As China continues to adopt the pro-active fiscal policy, the issue of tax reduction and how to conduct the cuts in the tax structure has become a focal point.
Some experts believe that big rises in tax revenues in recent years may neutralize the effects of a pro-active fiscal policy and they are calling for tax cuts to facilitate the expansion of domestic demand.
Against the global trend of tax reforms characterized by tax cuts, many believe that the significant growth of tax revenues in the past years is abnormal.
All the above concerns call for an objective and thorough study of the issue.
In fact, tax reforms in developed countries combine policies on several fronts, including enlarging the tax base, lowering the tax rate, canceling exemptions, and tightening supervision.
All these four aspects are inter-related.
For example, a broadened tax base should be the prerequisite for cutting taxes.
Otherwise, tax revenues cannot go up with economic growth, which will destroy the dynamic equilibrium between finance, tax income and economy.
Thus tax reforms in any countries should be conducted on the basis of sound budgets, increased tax revenues and steady economic growth.
For China, an across-the-board tax cut is impractical and a structural tax reform is the only solution.
At present, compared with foreign countries, the proportion of the national tax revenues in the gross domestic product (GDP) is relatively small.
However, major corporate tax items are almost a burden.
For example, the nominal value-added tax rate is 17 per cent. But unlike in Western countries where the tax tagged on the fixed assets can be deducted from the total tax on value-added, China taxes both as a whole. Thus, the real tax rate of value-added is around 23 per cent, higher than the average of below 20 per cent in Western countries.
Domestic companies pay corporate income tax at 33 per cent, but the same tax imposed on German companies is 25 per cent, and 30 per cent in Japan. The United States adopts a four-grade progressive tax formula, that is 15 per cent, 18 per cent, 25 per cent and 33 per cent.
If the low economic returns of domestic enterprises are taken into consideration, it is right to say that the real tax falls heavily on domestic enterprises, not to mention various fees and payments that are syphoned off.
Then it is obvious that the current tax system demands adjustments and improvements.
Some essential but new tax items such as heritage tax, environmental protection tax, and social security tax should be added, and the current natural resources tax, value-added tax and consumption tax should be adjusted.
For enterprises, taxes on domestic and foreign enterprises should gradually be unified and policies that give pre-tax deductions on several items should be introduced to relieve the enterprises' tax burdens and encourage innovation.
Besides, the large-scale increase in tax revenues in recent years is not based on the introduction of new tax items and a tax rate hike.
Analysis of the growth of tax income last year indicates that the major reasons are sustained economic growth and the better performance of enterprises, which helped build a solid and strong tax base.
The initial estimate was that this factor directly brought a tax increase of 120 billion yuan (US$14.5 billion), contributing 50 per cent of the total tax increase.
Another reason is the tax-for-fee reforms, which contribute around 70 billion yuan (US$8.46 billion) -- almost 30 per cent of the total growth in tax collected.
Moreover, with strengthened taxation and supervision efforts, an extra 50 billion yuan (US$6.04 billion) in tax was collected last year.
Though less visible, the government has employed policies equivalent to tax cuts in many fields.
For example, when enterprises pay corporate income tax, they can enjoy a reduction in the tax base equal to 40 per cent of their investment in technology innovation and home-made equipment.
In order to foster economic development in western areas, enterprises in the area enjoy a number of tax exemptions and reduction policies.
On the whole, the heavy burden on enterprises is to a larger extent caused by various kinds of fees levied under different names. It is the non-tax burdens that throttle their growth and undermine their profits.
Thus, we should not lump the issue of tax cuts with alleviating financial burdens of enterprises.
The experiences in tax reform across the world show that the adjustment and optimization of any tax system should conform with local situations and cannot be achieved overnight.
Take individual income tax for example. It is premature to introduce radical changes to the current tax system before the introduction of effective measures to calculate and monitor individual incomes, and the solution of related technical issues like creation of a new calculation model.
Even though relevant designs of the new tax structure and laws are in place, it still takes time to refashion the current system, allowing necessary preparation and correction.
To encourage investment and raise the competitive edge of domestic companies, structural tax reform is inevitable, but should not be achieved at the price of an overall decrease in tax revenues.
The author is the director of the Institute of Finance and Trade Economics with the Chinese Academy of Social Sciences.
(China Daily April 2002)