "the per capita tax burden in China is nearly 10,000 yuan ($1,633)".[Special coverage]

Perhaps taxpayers' misconception about "per capita tax burden" is to blame for the renewed debate. "Per capita tax burden" is the same as "average fiscal revenue". Academics and government officials are known to use the concept of "macro tax burden", which takes into account the ratio of total government revenue in a country's GDP. But the concept of "per capita tax burden" is relatively new to us.

The difference in the expressions of "per capita tax burden" and "average fiscal revenue" can be significant. Although the two terms refer to the same thing economically, people could derive different meanings from them. If we quantify the tax burden to every single citizen, people will dislike it. But they will be more than happy to accept an increase in average fiscal revenue.

The "macro tax burden" index can be more meaningful while measuring a country's tax burden, because the ratio of fiscal revenue accounting for GDP can better reflect the concentration ratio of government financial resources in a specific economic structure, and manifest certain fiscal and taxation systems. It also can analyze the characteristics of an economy's financial allocation and the government's role in controlling its resources for administration.

If we compare this index with the international level, going by the International Monetary Fund's standards, China's current ratio is less than 35 percent, which is the average of developing countries but much lower than that of advanced economies. This means China's macro tax burden is not that high and there is little sense in introducing a "per capita tax" index by quantifying the macro tax burden to individuals. For one thing, it can easily cause misunderstandings among the public. In China, less than 10 percent of the government's total tax comes directly from individuals, with companies paying more than 90 percent. This is because the tax system is aimed at redistributing social wealth from better-off groups to the poorer ones.

A deeper analysis of the tax burden, however, will show that not all the amount companies pay as taxes comes from their own pockets. Except for the corporate income tax, companies pass on the other taxes such as value-added tax and business tax to parties down the supply/delivery chain or ultimately to consumers. Such a tax is called "indirect tax". In China, indirect tax makes up the main part of the tax system, and it is the key to understanding the tax burden issue.

Since indirect tax accounts for nearly 70 percent of the total tax revenue in China, mass consumers are actually the main group contributing to the national treasury, which is a special attribute that separates China from other economies.

The main reason why people feel the tax burden is heavy in China is that most of the consumers are in the low- and middle-income groups with higher Engel coefficient, which means they spend a high proportion of their income on food, shelter and clothing. In such circumstances, they will certainly not like to pay more taxes. And once they realize that they pay indirect tax each time they buy food and other products, they may get angry even at the mention of paying additional tax.

China's rapid economic growth has contributed to the widening income divide and could create new problems in the near future. To redress people's grievance and reduce the their tax burden, the government should properly and gradually increase direct taxes. Until people's tax burden is alleviated, the government has to maintain the macro tax burden level. When more public revenue comes from direct tax paid by people with higher income, the economic interests transferred to the national treasury will enable the public to enjoy more government welfare. As a result, people will be less reluctant to pay taxes.

Adjusting the proportion of direct tax can also be a good way of meeting the requirements of modern national governance and fiscal and taxation systems, allowing more people to share the achievements of the reform and opening-up.

The term, "per capita tax burden" is thus misleading, although the issue of "tax burden" cannot be avoided in today's society. The key to lessening the tax pressure on the public is neither reducing the macro tax burden nor introducing a per capita index but judiciously redistributing the tax pressure and social wealth in society.

As the Decisions on Major Issues Concerning Comprehensively Deepening Reforms issued by the Third Plenum of the 18th Central Committee of the Communist Party of China says, we should "gradually increase the proportion of direct tax" and the government should integrate the tax reform into the process of optimizing income distribution, and eventually promote the overall restructuring and modernization of governance.

The author Jia Kang is director of the Research Institute of Fiscal Science under the Ministry of Finance.