Tax Reforms under the Principle of Transparency, Efficiency and Equity

By+HU+JIANGYUN

CHINA has been comprehensively deepening re- forms since the convening last November of the Third Plenary Session of the 18th CPC Central Committee. Tax reforms affect the interests of each citizen and every enterprise， and are inextricable from economic development and social stability.

As one of the worlds main emerging economies， China operates a fiscal system under the principle of high fiscal revenues and high fiscal expenditure， thus ensuring economic growth and social stability. From 2003 to 2012， Chinas fiscal revenue grew from RMB 2.17 trillion to RMB 11.73 trillion， with annual growth of more than 10 percent. The international financial crisis of 2009 saw growth of 11.72 percent， and was a period when Chinas fiscal expenditure rose from RMB 2.46 trillion to RMB 12.60 trillion. Growth had earlier hit 23.15 percent in 2007 and 25.74 percent in 2008， and growth of Chinas fiscal revenue and fiscal expenditure far exceeded that of its GDP and per capita GDP. From 2004 to 2012， the average growth of fiscal revenue surpassed that of GDP by 9.98 percentage points and that of per capita GDP by 10.58 percentage points. The average growth of fiscal expenditure， meanwhile， outstripped that of GDP by 9.15 percentage points and that of per capita GDP by 9.75 percentage points.

In the context of globalization， to deepen tax reforms China needs to stick to the principle of transparency， efficiency and equity. At present， the main problems are： non-transparency of fiscal expenditure， possible abuse of tax revenue， and non-public fiscal and taxation system policy-making processes which impede the participation of interested parties.

Transparency must be promoted in tax reforms to ensure that each taxpayer and every taxpaying enterprise is clear about the intended use of revenue. Interested parties should hence participate in and support these reforms.

Tax reform entails greater efficiency. A sound tax system guarantees rational tax rates， promotes economic growth and expands social wealth. Chinas tax collection and management system is less than perfect； there is a considerable discrepancy between the nominal and effective rates of taxation， and an efficient match between fiscal expenditure and tax revenue is yet to be achieved. According to the October 2013 edition of the IMF Fiscal Monitor， there was a downtrend from 2010 to 2013 in Chinas effective individual income tax rate and tax base， while the corporate income tax rate remained unchanged. There was meanwhile a downtrend in the effective VAT rate but an upturn in the tax base. The social security outlay tax base， meanwhile， increased， and there was an upturn in the property tax rate and tax base. Most developed economies， however， showed increases in both the tax rate and tax base of individual income tax. Deepening tax reform hence entails promoting efficiency， especially consistency between the nominal and effective rates of taxation.

The Tax Misery Index is a yardstick for measuring tax burdens. It is calculated according to a countrys corporate and individual tax rates， wealth tax rate， sales tax and value-added tax rate， and employer and employee social security contributions. Forbes has published the Tax Misery & Reform Index chart for 65 countries and regions. Having increased seven percentage points over the previous year， Chinas index in 2009 was 159 percent， second only to Frances 167.9 percent. Qatar， the United Arab Emirates （UAE） and Chinas Hong Kong， meanwhile， trumped other economies by retaining the friendliest tax climate. Chinas index comprised 25 percent corporate income tax， 45 percent individual income tax， and 17 percent sales tax and VAT – three numerical values that remained unchanged from the previous year. The misery index for employer social security was 49 percent – 4.5 percent higher than the previous year– and that for employee social security was 23 percent –2.5 percent higher than the previous year. Although there have been disputes over the ranking results， the warning“correct any mistakes you have made and guard against any you have not” is nonetheless good advice for reforms to Chinas tax system. China has many types of tax， and frequently changes its tax policy because it is far from user-friendly. Countries and regions with the friendliest tax climate have fewer tax types， and the tax burden on their citizens is lighter. For example， Qatar levies only corporate income tax， and the UAE only social security tax.

Tax reforms also need to take equity into account to safeguard taxation consistency throughout all social strata. Domestic enterprises are compared to foreign-funded enterprises， the medium- and low-income strata to the high-income stratum， especially celebrities and wealthy merchants， and taxpayers generally are compared to tax dodgers. All seek fair taxation. No matter in developed or emerging economies， before or since the international financial crisis， the interests of the majority should be protected. The structure of disadvantaged groups， the middle class and the wealthy should configure as a spindle rather than a dumbbell shape. This requires tax reforms to improve the fiscal and taxation system， adjust social structure and promote social stability and sound economic development. The table below， The Ratio of Revenue Proportion to Income Proportion of the Top 1% Income Group in Certain Developed Economies and Emerging Economies， shows ratios in the U.S.， France， Japan， Brazil and South Africa of more than two， while those in Italy， Germany， China and the U.K. are below two. China ranks between the U.K. and Germany. This implies that China has ample development space for tax reform.

While deepening its tax reforms， China should also increase public spending. This will guarantee sound and sustainable economic growth， enhance social welfare and also enhance Chinas international status. Chinas ratio of fiscal expenditure to GDP lags behind that of the U.S and the EU. Based on IMF statistics， from 2000 to 2012 Chinas ratio of fiscal expenditure to GDP increased from 17.05 percent to 24.86 percent. That in Germany， however， was more than 43 percent， that in the U.S. was 32 percent， and that in the U.K. and Japan was 33 percent. China clearly has some catching up to do.