Academic journal article Public Finance and Management

Taxing Choices for Ecnomic Growth with Social Justice and Environmental Protection in the People's Republic of China

Academic journal article Public Finance and Management

Taxing Choices for Ecnomic Growth with Social Justice and Environmental Protection in the People's Republic of China

Article excerpt

1. INTRODUCTION

Since initiating economic liberalization, and subsequent economic and fiscal reforms in support of a so-called, "socialist market economy", the Peoples' Republic of China (PRC) had experienced a sustained record of double-digit economic growth over the past three decades. This sustained growth has resulted in a record of economic growth and poverty alleviation unparalleled in the economic history of the world. In the coming decades, the PRC faces major challenges arising from global economic slowdown, ageing population, environmental degradation, fallouts from rapid urbanization, and serious income inequalities across individuals and regions and inequalities in opportunity across the nation. The reform of the fiscal system is potentially a powerful instrument to alleviate some of the emerging concerns. Since undertaking major fiscal reforms in 1994, the PRC has followed a consistent strategy of reforming the fiscal system in small but measured steps. This strategy embodies the wisdom of Chinese philosophers who argued for "feeling the stones while crossing the river". As a result of this strategy, the PRC has made significant progress in modernizing the fiscal system to cope with the demands of a dynamic economy. This modernization drive in recent years has followed the OECD model of having greater reliance on income taxes especially corporate income taxes as opposed to the PRC reliance in the past on mostly consumption taxation. This shift is likely to erode PRC's international competitiveness. Further, during the past several decades emphasis on growth led to a relative neglect of environmental and social equity concerns. Thus the tax reform agenda remains unfinished as growth, uncoordinated urban-rural development, environment and social justice concerns require a re-examination of the existing tax system to deal with these emerging concerns. This recognit ion was highlighted by the communiqué issued on 12 November 2013 at the conclusion of Third Plenum by the 18th Central Committee of Communist Party of the PRC. The communiqué announced establishment of leading committee on comprehensive reforms to design and implement the broad based tax and nontax reforms. This paper presents pathways to such reforms to strengthen efficiency and equity of the tax system while stimulating growth and preserving the environment.

The paper is organized as follows. Section 2 presents an introductory overview of the PRC tax system. This is followed in section 3 by a discussion of the existing structure of central taxes and pathways to reform. Section 4 presents an analysis of local public finance. A final section provides concluding remarks.

2. AN INTRODUCTORY OVERVIEW OF TAX SYSTEM IN THE PRC

The Central Government's Ministry of Finance is the sole agency responsible for tax policy and the State Tax Administration is responsible for collection and administration of centralized and shared taxes through its deconcentrated offices throughout the nation. Tax collection and administration of subnational taxes and charges are the responsibility of the province and exercised by provincial and local finance bureaus. Provincial and local finance and administration bureaus have dual reporting responsibilities to central and provincial/local governments and collect taxes on behalf of all orders of governments. There is also the practice of "revenue tasks" which entail central government setting a revenue collection target for the provinces and the provinces playing a similar role for setting local government revenue targets. Since 1994, legislative powers have been centralized for all revenue sources. Thus local governments have no ability to vary the base or rate of any tax without central approval. For most local taxes, the central government does allow limited discretion in setting tax rates to local governments by specifying a permitted range for such rates. Further productive bases such as VAT, enterprise/corporate and personal income taxes have been centralized thereby creating greater fiscal space for the central government to support national objectives regarding common economic union, regional development and economic integration of lagging regions. …

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