Download Tax Burden in China

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia
(ACESA)
Tax Burdens in China
Prof. Dashu Wang1
Peking University
I.
Introduction
Since the 1980s, many countries in the world have enacted or are considering tax
reforms. Although they have widely varying tax systems, some common themes –
most notably, the attempt to lower tax rates – run through most of these reforms.
There are abundant studies on cases of developed and developing countries in relation
to tax reform. Indeed, one of the economic objectives in many countries has been a
reduction in both personal as well as corporate tax rates along with the broadening of
the tax base. With the more recent interest in growth theory and alternative economic
policies that may result in economic growth, some economists have concentrated their
attention on the effect of tax reform on economic growth (see Engen and Skinner
[1999]). Indeed, the relationship between tax reform and economic growth has been a
widely addressed subject in growth literature.
1
Correspondence to:
Prof. Dashu Wang
School of Economics
Peking University
Beijing
P.R. CHINA
Email:
[email protected]
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Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia
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Research in this area began in developed countries, particularly within the US. Scully
(1988) shows that governmental institutional obstacles – e.g., substantial regulations,
restrictions on imports – along with taxes, hurt growth. This early research became
increasingly accepted as new refinements and extensions of the tax-growth literature
continued into the new century. In recent study (Gittell, Kaufman and Karson 2000),
the authors explore regional and state patterns in US economic change, concluding
that the role of geography itself is modest in explaining differentials but that other
factors, including state personal income taxes, play a more important role. A study by
Public Interest Institute of the US (2003) finds that states that exempted capital gains
had higher rates of economic growth than states with high capital gains taxes, and that
states that cut income taxes in the 1990s had high growth rates than states that raised
taxes.
The studies using US data are confirmed by numerous international studies. For
example, speaking of government taxation, a Spanish economist (de la Fuente 1997)
concludes that ‘there is evidence of a sizable negative externality effect on the level of
productivity’. Italian economists Tabellini and Daveri (1997) argue that the increase
in European unemployment and economic slowdown are caused by an excessively
high cost of labor, which is generated by, among other things, higher taxes on labor.
Using a complex general equilibrium model, German economist Heitger (1993) states
that for the most OECD countries, taxation turns out to be growth-retarding.
Fougere’s (1998) work on Canada shows adverse effects of taxes on growth, both
impacting on supply and demand. Scully (1996) concludes that New Zealand would
have to cut its taxes roughly in half to maximize its economic growth, and that ‘the
marginal cost of taxation … is $2.64 for each extra dollar of taxes collected’.
Tax reform also constitutes one of the core areas of recent economic reform programs
in developing countries. Chelliah (1975) has presented a comprehensive analysis of
taxation trend in developing countries. A number of researchers have presented some
case studies in this area. For example, Gordon (1990) discusses reforms of explicit
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and implicit taxes in China; McLure (1990) considers tax reform in an inflationary
environment in Colombia; Gillis (1990), looks at tax reform in Indonesia; Diaz (1990)
presents a historical overview of tax policy goals in Mexico.
Benson and Johnson (1986) show that taxes have lagged negative effects, with the
adverse impact being realized often after about three years. Some researchers
concentrate on the relationship between tax structure and the economic structure as
related to the level of economic development (see, Abizadeh [1979] and Chelliah
[1989]). Utilizing new tax burden indexes, Pillarisetti (2002) argues that a flat or zero
income tax creates pro-growth initiatives, reduces corruption and the size of informal
sectors and generates overall institutional improvements in low income countries.
Since 1994 when China reformed its tax system, its tax revenues have rapidly grown.
According to the statistics from the State Administration of Taxation (SAT), tax
revenues in 2002 were 1700 billion yuan, more than doubling those in 1997 (823
billion yuan), and the ratio of tax over GDP was 16.7%. In 1998-2002, tax revenues
accumulated to 6423 billion yuan, more than the total revenues in 1949-1997 by 661
billion yuan. In 2002, Jin Renqing, the then head of SAT, stated that the five years
from 1998 to 2002 were the best since the establishment of new China, because tax
revenues had rapidly grown, and the role of tax policy had functioned well.
It is beyond debate that China has enjoyed a rapid growth in tax revenues, but it is
controversial whether its tax burden is too heavy or not. On the one hand, An Tifu
(2002) and Gao Peiyong (2002) argue that the tax burden is too heavy; on the other
hand, Guo Wenxuan et al. (2002) hold that tax revenues are not adequate. The purpose
of this paper is to present a general picture of the tax burden in China and from the
tax/GDP ratio to analyze the factors which influence the tax burdens.
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II.
Tax Rates
The current tax structure in China was established in 1994. During that time, its tax
administration and collection were inefficient. In order to maintain enough revenue
the authorities deliberately set higher tax rates. This section presents examples in the
areas of important sectors in Chinese economy such as agriculture, industry, service,
individuals and business.
Most, if not all, countries in the world do not collect agricultural tax. It is interesting
to note that many countries levy a negative tax on agriculture, that is, they allocate
special funds to subsidize farmers. For example, the US and Japan spend a huge
quantity of money to subsidize agricultural producers. However, China is the
exception, along with a few other countries. According to the Regulations of
Agriculture Tax, the national average rate on agricultural products is 15.5% of the
yield in a normal year, and the currently implemented average rate is 8.8%.
The major source of tax revenue in China is Value Added Tax (VAT), and in 2001 it
made up 40% of the total. The VAT standard rate in China is 17%. However, it should
be noted because China’s VAT is a VAT with a production base, tax paid for fixed
assets is nondeductible. The rate of 17% in China is equal to 23% in other countries
where VAT with a consumption base is applied and tax paid for fixed-assets is
deductible. As a matter of fact, in most countries VAT are less than 20%. For example,
the US does not levy VAT, and its rate is zero; the VAT rate in Singapore is 3%; the
VAT rate in Japan is 5%; the VAT rate in Canada and Thailand is 7%; the VAT rate in
Australia, Korea, Philippines, Indonesia and Mexico 10%. It can be seen from Table I
that China’s VAT rate is one of the highest. Indeed, in the world there are only eight
countries with a VAT rate more than 22%, and China is one of them.
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Table I. VAT Standard Rates Higher Than 20%
Country
Rate %
Hungry
25
Denmark
25
Sweden
25
Slovak
25
Iceland
24.5%
Uruguay
24%
Czech Republic
23%
China
23%
Norway
22%
Poland
22%
Source: Chen Zhimei (2000)
Corporate income tax in China is charged at the rate of 33%. However, the allowable
deductions for corporate tax are too limited. For example, only 800 yuan is deductible
as wage for each employee every month. If an employee’s monthly salary is 2000
yuan, only 800 is exempted from tax, and his or her employer has to pay tax for the
remaining, 1200 yuan. Even worse, the employee has to pay personal income tax for
the total 2000 yuan. In this regard there is a double taxation.
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Table II. Personal Income Tax Rates Schedule
Monthly taxable income (wages and salary)
RMB yuan
Rate（%）
1 Income of 500 or less
5
2 That part of income in excess of 500 to 2000
10
3 That part of income in excess of 2000 to 5000
15
4 That part of income in excess of 5000 to 20000
20
5 That part of income in excess of 20000 to 40000
25
6 That part of income in excess of 40000 to 60000
30
7 That part of income in excess of 60000 to 80000
35
8 That part of income in excess of 80000 to 100000
40
9 That part of income in excess of 100000
45
It is interesting to note that personal tax is calculated on monthly income. Because
income fluctuates widely each month, it is easy for taxpayers to go up to higher tax
grades. The limited exemptions create another problem. Taxable income is monthly
income after lump-sum deduction of 800 yuan and certain items (at present including
only basic pension insurance premium, medical insurance premium, unemployment
insurance premium and reserve funds for housing) are ruled as expenses, and other
deductions are forbidden. Personal income tax applies the nine-grade progressive rates
as shown in Table II above.
Personal income tax is progressive, but it is not the major source of tax revenue, since
it constituted only 6% of the total revenue in 2002. The other taxes in China are not
progressive. Therefore we have reason to believe that in China taxes are proportional
taxes, not progressive taxes.
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Table III. Elasticity of tax and Tax-GDP Ratio
Year
(Calculated at current prices)
1995
1996
1997
1998
1999
2000
Growth rate of GDP（%） 25.1
16.1
9.7
5.2
4.6
8.9
Growth rate of tax（%）
17.8
14.4
19.2
12.5
15.3
17.7
Elasticity of tax
0.71
0.89
1.98
2.40
3.33
1.99
Tax-GDP ratio（%）
10.3
10.2
11.1
11.8
13.0
14.1
Sources: Statistical Yearbook 2002; An Tifu (2002)
Theoretically speaking, most taxes are proportional, so in normal circumstances, the
growth in tax revenues should be lower than GDP growth, that is, the elasticity of tax
is less than one. On the contrary, since 1997, tax growth has surpassed GDP growth,
and its elasticity has been greater than one, and in 1999 as high as 3.33. It is
interesting to note that in a proportional tax structure, tax revenue is progressive. This
indicates that the tax growth is abnormal. The fact that tax burden and elasticity of tax
are rising when GDP growth is slowing indicates that the recent tax policy in China is
a policy of tax increase. For example, Ni Hongri suggests that the rapid growth of tax
revenue over recent years is a result of a policy of tax increase (2002).
III.
Driving Forces for Tax Growth
The current tax bases and statutory rates in China are decided on the efficiency of tax
collection in the early-1990s. During that time, the effective rates were low, because
there were many exemptions and concessions in tax policy. In order to maintain the
levels of tax revenues at that time, it is understandable that China deliberately set
wider tax bases and higher tax rates. Since then, the efficiency of tax collection has
been dramatically enhanced thanks to the development of computer technology and
the Internet, and the enforcement efforts by tax authorities and tax collectors at all
levels.
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In 1998, tax authorities made more efforts to collect taxes. Some taxpayers with more
than certain amount of taxable income (5 million yuan for VAT or consumption tax, 1
million yuan for business tax, and 0.1 million yuan for personal income tax) began to
be targeted by the tax office. In 2001 “Golden Tax Project” was established and put
into operation to ensure stringent administration. In 2002, a system of invoice rewards
was employed to involve more citizens in the supervision of taxpayers.
Jin Renqing (2002) analyzes three elements which are attributable to the rapid growth
in tax revenues since 1998. The first element is the economic development: tax
growth is synchronized with GDP growth. With the proactive fiscal policy, stable
monetary policy and industrial restructuring policy being implemented, China enjoyed
a sustained economic development. The sustained growth and improvement of
business efficiency generated a rich tax source. From 1998 to 2001, 55.2% of the
increase in tax revenues was a result of economic development.
The second element is the change in tax policies, especially in the exemptions and
concessions policy: the expiration (because they are due) of preferential regimes such
as tax rebate for the excessive part of the tax burden to Chinese-foreign equity joint
ventures, Chinese-foreign contractual joint ventures, foreign-capital enterprises, and
enterprises affiliated with schools; and the resumption of a levy of income tax on the
interest of savings deposits. The increase in this regard accounts for 19.2% of the total
increase.
The third element is the enforcement effort. Excluding revenue from the first and
second elements, the remainder is because the tax authorities made more efforts to
collect tax, and this contributes 25.6% to the growth. Indeed, the strengthening of tax
administration at different levels promoted the increase in tax revenue. The significant
policies made by the central government were carried out to the letter by tax
authorities at different levels. The principle of “strengthening administration, blocking
loopholes, penalizing corruption and rectifying arrears” was strictly upheld. The
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guiding thought of “administering tax in accordance with law and managing
administrators’ teams in line with regulations” was scrupulously observed. The
observance of fiscal disciplines and the rectification of tax rules were strengthened.
The supervision of law enforcement and administrative power was enhanced. All
these factors gave rise to a marked improvement in the quality and efficiency of tax
collection, which generated approximately a quarter of revenue increase. (see Table
IV)
Table IV. Contributors to Tax Growth
Year Tax
Incremental
revenue
over
previous
RMB billion yuan
Contribution
%
from
%
from
taxation
development
policy
from
%
enforcement
effort
year
1998
9 09
1 00
32
31.6
24
23.5
45
44.9
1999
10 31
1 22
82
66.1
0
0
41
33.8
2000
12 66
2 35
1 55
66.1
50
21.1
30
12.8
2001
15 17
2 51
1 23
49.0
63
25.1
65
25.9
Total
47 24
7 08
3 91
55.2
1 36
19.2
1 81
25.6
Source: Jin Renqing (2002)
In addition to the aforementioned, departments of industry and commerce, the
customs, foreign trade and economics, public security and the courts have cooperated
with tax authorities in mobilizing financial resources and contributed to the successful
rectification of tax arrears, a crackdown on tax evasion, fraud, and the refusal to pay
tax and the maintenance of tax administration order.
The Research Center of Public Policy at Shanghai University of Finance and
Economics analyzes factors contributing to the rapid growth in tax revenues and
suggests that the most important element is enforcement and management (2003).
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Gao Peiyong believes that tax collection is enhanced by ‘at least ten percentage
points’ (2002). Indeed, given the efficiency of current method of tax collection, tax
rates set ten years ago are higher than they now should be.
IV.
Tax, GDP and GDP Per Capita
Table V. GDP and tax/GDP Ratio
in US dollars
Tax
revenue
(in Tax/GD
Per-capita
P
GDP
GDP (in billion) billion)
United States
9837
2912
0.296
$34100
Japan
4842
1312
0.271
$35620
Germany
1873
708
0.378
$25120
United Kingdom
1415
529
0.374
$24430
France
1294
591
0.457
$24090
China
1080
152
0.141
$840
Italy
1074
451
0.42
$20160
Canada
688
246
0.358
$21130
Mexico
575
106
0.185
$5070
Spain
559
197
0.352
$15080
Korea
457
119
0.261
$8910
India
457
55
0.12
$450
Australia
390
123
0.315
$20240
Netherlands
365
151
0.414
$24970
Switzerland
240
86
0.357
$38140
Sweden
227
118
0.52
$27140
Demark
162
64
0.394
$32280
Hong Kong
163
29
0.178
$25920
61
7
0.11
$440
Pakistan
Source: International Statistics Yearbook (2002)
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It can be seen from Table V that China’s GDP ranks 6th in the world, and that China’s
tax revenue maintains a similar position, ranked 9th in the world.
Tax is paid by people, so when analyzing the tax burden, we should take population
into account.
Tax revenue/ GDP= Tax revenue/ Population/Population/GDP=Tax revenue per
capita/GDP per capita
Superficially, tax revenue per capita is in inverse proportion to GDP per capita. But
closer scrutiny reveals that tax burden cannot surpass the stages of economic
development. Nations with a higher tax burden are those with higher GDP per capita,
such as the US, Japan and Sweden. When analyzing the effect of economic
development on the tax structure of developing countries, Chelliah (1989) states
that, … ‘since the process of development would give rise to new potential tax bases
and also generates the capacity and conditions for collecting the more difficult forms
of taxation, the evolution of the tax structure would be influenced strongly, even if not
governed, by the changes in the economy.’
It should be noted that tax revenue is positively related to economic development. A
number of researchers (e.g., Bahl [1971] and Chelliah [1975 & 1989] suggest that the
higher the income, the degree of openness, the level and degree of industrialization
and the level of urbanization, the higher the overall tax ratio would be. As far as a
country is concerned, if it enjoys a high level of economic development and GDP, its
tax base is large, and it is easy for the government to collect more revenue. Therefore,
tax burdens in developed countries are higher than those in developing countries.
According to some statistics, Tax/GDP ratios in advanced countries are above 30%,
while those in less advanced countries are more often than not below 20%.
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Table VI. Per-capita GDP and Finance Revenue/GDP
Per-capita
GDP GDP
(US$)
2000
Finance revenue
Finance
(US$ billion) (US$ billion)
revenue/GDP
Hong Kong
25920
163
28.5
0.175
Taiwan
14087
309
58.7
0.19
Korea
8910
457
118.8
0.26
Malaysia
3380
90
16.4
0.182
Thailand
2000
122
18.5
0.152
Philippines
1040
75
11.5
0.153
China
840
1080
165.2
0.153
Indonesia
570
153
24.5
0.16
India
450
457
60.3
0.132
Pakistan
440
61
10.4
0.17
Lao
290
2
0.2
0.124
Cambodia
260
3
0.3
0.102
Nepal
240
5
1
0.113
Sources: Asian Development Bank (2002); International Statistics Yearbook (2002)
Although China is a country with a lower middle income, its finance revenue is the
largest in the developing world. In 2000, its finance revenue/GDP ratio was 15%, and
in 2002 it rose to 18.2%, maintaining a higher position in developing countries.
V. Tax and Economies of Scale
In the 1970s and 1980s, some OECD and IMF economists conducted a regression of
tax burdens and jumped to the conclusion that there is no significant correlation
between tax ratio and per-capita GDP. After careful study, however, it can be found
that this conclusion is a rash one. In fact, the countries that do not correlate to the
norm are the US, Japan and Sweden. The US and Japan are the most developed
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nations with large populations in the world, and their tax/GDP ratios are very low by
the average OECD standard; on the other hand, Sweden with a small population has
the highest tax-GDP ratio in the world, and not surprisingly, it maintains a very high
tax burden.
Like the management of enterprises, when managing the economy, a country also
faces an issue of economies of scale. Indeed, the major part of the national machinery
consists of fixed costs, for example, a central government, a defense system, a police
system, a legal system, and so on. If a country has a large population, more people can
share the fixed costs, and the average cost will be reduced; in other words, there are
more people to contribute to the tax revenue. It comes as no surprise that its tax/GDP
ratio is small. Large nations usually enjoy a low tax/GDP ratio. In the United States,
for example, it is beyond debate that its quantity of tax revenue is number one in the
world, but its tax/GDP ratio is the lowest among OECD countries because of its large
population. On the other hand, nations with the highest tax/GDP ratio are more often
than not medium- or small-sized, because fewer people share the tax burden.
China’s tax revenue ranks the first among developing countries and its tax/GDP ratio
is relatively high, even approaching that of some developed countries. As you know,
however, its population is also the number one in the world. If the economies of
national scale is taken into account, China’s tax/GDP ratio should be at a low level.
VI. Tax and Public Goods
Tax revenue/ population is per-capita tax revenue, and its corresponding concept is
per-capita public goods, because tax is the cost for the government to provide public
goods. As far as private goods are concerned, its aggregate demand curve is calculated
by horizontal summation, that is, the market demand at any given price involves
summing the horizontal distance between each of the private demand curves and the
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vertical axis at that price. However, public goods are different, and the willingness to
pay by the public is reflected by its aggregate demand curve which is generated by
vertical summation of the individual demand curves. If the quantity of public goods
characterized by nonrivalness and nonexcludability is fixed, the more the population,
the less the cost to produce the per-capita public goods. It is due to the economies of
national scale that more people can share the fixed amount of public goods.
The quantity and quality of public goods provided by Chinese governments are far
less than those provided in advanced countries. For a long time, there is a two-tier
system which separates China into urban and rural areas, and as a result 0.8 billion
farmers are excluded from some - if not most - public goods enjoyed by their urban
counterparts. For example, rural infrastructure is funded by farmers themselves, and
governments only subsidize some of it; in some areas farmers financially support their
children for the 9-year compulsory education; farmers cannot access unemployment
benefits; farmers are not covered by Medicare.
As far as people in urban areas are concerned, the quantity of public goods is
decreasing though the tax revenue is increasing by more than 20% annually. For
example, the coverage of Medicare is narrowing, and more and more people have to
pay their medical insurance premium; governments stopped providing housing; tuition
fees paid by students are increasing; in some areas, corporations have to provide
education for the children of their employees.
According to the Niskanen (1971), a bureaucrat’s objective is to maximize his or her
budget. However, a fundamental problem is that in so doing it may be inefficient.
Indeed, many governments pursue economic development strategies aimed at
promoting growth. Unfortunately, many studies find that government spending is an
en ineffective approach to economic growth. Some quantitative studies sport this pint
of view. For example, Feldstein (1997) concludes that ‘the deadweight burden caused
by incremental taxation … may exceed one dollar of revenue raised, making the cost
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of incremental government spending more than two dollars for each dollar of
government spending”. Cashin’s (1995) study shows that each one percent increase in
taxes as a percent of total output lowers output per worker by about two percent. He
observes positive effects of spending from taxes, but typically the positive spending
effects are only about one-half as large as the negative tax effect, which is about the
same thing as saying that private sector spending is twice as productive as public
sector outlays. According Ma Shuanyou’s (2001) calculation, in China 1 yuan increase
in tax revenue will decrease GDP by 2.20-2.55 yuan.
In developed countries, governments collect tax revenues and return them mainly by
providing the public with public goods. However, the Chinese government returns
them by two means: public goods and public investment goods. Unfortunately, the
public investment in China is inefficient because of government failure, and the loss
from the investment is at the expense of taxpayers. It is possible that the increase in
public investment reduces private investment, that is, there is a crowding-out. In fact,
what the government can do is to remedy the market defects; it cannot replace the
market mechanism. According to a report in China’s Economic Times on March 25,
2003, Lou Jiwei, a Deputy Treasurer, states that ‘the central government should not,
and cannot, increase investment in less advanced areas by the use of deficits for a long
term to maintain their growth’. Indeed, too much public investment has come to an
end. Apart from its by-products, public investment leads to an over-reliance on the
planning mechanism at the expense of the market mechanism. If the government
invests too much and the short-termed policy of government investment becomes
long-term, the market mechanism cannot function well, and this is contradictory to the
objective of establishing a market economy. Because of heavy tax burdens, enterprises
as main investors and participants in markets lack the motivation and capability to
invest and to innovate. Thus it is difficult to stimulate private investment and
consumption.
Even worse, the public investment is inefficient and huge quantities of funds were
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wasted as a result. By the end of 2001, Chinese governments invested 8600 projects
funded by Treasury bonds with the value of 2600 billion yuan. In 2002, another 150
billion yuan were issued. According to Wu Zhongnan’s calculation, in the process of
construction funded by treasury bonds, a project changes hands several times between
contractors, and sometimes 60% of the funds have been wasted until the project
reaches the builder (2003). Indeed, governments are not good at picking economic
winners and losers and sometimes they waste taxpayer money on risky economic
development schemes. Guo Wenxuan et al. suggest that the efficiency of government
investment is lower than private investment, and that only 30% of the projects are
efficient, that is to say, 70% are unprofitable (2003).
The Chinese government declares that the fiscal policy in China is proactive. As a
matter of fact, the “proactive” fiscal policy is one-sided, because only the spending
policy is proactive, and the tax policy is not. To make the fiscal policy more
“proactive” and aimed at stimulating the economy, the policy should be a “proactive”
policy of two-sided, that is to say, the tax burdens should be reduced.
Tax is the main source for government revenues and its basic objective is to meet the
demand for public expenditures. Provided that the functions of government are
decided, the levels of tax burdens should be determined by financial needs which can
enable the government to function and provide public goods. However, the problems
in China are that governmental departments and agencies are too large, and the
employees of governments funded by the Treasury are too numerous. According to
statistics, the ratios of government officials paid by the Treasury over ordinary people
in the Chinese history are as follows.
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VII. The Ratio of Officials/ the Population
Time
The ratio of officials/ the population
Han Dynasty
1: 945
Tang Dynasty
1:500
The period of Kangxi
1:91
The early 1950s
1:91
1978
1:50
Now
1:28
Source: Dong Shaoguang (2003)
It can be seen from the Table VII that there is one government official out of 28
persons. Indeed, there are too many officials in China. Currently, from the center to
provinces, to cities and to counties, there are five bureaucrat systems: the Party
Committee, the Party Discipline Committee, government, Parliament, and the
People’s Political Consultative Conference.
An enterprise should reduce costs as a way to enhance productivity; similarly,
governments as a special sector (public sector) should also enhance efficiency and
reduce the costs of the supply of public goods, that is, to decrease the tax burdens of
individuals and enterprises.
VII. Three Indicators to Describe Tax Burdens
For the purposes of public finance comparison, economists usually use tax/GDP ratio
to describe a country’s tax burden. Tax/GDP ratio is computed by taking the total tax
payment for a particular year as a fraction or percentage of the gross domestic product
(GDP) for that year. As suggested by Messere (1997), however, although the tax/GDP
ratio is the only way to compare tax revenues between countries, it cannot provide a
clear indicator to describe the levels of influence on the economy by the government,
Wang, D., ‘Tax Burdens in China’.
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nor describe the levels of transfer from private to public sectors. Especially in China,
because there are several ways for governments to collect revenues, the ratio of
tax/GDP alone cannot describe the tax burdens. Based on the government statistics,
An Tifu (2002) calculated three ratios:
1.Tax revenue over GDP, denoted by T0. It is computed by taking the total tax
payment as a percentage of GDP for a given year. For example, the tax/GDP ratio in
Table V is T0.
2. Finance revenue over GDP, denoted by T1. The finance revenue is budgetary
revenue, including tax revenue (T0), and revenue generated by public assets and
revenue from selling of public assets (TB). T1=T0+TB. For Example, the ratio of
finance revenue/GDP in Table VI is T1.
3. Government revenue over GDP, denoted by T2. The government revenue includes
not only the budgetary revenue (T1), but also extra budgetary revenue, fees,
surcharges and other non-tax receipts collected by central, provincial and local
governments (TG). T2=T1+TG.
According to Zhang Xuwei and Zhang Xuqiang (2000), the extra budgetary revenue
and fees collected by all the governments accounted for 6% and 8% of GDP,
respectively, and in some years, they are equal to T0. Among the three ratios, T2
reflects the financial burden of the overall economy. Therefore, T2 is more
comprehensive than T0 and T1.
Wang, D., ‘Tax Burdens in China’.
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Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia
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Table VIII.
Year
Three Tax Burdens in China
GDP
in billion yuan
Tax
Finance
Government T0 (%)
revenue
revenue
revenue
T1（%） T2（%）
1994
46759.4
5126.9
5218.1
7691.1
11.0
11.2
16.4
1995
58478.1
6038.0
6242.2
9661.2
10.3
10.7
16.5
1996
67884.6
6909.8
7408.0
13128.0
10.2
10.9
19.3
1997
74462.6
8234.0
8651.1
15645.1
11.1
11.6
21.0
1998
78345.2
9262.8
9876.0
17599.0
11.8
12.6
22.5
1999
82067.4
10682.6
11444.1
19784.9
13.0
13.9
24.1
2000
89403.5
12581
13395
22460.0
14.1
15.0
25.1
2001
95933
15301
16368
15.9
17.1
2002
100 000
17 004
18 194
16.7
18.2
26%
Sources: An Tifu (2002); Statistical Yearbook 2003
It can be seen from the Table that for the last nine years, T2 has been greater than T0
by 5-10 percentage points. In 2000, for example, T0 was 14.1%, T1 was 15%, but T2
was 25.1%. In 2002 T0 was 16.7%., T1 was 18.2% and I guess T2 was 26%. In fact
this estimation is conservative, and some economists suggested that T2 was greater
than 30%. As estimated by Gao Peiyong (2002), for example, the T2 in 2000 was
34.4%.
Since the last tax reform, tax/GDP ratio has maintained an upward momentum. Death
and taxes may be inevitable, but a persistent rise in tax levels may not be, judging by
recent evidence. Indeed, very few countries have consistently maintained a trend of
rising tax ratios since 1995. As a matter of fact, since the late-1990s, many countries
in the world have enacted or are considering tax cuts.
Forbes measures tax burdens by the use of indices of tax burden (the higher the index,
the heavy the tax burden). Its conclusion is that China with an index of 154.5 is a
Wang, D., ‘Tax Burdens in China’.
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heavily-taxed nation, ranking the third among 30 countries (next only to France and
Belgium). Although economic growth is slowing down, the tax burden in China is
rising. From 1994 to 2002, T0 rose from11.0% to 16.7%; T1 rose from 11.2% to
18.2%; T2 rose from 16.4 to 26%.
VIII. Tax and Growth
There is mounting evidence that taxes have negative effects on economic growth.
Higher taxes exert a negative impact on both demand and supply.
On the one hand, high taxes on goods and service push up prices and thus reduce
consumption. As observed by Ladd and Bradbury (1988), high property taxes lower
property values, causing significant loss of real wealth. This may leads to a reduction
in consumption due to a wealth effect. Personal income taxes reduce taxpayers’
disposal income and decrease personal spending. All these will reduce demand for
goods and service.
On the other hand, high taxes on personal income also force up labor costs, as
employers have to compensate for the tax burden. It is understandable that taxes
reduce job opportunities and sometimes lead to higher unemployment. Moreover, high
corporate taxes reduce the profit retained by companies and thus deter business from
investing. This will have an adverse effect on supply.
Because of the negative impact of taxes on economic growth, many economists
suggest cutting taxes. For example, Hakkio, Rush and Schmidt (1996) conclude that
‘lowering taxes significantly raises economic growth’. High taxes discourage
economic growth. Balanced budget reductions in taxes on wages and profits exert
favorable effects on employment and growth.
Taxes are a price imposed on different activities. When the price is high, it
Wang, D., ‘Tax Burdens in China’.
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discourages the activity being taxed. Therefore lower taxes on work, savings and
investment encourage additional economic growth. It is accepted that tax cuts help the
economy by improving incentives to earn more and build wealth.
One of the reasons why the authorities are reluctant to cut taxes is their worry about
reduction in tax revenue. As a matter of fact, one noteworthy feature of good tax
reform is that the actual reduction in tax revenue is always smaller than suggested by
static revenue-estimation models because lower tax rates encourage taxpayers to work
more, save more and invest more. The economy grows, national income increases and
the tax base expands. As a result, tax cuts will generate a large enough increase in
taxable income to offset the revenue loss associated with lower tax rates. Therefore,
we have reason to believe that tax cuts can lead to a revenue feedback caused by
better economic performance, especially in the long-run.
IX. Conclusion and Suggestion
There is a tax premature in China, since its tax burden is heavy. China’s tax revenue
ranks 9th in the world. As a developing country with the largest population, its
tax/GDP ratio is high. If non-tax revenue is taken into account, its ratio of government
revenue over GDP is very high in the context of the rest of the world.
International experiences confirm the basic proposition that higher taxes have adverse
effects on economic growth. If tax burden in China is too heavy, it would be a good
idea for the Chinese government to cut tax with the purpose of promoting economic
growth. As a matter of fact, there is room for China to cut its taxes in agriculture,
industry and services as well as in corporate and personal income.
Agriculture in most countries is free of tax, so the agriculture tax in China should be
abolished. The VAT with a production base should be changed into a VAT with a
consumption base, that is, the VAT paid for the purchase of fixed-assets should be
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Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia
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deductible for the next stage in the areas of production or circulation. The basic rate of
VAT should also be reduced.
As far as the corporate tax is concerned, its rate should be reduced in order to relieve
enterprises from heavy tax burdens and encourage them to invest. There are some
proposals to do so, for example, a reduction of eight percentage points from 33% to
25% seems reasonable.
There are very few countries in the world where monthly income is used as a tax base,
therefore, personal income tax should be applied to yearly income instead of monthly
income. The exemption of 800 yuan was set in 1980, when 800 yuan was regarded as
high income. Now the average income is more than 1200 yuan, so the exemption
should be raised.
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