China’s Tax Burden: A Mysterious Lead Sinker

(Beijing)—In much of the world, admiration and envy are common reactions to China’s consistently high GDP growth rates.

But closer to home, the Chinese public’s admiration of their own economic miracle is shadowed by tax increases that consistently outstrip GDP expansion rates.

Dissatisfaction is building over the fact that the overall tax burden has been climbing year after year in China. Indeed, the tax growth rate exceeded the nation’s GDP rise by 50 percent between 1997 and 2011, based on 1997 price levels, according to a Caixin analysis.

The total levy for all government taxpayers in China climbed to 35.8 percent of nationwide income this year—higher than in some developed countries—based on fiscal revenue data released by the central government.

Indeed, the tax rate has risen a full tick every year since topping the 30 percent mark in 2007.

Anecdotal evidence suggests objections over taxes factored into votes cast against a central government budget plan during March sessions of the National People’s Congress. Opposed were 483 voters, or about 15 percent of the representatives. Another 131 abstained.

The budget passed, but NPC member opposition to the fiscal 2012 spending plan reflected the highest level of anti-budget sentiment seen at the congress in at least five years.

Meanwhile, at the Chinese People’s Political Consultative Conference that convened in Beijing in tandem with the NPC sessions, member Li Jiange was among the few willing to speak out against tax trends.

“Whether from the perspective of crisis response or systemic reform, restructuring, or clean government, large-scale and substantial tax cuts are not only imperative but within our power,” Li said.

Steep and Opaque

Neither the government nor independent institutions in China closely track or accurately assess tax levels. This lack of authoritative data has led to gaps between government and private sector estimates. The situation has moreover confounded international agencies trying to compare China and the rest of the world.

A simple way to seek truth in the government’s numbers can involve calculating taxes based on official revenue reports.

According to the central government, nationwide fiscal revenues for all levels of government across the country last year totaled 10.4 trillion yuan. Major fees paid to governments brought in 4.1 trillion yuan, while payments to China’s five social security funds provided another 2.4 trillion yuan.

This 16.9 trillion yuan in combined revenues equaled nearly 36 percent of the country’s GDP in 2011, based on Caixin’s calculations.

The World Bank, which used Chinese government and International Monetary Fund data for its calculations, said China’s tax burden in 2010 was about 10 percent of GDP.

Any differences in fiscal evaluations inside China are rooted in incomplete government revenue statistics and a lack of transparency. Government non-tax revenues are not included in the fiscal budget, for example, nor are numerous other inputs ranging from school fees to gray-zone collections by government institutions.

Some experts say if all hidden costs were considered, China’s tax burden would exceed 40 percent.

The public also pays to support the government’s administrative monopoly protection for products and services provided by state-owned companies such as oil firms, telecoms and electric utilities.

Tax system reforms were enacted by China’s government in 1994, just as fiscal revenues started taking off with the country’s soaring economy. On average, these revenues have grown much faster than the economy or budget plans.

Between 1996 and 2011, for example, budgeted national fiscal revenue growth was supposed to be an average 10.4 percent. But in fact the result hit 19 percent—far higher than the nominal GDP growth rate during the period of around 13 percent.

Cuts, Sort of

Faced with rising anti-tax pressure, government officials have pledged since last year to cut taxes. Several proposals have been introduced and a few enacted.

In September, the standard personal income tax deduction was raised to 3,500 yuan a year. Authorities called it a tax cut, although some experts said it is not a real cut as the standard should be adjusted regularly to fit consumer prices.

Calls for reducing the tax burden on small and medium-sized enterprises (SMEs) as well as family businesses have drawn attention among advocates of structural tax reform at the Ministry of Finance. Thus, the ministry decided in October that it would exempt family businesses’ stamp duty for loan contracts from financial institutions starting November 1 until October 31, 2014.

But the family business lending sector represents a small portion of what the central bank said were 54.8 trillion yuan in loans issued last year, including 7.6 trillion yuan borrowed by SMEs.

Another tax relief policy for the nation’s small, private businesses raised thresholds for both value-added tax and business tax to 5,000 yuan to 20,000 yuan per month from current 2,000 yuan to 5,000 yuan and 1,000 yuan to 5,000 yuan respectively. The change took effect in November.

On the surface, these changes appear significant. The State Administration for Industry and Commerce counted more than 34 million private business with 71 million employees in 2010. But in many parts of the country, these thresholds were already higher than 5,000 yuan.

And the final say on these threshold rules will be set by local tax authorities, which often base collections on business volumes and have the power to adjust figures to achieve levy goals.

Another major reform project announced by the government is designed to reduce the tax burden on Shanghai companies by replacing the business tax with a value-added tax. At its core, the pilot project would convert a 3 percent business tax for the transportation industry firms to an 11 percent VAT. A portion of the service industry will be subject to a 6 percent VAT rather than a business tax of 5 percent.

Since the pilot began early this year, Shanghai transportation companies have reported a higher tax burden—claims central government and Shanghai tax authorities confirmed.

What’s happening in Shanghai is a common phenomenon since local authorities, not the central government, ultimately determine tax collections. Tax-reduction policies do not set mandatory targets but are more like soft constraints on local tax bureaus that can make their own decisions.

Meanwhile, central authorities have set a number of quality-of-life improvement goals for 2012, the final year for the current government, that are expected to require significant revenues increases over the next few months.

Finance Minister Xie Xuren, for example, has promised to put his agency squarely behind efforts to improve the quality of life for China’s citizens.

But it’s a tough task: The budgeted revenue growth rate for the 2012 fiscal year is up 1.5 percentage points from last year to 9.5 percent, but the forecast GDP growth rate is 7.5 percent, down 0.5 points from last year.

One quality-of-life goal is to build affordable housing nationwide. Plans call for adding at least 5 million units to the nationwide stock and starting construction on at least another 7 million units.

A goal for nationwide education spending is for expenditures to equal 4 percent of GDP, or 2.2 trillion yuan. That would mean an increase of more than 580 billion yuan over last year’s outlay.

By the end of the year, the government also plans to impose full coverage for new pension insurance systems for rural and urban residents, and raise basic pensions for urban retirees.

How will the government raise the necessary cash? New revenues could be tapped, administrative spending could be shifted to social programs, or the government could implement efficiencies while directing its savings elsewhere. Indeed, for the past two years the central government has called for controlling administrative expense growth.

Building projects could be scaled back, too. This would mean cutting construction budgets and diverting funds into social programs—something many critics of the government’s budget policies have long called for.

But the 2012 government budget plan actually calls for a significant increase in construction outlays. This year’s budget was set at 800 billion yuan, down 50 billion yuan from the previous year, but the fund set for central government’s construction projects showed no reduction. Moreover, the excessive fiscal income last year provided more than 100 billion yuan additional funds that can be used this year.

Another potential source of social funds is the state-owned company sector. State-owned enterprises could be forced to turn over their profits to public coffers. So far, they have not.

In general, social programs are low man on the totem pole in the state-owned sector.

Social security funds are slated to receive only about 5 billion yuan, or less than 6 percent, of the 87.5 billion yuan budgeted as operating expenditures for state-owned company capital improvements this year. Most of the money is to be spent on economic growth-oriented projects such as industrial restructuring, enterprise subsidies, technological innovation and foreign investment.

Wang Changyong and Xing Yun are Caixin staff reporters.

Taxes, Economic Growth