Calls for further tax cuts gaining wider support

(Ecns.cn) – As the end of 2011 approaches, many reputable Chinese economists and entrepreneurs have delivered keynote speeches in programs aired on China Central Television (CCTV), four of whom happened to mention a topic that the public is keeping a close eye on – tax cuts.

The speakers were Liu Mingkang, chair of the China Banking Regulatory Commission (CBRC) and chair of the Board of Directors of the People's Bank of China (PBOC); Liu Chuanzhi, Lenovo Group's founder and chairman; Fan Gang, one of China's most prominent economists and leading active reform advocates; and Chen Zhiwu, an expert on finance theory, securities valuation, emerging markets, and China's economy and capital markets.

According to all four of them, China's tax burden is currently at a higher international level, a fact that is not in line with the official statement that the country's overall tax burden – when measured using a tax to gross domestic product (GDP) ratio – is not heavy compared to the global average, reported China Economic Weekly.

Tax misery in China?

As the issue of taxation affects every individual in society, such a disparity between personal feelings and government opinion is deeply troubling – and the contradiction is only intensifying.

On December 11, 2011, the Ministry of Finance released the latest statistics on China's fiscal revenue in the first 11 months of this year, which show that about 80% of the 9.73 trillion yuan ($1.54) came from taxes, a large increase compared with the same period in 2010.

The statistics have not eased the debate over the country's macro tax burden, but have instead reminded the public of China's miserable tax ranking by Forbes Magazine in 2009.

In the Forbes survey, the Chinese mainland ranked second in a list of countries or regions with the harshest tax regimes in the world, following France.

The government made immediate response to the issue by clarifying China's tax burden with statistics. Officials from the Ministry of Finance pointed out that tax "misery" differs from tax "burden," as the index only aims to reflect the feelings of taxpayers but not the tax burden itself, which is not based on an internationally recognized system of objective indicators.

According to the Ministry, in 2009, China's macro tax burden was 25.3% using statistical standards created by the International Monetary Fund (IMF), much lower than the average international level of 36.4%. However, the public wasn't buying it.

Some Chinese scholars didn't agree with the opinion either. Zhou Tianyong, professor and deputy director of research at the Central Party School, said China's tax-to-GDP ratio is in fact about 34% (after including taxes collected from transfer of state-owned land-use rights and revenue from social insurance funds), making it significantly higher than the advised ratio of between 18% and 25% for developing countries in the world.

Zhou noted that there are many other fees charged by departments other than the Tax Bureau and Customs, which are not in the name of taxation, including those charged by the Industrial and Commercial Bureau, the Environmental Protection Agency, the Urban Management Department, the Quality and Technical Supervision Bureau and other departments.

Such factors have obviously added fuel to the flames of tax misery. Moreover, if the imbalance between China's macro tax burden and quality of public services continues to rise, the public will likely grow even more doubtful on this issue, regardless of official statistics.

Shifting of taxation

Though the country has raised the threshold at which individuals must pay income tax from 2,000 yuan to 3,500 yuan since September 1 (a policy that has saved wage earners and small businesses billions of yuan), it has not stopped the debate over the macro tax burden.

According to a report on China's taxation released by the Central University of Finance and Economics earlier this year, unreasonable government fiscal expenditure has led to the disproportion between public welfare and the tax burden.

In China, there are 19 categories of taxation, including consumption tax, business tax, personal income tax, stamp tax, value added tax, property tax, customs duty, and others.

According to Gao Peiyong, a researcher at the Chinese Academy of Social Sciences (CASS), under China's tax system 70% of tax is collected indirectly by means of value added tax, consumption tax and business tax, while the other 30% is direct, such as personal income tax.

Everyone knows that enterprises are the most important taxpayers in the country, and nearly 90% of the tax is collected from them. However, the enterprises always find ways to shift the tax burden to consumers by setting higher commodity prices. The more circulation links they involve, the higher the frequency of shifting taxation there will be, noted Gao.

The shifting normally leads to two major consequences – unfair transactions and surges in prices. In this regard, the rich are paying taxes at the same level as the poor, which is quite unreasonable, added Gao.

Widening tax reforms

Currently, China's tax system is geared mainly towards subsidizing production for exports and real estate investment, causing an imbalance that cannot be neglected.

For example, in 2010, the amount of value-added tax was about 39.5% of total tax revenue, while consumption tax was 9.9% and business tax was 14.4%, according to China Economic Weekly.

On this issue, determining a reasonable tax burden level seems very important. Liu Mingkang proposed that the government should widen policy-related and structural tax cuts to more areas, as the country is now economically capable of gradually easing the tax burden to a larger degree.

According to Gao Peiyong, tax cuts are expected to play a more important part than fiscal expenditures in sustaining economic growth next year.

On December 14, 2011, the annual Central Economic Work Conference said more tax reforms are on the 2012 agenda as part of China's "positive fiscal policies," which are intended to restructure and balance the economy, according to China Daily.

The plan involves five tax reforms: a pilot program for the value-added tax; one for the property tax; adjusting the scope and structure of the consumption tax; expanding resource tax reform and studying the feasibility of an environmental tax.