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The Crux of Fiscal and Tax Reform

Sep 01-2024   



In a recent media interview, Prof. Yao Yang of the NSD commented on some thorny issues in the current round of fiscal and tax reform and offered his advice. He is PKU Boya Distinguished Professor and Director of China Center for Economic Research (CCER).

 

Cigarettes and liquor make up a large portion of the consumption tax. If collection of this tax is devolved to local governments, provinces that are big producers of these two items will benefit enormously, particularly Yunnan, Guizhou, Sichuan, and Hunan, said Prof. Yao. This is on the condition that the tax is levied ex-factory, as per current practices. He noted that before the tax-distribution reform in 1994, the consumption tax had been collected by the local governments, which were in a relatively good fiscal shape. Returning the tax to the less economically developed provinces is a good thing, said Prof. Yao.

 

Another major move concerns adjusting the outlays and revenues of both the central government and the local governments. Currently, the local governments and the central government each collect half of the governmental recurring revenues. The latter then transfers a big share of the revenues to the former. In terms of expenditures, the local governments account for 85% of all governmental outlays; the central government, 15%. Prof. Yao believed that adjustment will most likely be made to social security, namely pension and medical care, with the central government taking charge of the overall control of a nationwide social security system. This will boost the making of a unified and more effective labor market across the country. Workers moving from one area to another for jobs will be saved from worries of getting cut off social security.

 

Reform to the relationships between the central government and the local governments is also highly important, said Prof. Yao. According to the Resolution of the Central Committee of the Communist Party of China on Further Deepening Reform Comprehensively to Advance Chinese Modernization, those that use government funds and credit must submit the entirety of their revenues to government budgeting. Prof. Yao said that this means debts will be included in budgeting, too. As such, the financing platforms of local governments will all be brought under budgetary management, which will be a giant step ahead, said Prof. Yao.

 

On the much-speculated property tax and capital gains tax, Prof. Yao said that they are unlikely to materialize soon given the poor market conditions. By contrast, he called for reforming the personal income tax by basing it on household income. This will show fairness to families where one spouse works and the other stays home to take care of the family. It will also incentivize childbearing and attract high-end talents to work in China. 

The Crux of Fiscal and Tax Reform

Sep 01-2024   



In a recent media interview, Prof. Yao Yang of the NSD commented on some thorny issues in the current round of fiscal and tax reform and offered his advice. He is PKU Boya Distinguished Professor and Director of China Center for Economic Research (CCER).

 

Cigarettes and liquor make up a large portion of the consumption tax. If collection of this tax is devolved to local governments, provinces that are big producers of these two items will benefit enormously, particularly Yunnan, Guizhou, Sichuan, and Hunan, said Prof. Yao. This is on the condition that the tax is levied ex-factory, as per current practices. He noted that before the tax-distribution reform in 1994, the consumption tax had been collected by the local governments, which were in a relatively good fiscal shape. Returning the tax to the less economically developed provinces is a good thing, said Prof. Yao.

 

Another major move concerns adjusting the outlays and revenues of both the central government and the local governments. Currently, the local governments and the central government each collect half of the governmental recurring revenues. The latter then transfers a big share of the revenues to the former. In terms of expenditures, the local governments account for 85% of all governmental outlays; the central government, 15%. Prof. Yao believed that adjustment will most likely be made to social security, namely pension and medical care, with the central government taking charge of the overall control of a nationwide social security system. This will boost the making of a unified and more effective labor market across the country. Workers moving from one area to another for jobs will be saved from worries of getting cut off social security.

 

Reform to the relationships between the central government and the local governments is also highly important, said Prof. Yao. According to the Resolution of the Central Committee of the Communist Party of China on Further Deepening Reform Comprehensively to Advance Chinese Modernization, those that use government funds and credit must submit the entirety of their revenues to government budgeting. Prof. Yao said that this means debts will be included in budgeting, too. As such, the financing platforms of local governments will all be brought under budgetary management, which will be a giant step ahead, said Prof. Yao.

 

On the much-speculated property tax and capital gains tax, Prof. Yao said that they are unlikely to materialize soon given the poor market conditions. By contrast, he called for reforming the personal income tax by basing it on household income. This will show fairness to families where one spouse works and the other stays home to take care of the family. It will also incentivize childbearing and attract high-end talents to work in China.