The order and focus of fiscal and tax reform
The recent publishing of the book Deepening Fiscal and Tax System Reform (hereinafter referred to as Reform) by finance minister Lou Jiwei mainly explains the following 3 aspects of the new round of fiscal and tax reform, namely: Budget system reform, tax reform and readjustment of the relationship between the central government and the local governments.
The major framework of budget system reform has been basically established. The only problem left is implementation. The other two aspects still waiting to be determined are the future focus of fiscal and tax reform.
From the perspective of the current situation, one of the crucial characteristics of this round of fiscal and tax reform hereof is the tendency towards stable increase of tax rate. To this end, considering the relatively low macro tax burden of China, the financial ministry expresses its opinion that direct tax burden can be uplifted by way of setting up such items as house duties without reducing indirect tax burden. Apart from that, the ministry also claims the issuing environmental tariff and the boosting of the transition of personal income tax to comprehensive levying.
The other focus of fiscal and tax reform is the adjustment of the relationship between the central government and the local governments. The finance ministry tends to enlarge the financial power of the central government, such as the levying of taxes as turnover tax and personal income tax all by the central government whereas the local counterparts are mainly in charge of property taxes (including the newly established building taxes). What is interesting is that Lou Jiwei, by taking history as a mirror, points out that whenever the central government is with huge financial power, the times are peaceful and prosperous, and turbulent vice versa.
Fundamentally speaking, the fiscal and taxation system reform shall first adjust the relationship between tax payers and the government. That is to clearly define the rights and power of the government and require it not to unnecessarily interfere with economic society. The second point is to adjust the relationship between governments. Yet the current situation in China goes just in the opposite direction.
Despite mentioning “defining the relationship between government and market” in Reform, it was only a skimming over. More of the focus is on how the cake made by tax payers would be divided by the central and local governments. When encouraging and requiring the local governments to take property tax as the major source of taxes, the book never responds to the fact that the tax burdens are too much, but public services are too few.
Although the book defines the relationship between governments and the market, it does not provide details for how or the subjects. In fact, as it has been clear in most people’s hearts, the main body defining the relationship hereof is not the finance ministry, but NPC at all levels. What governments and the finance departments fulfill is just their execution of responsibilities. The key issue defining the relationship hereof is the power enlargement at all levels. Looked at from the point hereof, the current round of reform has evaded the problem of fiscal and taxation system at the very central core.
The division of the individual authority power can only be divided after the definition of the governments’ responsibilities is done. The tax types can then be classified as the next step. The definition order of the relationship between the central and local governments shall be first the authority of affairs and the then the financial power. Although the central government has always been emphasizing that China, as a country of single system, shall focus on collecting financial power, which is with reason. Yet it may not make so much sense that the issuing of preferential tax by the local governments is forbidden by the finance ministry in order to suppress the flow of capitals and talents among regions and reduce the choices of them on where to live and invest by claiming that the preferential taxes are inefficient migration and bad for harmonious unification. Actually, it is just because of such fiscal and tax system that local governments are more willing to push away people coming from the outside by making such restrictions as limiting vehicles coming from foreign provinces and cities or setting up barriers for population of non-residents on compulsory education, which at the same time destroys the unification of China’s market. The above-mentioned disadvantages are what shall be focused more on in the current round of fiscal and tax reform.
