Tax Cuts are Not the Solution, Reforming the Taxation System is

Cover Issue 476, July 5
Translated by Tang Xiangyang
Original article:[Chinese]

The EO published a report on June 28 stating that China's fiscal revenue will exceed eight trillion yuan this year, ranking number-two worldwide. This report has led to a great deal of commentary and has triggered a public call for tax cuts. However, as far as we are concerned, whether it is tax cuts or how to implement them, we should first study the effects of the previous tax reduction policies our government has imposed.

Since our fiscal revenue is on the path to rank number two in the world, it is natural for our government to reduce taxes. In fact, the central government began reducing taxes in 2004 because the economy resumed growth in 2003. In 2004, northeast China began a pilot to transform value-added tax; in 2006, the central government announced the elimination of the agricultural tax. In subsequent years, China lifted the personal income tax threshold; reduced the amount of and eliminated for first time buyers the stock stamp tax, land value-added tax, contract tax and the purchasing tax on select vehicles. At the end of 2008, while the world financial crisis was affecting China, the central government began to implement tax cuts worth 500 billion yuan.

What are the effects of a series of tax reduction policies? The answer to this question in uncertain. For example, though farmers have been exempted from paying over 100 billion yuan, 120 yuan per farmer, since the elimination of the agricultural tax took effect, they still earn little from farming because of the huge gap between the price they must sell their agricultural products at and the costs of raw materials and industrial products they must purchase in order to farm. Instead of narrowing, the income gap between urban residents and their rural counterparts has been expanding in recent years.

The situation is similar in cities. Stimulated by the lowering of property taxes and the first-time buyer tax exemption, city dwellers are eager to buy homes. However, after the initial happiness over new property tax reduction policies, housing prices skyrocketed and the tax did not make a difference in terms of how much money buyers needed to purchase a home. In fact, due to soaring housing prices, buyers were worse off.

Who on earth has benefited from the tax cuts? In the agricultural market, it has been the individuals and groups who speculate using prices differences; In the property and vehicle market, it has been the property developers, and the car manufacturers and dealers who sell homes and cars at unreasonably high prices; and in the stock market, has been the inside traders and speculators.

Moreover, while tax payers have been allegedly enjoying favorable tax cuts, some local governments have altered their methods and have begun charging fees and imposing fines in place of taxes; the real burden of ordinary people has not decreased. The tax reduction policies of previous years have not produced much of an effect.

Therefore, we think a simple tax reduction policy will not necessarily work well and may even go against the original intention of policy makers. Without a complete reform of the taxation system and a clear separation of taxes and fees, a large scale tax reduction will only make the privileged class gain more while the ordinary people suffer more losses.

So, while reducing taxes, we should simultaneously promote a series of tax cutting policies and regulations. Many local governments are complaining that their revenue has been reduced because of tax reductions and are thus charging more fees, while officials are still travelling and treating people to dinners on public funds; waste does not weaken with tax cuts. How can we stop the expenditure of these so-called "administrative" fees? Chinese officials are always excusing themselves by claiming that the tax burden in China is not high, conveniently ignoring the fact that, because of China's inadequate social security system, the people have to pay for all health care, education and housing expenses. Therefore, taking these factors into consideration, the tax burden of Chinese people is not light. Rather than simply reducing taxes, it is better to transfer more capital into social security fields such as health care and retirement funds. The very nature of people will change if they have nothing to worry about. Now our government has gathered lots of money from the people, but we do not know where it has gone. Maybe it has been squandered by officials; such a problem will not be solved by reducing taxes.

Though the central government is determined to reduce taxes, some local governments, troubled by their lack of steady tax resources, are planning to impose a new real estate tax, without considering getting the approval of taxpayers. If all new taxes are imposed in this manner, all tax cuts will be paid back by the people sooner or later.

Therefore, tax reduction should be a long-term policy and we should simultaneously reform the taxation system. This process should be connected with the reform of the income distribution system and the plan to increase people's income, so that taxes will benefit the taxpayers in real terms. If so, even without tax cuts, taxpayers will be happy.

This article was edited by Rose Scobie