Tax and fee reform

This year's government work report shows that China's GDP in 2008 was up 9% from the year before. The total government revenue comprises over 20% of GDP and is up 19.5% from the year before. Some economists have shown concern about the big proportion of China's government revenue to GDP.

Xie Guozhong, Independent Economist

China’s household sector is quite poor. The income level is relatively low and the wealth level is very low while the government is very rich.

A: In your proposal, you say assessing the proportion of the government income accounting for the GDP is key. What are your thoughts?

X: Many people argue we should reduce the government spending in total. I think we should restructure. First, for the social security, the portion is too small. I suggest we should increase this, at least in 1 or 2 years or 3 years and increases more than 10%. And we should reduce the other part of the government revenue below, at least 25%. In the range of 20% to 25%, I think, is better than now, but now, at least, more than 25%. I suggest the government could, the first, the government should do the legislature policy. I suggest, without the People’s Congress, maybe in the central level, or provincial level, even municipal level, even county level. Without the People’s Congress’approval, no government department could collect the fees. This means every regulation for fee collecting must be published and must be reported to the People’s Congress. And a good example is for the farmers. You know, for the agriculture tax, in the reform of this process, I took part in this process. This first step is to abolish all the fees and put some fees, money, into the agriculture tax. So agriculture tax rise is 3%, and we eliminate some fees and make the agricultures tax rise to 7%. Even you look at this, you say,“Oh, the tax rate is higher.”, but actually, low. They eliminate many unauthorized fees. Not anybody can charge the fees from farmers. I think this is a very good example. We should enlarge this to cover all the fees, not only the fees for farmers.

In this year's government work report, Premier Wen said that the government will carry out structural tax reduction and promote reform of taxes and fees. The government will reduce tax burdens on enterprises and individuals by a variety of means such as tax cuts, rebates and exemptions to encourage enterprise investment and consumer spending.

X: First, the government takes some measures to transfer the fee into tax. Just as we have the road maintenance fee, all 6 kind of the fees. We abolished this, and we call it the consumption tax in the petroleum to replace this. I think, in the future, we should continue to transfer some fees into tax. This is one of the part of this, and another part is unauthorized the fees. Even some local government issued the document to charge the fees. I think we must eliminate, abolish this. We are not authorizing them to charge the fees. I think this is the two cases of this. First is transfer the fee in to the tax, another is abolish these fees.

Narrow the gap between the rich and the poor

Under the market-oriented economy, the gap between the rich and the poor has been broadened. The income gap may suppress spending as the wealthy tend to invest rather than consume while poor people don't have much purchasing power.

A: We talked a little bit before about adjusting the income for the poor. What can you suggest the government do to help improve that?

X: The first priority is the farmers. For the farmers, they got a job in the urban, in the cities, more than 100 million. So, at least, more than 500 million people, they live in the countryside, and they get the money from the production of the agriculture goods. If they can not get the revenue more and more, how can you increase the consumption? We have two measures, to help them, to earn more money. One is the government give them subsidies, for their seeds, for the agriculture machine, for the fertilizer, something like that. Our government gives them subsidies. They reduce their cost, they sell their goods, and they earn more money. Another way is the government increases the price of the agriculture goods. I think we should increase the price as the main measure to increase the farmers’revenue. For example, in last year, for the pork, the price of the pork, very short time, the price of the pork increased very fast, and government said,“Oh, we should reduce the price.”and gave some subsidies for the pig-raising family, and the pork price has declined step by step. But at that time, some people argue we should keep the price of the pork higher, just like that. And the farmer will raise the pigs, because the price is higher. And you can use the money to subsidize the poor people. So, you can save the money and keep the farmers increase revenue and poor people, their ordinary life is keep the same, not affected by this. These are two arguments. I prefer the increase of price of the agriculture goods.

Calls have been growing for the government to raise the 2000 Yuan personal income tax threshold to stimulate domestic consumption. However, China’s vice minister of finance said in the Two Sessions that the time is not ripe now for the government to raise the threshold.

A: Do you think that will require raising the taxes for the wealthy and maybe for the middle class; and then eliminating them for the lower class; or are you talking about just balancing the system a little bit more?

X: For the rich people, I don’t think increase their personal income tax is a good way. We have 9 level to pay this, and marginal rise increase from 5% to 45%. I think the gap is too narrow. We should enlarge this and reduce the level. Maybe 3 levels or even 4 levels are enough. So, for the rich people, I don’t think the personal income tax for them is very important to the government. I think a good personal income tax will help the poor people. This is a purpose of this, but another purpose is, a good personal income tax will absorb, keep the rich people to live in here happily. They think the tax burden is not very heavy, so I’m willing to pay this, and I stay here and I enjoy the life here. So, the personal income tax has 2 purposes. Not only for the poor people, even for the rich people. I think a good personal income tax should keep the rich people living here.

A: Well, someone suggested expending the tax categories; do you think that would work?

X: It depends. For the personal income tax, there are many suggestions, how to reform the personal income tax. Many people suggested to have a comprehensive personal income tax to let you merge some categories income as a whole and to deducted your spending. But I don’t think this is very good to China now. For example, some people argued,“I supported my parents, so the personal income tax should deduct the money.”But in China, how can you calculate how much you support your parent? And maybe they have 3 children, how can you calculate, you pay maybe 30% and he pay maybe 50%, how do you calculate this? Even some parents, they have some salaries. Some people working in the city, and their parents in the countryside. They are farmers. They gave them money every month. And even their brothers, even their brothers’children, they study in the school, and they have no money. They are farmers. How can you calculate this? I don’t think this is very clever.

Consumer spending has been declining at some level for the past decade, according to reports, regardless of the status of the economy. But a clear long term plan to boost confidence and level out imbalances in incomes across the country, some say, is just what China needs to stimulate spending and better insulate the nation from further global financial problems.