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Calls for Tax and Budget Reform Echoed at Congresses

From cover story, issue no 358, March 10th 2008
Translated by Liu Peng
Original Article:

Calls for lower taxes dominated the on-going top legislative meetings in Beijing, with representatives saying that Chinese should enjoy more of the fruits of China's bourgeoning economic growth.

Members of the 11th National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC), known as the two sessions (两会) in Chinese and scheduled between March 3 and 18, have proposed various means to reduce the tax burdens for individuals and businesses. 

Liu Yonghao, president of the New Hope Group, which focuses on agricultural production and strategic investment, expressed hope for further tax cuts and lower fees for the agricultural products processing industry.  

"Due to the rising prices of food items like pork, many people think that we have made big money, but that is not the case," Liu, once listed as the richest man in China, told the reporters.  

Another CPPCC member Zong Qinghou, who is also the president of Wahaha Group, China's leading beverage producer, also proposed tax cuts; but he targeted the individual income tax, calling for a raise in the taxable threshold from the current 2,000 yuan to 5,000 yuan.  

Meanwhile, the CPPCC's No. 1 Proposal too highlighted the need to discuss tax policy in the capital markets. 

The chorus of demand came at a time when China's state treasury's income had reached 5.1 trillion yuan and the size of its GDP ascended to the fourth largest in the world last year.

Looking for Dividends
The 2007 government work report revealed that the state treasury's income had exceeded the budgeted value by 723.9 billion yuan, a remarkable 31% growth over the previous year's. 

By comparison, the per capita disposable income of urban citizens nationwide only increased by 12.2% and 9.5% for rural residents.   

A recent study by the National Statistics Bureau also confirmed that the growth rate of income for the state and the corporate sector had risen much faster than the income of individuals in recent years.  

Economic scholar Zhou Tianyong believed the state revenues in 2007 were higher than the published figure, which omitted non-budgeted incomes, and estimated that the value actually reached 9 trillion yuan, or 36% of the country's gross national product last year.  

Official government data said that the state revenues made up 20.68% of GDP last year. As the state's wealth has been accumulating rapidly in recent years, public grumbling about taxation has become more prominent.  

On the eve of the two sessions' opening, the Ministry of Finance published a statement on its website claiming that taxation was not the main driver behind robust growth rate of the state revenue, which had gone up faster than the country's GDP. 

Having said that, the ministry had last year unexpectedly raised the stamp duty to 3% from 1%. As a result, the stamp duty income alone contributed 200.5 billion yuan to the state coffers, a remarkable increase of 1017.4% or eleventh times more than that in 2006. Moreover, a 5% interest tax was still imposed on individual savings, despite the fact that CPI had exceeded 7%. 

Even though the government had in the past two years raised the individual income tax threshold twice, the public has still expressed that the bar was set way too low.

Who moves my cheese?
The pressure of excessive taxations was in the public's imagination, some argued. Jia Kang, CPPCC member and director of finance research center under the Ministry of Finance, claimed that Chinese' tax burden was relatively small compared to other developing countries.  

He argued that, except for the stamp duty, the government had in recent years cut more taxes than it had raised. He provided examples of integrating corporate income taxes, repealing agricultural taxes and amending the value-added tax. 

To Wang Qiang, a native of Shanghai, the issue was not whether the government taxed more or less: "The government asks us to dutifully file of income tax returns, yet, isn't it also the duty of the government to make public the detailed earnings and expenditures of the state? Where has the money gone?" 

According to government reports, total state revenues over the past five years amounted to 17 trillion yuan, with more than 5 trillion yuan (31.68% of total revenues) invested in education, health care, social security, employment and other areas. In contrast, the administration expenditures constituted between 17% and 20% of total revenue. 

CPPCC member Bao Yujun said: "At present, there's no transparency in how state revenues are spent. At the NPC, the premier would say this area needed to be strengthened, so, the government would allocate this much funds; or that area needed attention, so, that much funds were made available." 

"But what is the mechanism that establishes what and where needed money? The public has the rights to know," Bao added. 

Between 2001 and 2006, the contribution of consumption and investment to China's economic growth had declined from 50% to 39.2%, and 50.1% to 41.3% respectively; while the contribution of net exports had gone up from -0.1% to 19.5%.

Wei Jie, professor at the economic management school at Tsinghua University, believed that encouraging domestic demand and consumption would be the key to further economic reform.

To accomplish that, he said, would require the government to cut its revenues and increase the income levels of the people. He added the government should also invest more in social security, infrastructural facilities, education and health care projects; so as to free its people from shouldering too much costs and have extra in their pockets for other consumption. 

He also suggested that the individual income tax threshold be raised to at least 5,000 yuan in order to fuel domestic demand and consumption. 

The list of tax rebates proposed by the members of NPC and CPPCC included the raising the individual income tax threshold, lowering individual income tax rates, imposing stamp duties on sellers only and tax exemptions for agriculture product processing businesses.  

In addition, some members also proposed to provide subsidies to low-income groups. Li Daokui, CPPCC member and director of the finance department of the economic management school at Tsinghua University, suggested that the subsidy should be adjusted to food prices and distributed systematically. 

He was against a one-off policy but asked for the establishment of a stable and long-term mechanism to ensure everyone shared the fruits of economic development. 

Cai Dingjian, director of the constitutional research institute at the China University of Political Science and Law, said public finance reform should lead to more investment in developing public goods, be more transparent, and allow for more public participation in deciding the budget.  

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