China's Fiscal Policy

Discretionary Approaches and Operation Design

Gao Peiyong

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781138899575
• eBook ISBN: 9781317480853
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

As an important macroeconomic variant, the fiscal revenue and expenditure can influence the operation of the whole economic and social activities by changing the existing GDP distribution pattern, affecting the consumption and investment of enterprises and people, etc. Thus, fiscal policy has always been a primary instrument of macroeconomic regulation.

This book imports fiscal policy into the framework of macroeconomic analysis and through the analysis of the former, it unfolds the major changes of China's macroeconomic operation in the past 20 years. This book begins with China's rejoining the General Agreement on Tariffs and Trade (GATT) in the 1990s which enabled China to deepen the reform and join the international market finally. It elaborates on the challenges China's taxation would be confronted with after rejoining the GATT, including the decrease of tax revenue and higher requirements for tax reform. Then this book combs China's fiscal policies under various economic situations chronologically–tax policy under the background of deflation, proactive fiscal policy at the beginning of 21st century, macroeconomic policy options facing a complicated and volatile economy, etc. How to deal with the ¡°new normal¡± of development China's economy has entered is also addressed.

This book will appeal to scholars and students of economics and China's economic studies.

1
China’s taxation after rejoining the GATT

China has applied to rejoin the General Agreement on Tariffs and Trade (GATT) for eight years. According to the agreement made in the Uruguay Round negotiations, the date to rejoin the GATT is coming. Rejoining the GATT means that, by deepening reform and opening wider to the outside world, the Chinese economy will become in line with international standards gradually and China will finally join the international market. With such background, like in other national economic fields, taxation will face an unprecedented challenge.

At the initial stage of rejoining the GATT, tax revenue in China might be impacted greatly

The economic theorists generally agree on the significance of China’s rejoining the GATT. On condition of international market integration, as a developing country, China has to participate in international competition and division to promote domestic economic prosperity. Rejoining the GATT – which is the biggest international trade organization in the world – helps to explore international markets, attract foreign investment, absorb foreign advanced science and technology, learn managerial experience, pick up information, deepen economic system reform and create conditions for economic take-off in China. Moreover, in the long term, the rapid national economic growth helps to cultivate and increase tax funds by driving robust growth of tax revenue.

Nevertheless, almost everything has advantages and disadvantages. The measure which is good in the long term may be bad in the short term. For China’s tax revenue, an unignorable fact is that, at the initial stage of rejoining the GATT, some problems causing the decrease of tax revenue have to be solved.

• Reducing tariffs is the core of GATT, and is also China’s important duty after rejoining the GATT. Since the GATT went into effect in 1948, it has held eight rounds of multilateral trade negotiation aiming to reduce tariffs. By the first seven rounds, the average tariff had decreased from 40 percent to 4–5 percent in western developed countries, and to 13–15 percent in developing countries. The Uruguay Round, the eighth round of negotiations which was completed just now, reached the agreement to further cut off
• tariff rates. The average tariff rate of industrial and agricultural products decreases 40 percent in six years, and the tariff rate of industrial products decreased so sharply that some products are even tax-free. As it is well known that the tariff rate in China is high, the import tariff of some products such as electronic, chemical and medical products is even 130–200 percent. In order to rejoin the GATT, China unilaterally cut off the tariffs involving more than 3000 products in October 1991, and on December 31, 1992 (it involved 225 products at the first time, and 3371 products at the second time), which decreased the tariff rate from 22.3 percent to about 15 percent. Even so, the average tariff rate in China is still higher than the average level of developing countries. The implementation of the Uruguay Round negotiations will further deepen this gap. Obviously, according to it, further decreasing the average tariff rate is the “fee to rejoin GATT” we have to bear. Once it is carried out, the average tariff rate will decrease below 10 percent, and it will impact the tariff in total more than 20 billion Yuan, which accounts for about 6.5 percent of the total tax revenue. If the increase of tax funds brought in by the increase of import products in short time can’t counteract the impact of lowering average tariff rate, the tariff revenue will decrease.
• With the development of socialist construction, a relatively complete industrial system has been established gradually in China; thereinto, some departments of it have made top achievements in the world. However, the industrial technology is comparatively low in general. Nowadays, many industries are protected by maintaining a high tariff rate above 100 percent, and even administrative restrictions on import products. Once it rejoins the GATT, the tariff will decrease, the administrative restriction will be weakened, and the intellectual property will be protected; thus, many industries have to compete with import products. In the long term, it helps the industrial structural adjustment and technical transformation, and helps to improve the level of production and enhance the competitiveness in international markets, as well as promotes the enterprise mechanism transformation and establishment of a modern enterprise system in China. However, in the short term, it will impact the industrial system enjoying long-term tariff protection and non-tariff barrier protection significantly, especially the electromechanical, chemical and pharmaceutical industries; and so does the tax revenue. For example, the technologies of many electromechanical products are weak. The research on the technological level of about 3000 electromechanical products produced in the 1980s in Shanghai indicates that, 19 percent of the products could catch up with the foreign products produced in the 1930s–1940s; 76 percent of them could catch up with the foreign products produced in the 1950s–1960s; and only 5 percent of them could catch up with the foreign products produced in the 1970s. due to low technology level, although the electromechanical products made in China range widely, yet no “fist” product can compete with foreign products. The high-tech industries – such as computer, car, VCR, broadcast and TV equipment; numerically-controlled machine tools; precision processing equipment;
• high-grade, precision and advanced control instrument; integrated circuits; and so on – can’t compete with foreign products because of late starting, weak base and incomplete matching industries, as well as price disadvantage. Moreover, the electromechanical industry in China is depressed. Comparing 1990 with 1989, the gross electromechanical industrial output increased 2 percent and the sales revenue increased 4.2 percent, but the total pre-tax profits decreased 31.9 percent, and unprofitable enterprises doubled. In 1991, the situation didn’t change much, although the scale of losses decreased, yet the total loss increased greatly.

For many chemical enterprises in China, their manufacturing technique and equipment are backward (most equipment follows the international level in the 1960s and 1970s); even though there are various protections, the costs are so high that domestic sale prices are higher than similar products in international markets. More than 10 sets of ethylene equipment and down-stream products which are being built or planned to be built, struggle to compete with similar products in international markets because of high cost caused by small-scale production (many of them just 110 kt). Moreover, the construction cycle of petrochemical enterprises is long, and international markets may change during the period of construction.

By late-mover advantage and industrial transfer, China copies many foreign advanced products, especially the main products of the chemical, pharmaceuticals and pesticide industries, which drives the whole industry to enter a new stage in the short term (many valued products are invented and created, too). According to the Uruguay Round negotiation which strengthens intellectual protection, China has to pay the duty on intellectual protection for rejoining the GATT, and it also will bring difficulties to many industries.

No need for reticence. If China’s industry keeps the existing level to compete in the severely competitive after rejoining the GATT, it will be impacted significantly: the prices of many industrial products will have to be lowered. The enterprises which used to be big taxpayers in the long term will make meager profits or even take losses. Some enterprises with poor operation and bad products, as well as diseconomies of scale, are likely to be out. Furthermore, lowering the price of industrial products means that the turnover tax gaining from these products tends to decrease. The big taxpayers turn into meager-profit or unprofitable enterprises, as well as some enterprises are out during the market competition; it means that the government will lose tax revenue gained from them (at least temporarily).

• Opening service trade and bringing the service trade occupying one-fourth of the total trade in the world into GATT is one of the important terms agreed by the Uruguay Round negotiations. Compared to the service industry abroad, the service level in China is much lower than the developed countries (70 percent lower than theirs), and is lower than the average level of developing countries (40–50 percent lower than theirs). In order to rejoin the GATT, China has made a tentative promise to open service trade. Since this promise which only involves six service fields including shipping, banking,
• advertisement, tourism and offshore oil exploration, is not accepted by other countries, especially the developed countries, China may have to make a greater concession. On condition of this promise, no matter how greater the concession is, it is hard for the service trade in China to compete with foreign competitors after rejoining the GATT. It is unavoidable that some domestic service industries at a disadvantage will be out and the others may be in trouble. In this process, it is obvious that the tax revenue gained from service industry will suffer loss.
• After 1985, the export rebates take the place of the export loss subsidy system implemented in a long term in China. It is an important policy aiming to let export products compete in international markets with tax-exclusive prices and strengthen their competitiveness according to international practice. It is obvious that the export rebates are implemented at the cost of reducing the revenue gained from turnover tax or the tax expenditure. Besides, the amount of export rebates has positive correlation with the scale of export products. In recent years, with the enlargement of export products, the amount of export rebates tends to increase year by year. It is almost confirmed that the promotion of rejoining the GATT will increase export products and even cause it to jump. The sharp increase of export rebates causing by it will induce huge tax expenditure, and then impact the revenue gained from turnover tax.

The rejoining of GATT sets higher requirements for tax reform in China

As the greatest tax reform in an all-round way after the foundation of the People’s Republic of China, the new tax system implemented on January 1, 1994 greatly helps the tax system in China stride towards market economy. It can be said that it is also a necessary step to rejoin the GATT based on market economy. However, the reformed tax system in China is still far away from the requirements of the World Trade Organization (WTO) which will replace the GATT soon. Therefore, it still has to promote the tax reform basing on it, it is still has to promote the tax reform.

• The third term of GATT concerning the principle of national treatment regulates that different treatments between domestic products and import products on price and regulation cannot exist anymore, which means the government should provide import products with national treatment on the taxes and the decrees and regulations of sale, purchase, transport and distribution. It can be said that many aspects of our new tax system disobey this principle. For example, the current enterprise income system still classifies the enterprises as domestic and foreign enterprises. Although the income tax rates of domestic and foreign enterprises are the same, there are many differences in the system and regulation including tax deductions, standards of disbursed cost and expenditure, tax credit and so on.

The tasks of eliminating different treatments between domestic and foreign enterprises caused by tax law and establishing uniform enterprise income system have to be carried out as soon as possible during the process of rejoining the GATT.

Providing various tax preferences for special economic zones, economic development zones and coastal open cities is a special tax policy to attract foreign investment and open wider to the outside world. Although the reformed tax system reorganizes various tax reliefs carried out by local governments and prevents the tendency of tax reliefs to some extent, the framework of the policy about tax reliefs is not adjusted significantly. The essence of special tax policy aiming at different regions and different enterprises is a kind of different treatment. According to the principle of GATT, it must be canceled. In practice, local governments’ tax preference for foreign enterprise and development zone should first be abolished. Based on it, the difference of tax preference on areas should be narrowed gradually, and finally, tax preference on areas should be changed to tax preference on industries or businesses.

• The GATT is based on the market economy. Market price and free competition are the footstone of GATT. It means that the development of price reform in China directly relates with the success of rejoining the GATT. And for the price reform, it is very important to change the turnover tax from “taxes included in price” to “taxes not included in price”.

In order to match the traditional planned price, the system of “taxes included in price” is carried out through turnover tax in the long term in China. For the reformed turnover tax system, besides that the tax not included in price is carried out through added-value tax, the other two items of taxation – consumption tax and business tax – are still levied by taxes included in price. On condition of the system of taxes included in price, turnover tax is a part of planned price, and if the tax is levied by tax-inclusive price, the change of tax rate will not change the price but the corporate profit. Its purpose is to match the price policy to regulate the profitability of different products; “high tax matching high price, and low tax matching low price” is the brief summary of the system of taxes included in price. However, as rejoining the GATT requires opening the price of almost all products including domestic and import products, the incompatibility between the system of taxes included in price and market price system will be obvious day by day. For the system of taxes included in price, the tax is included in price. Even though the supply and demand change, tax is fixed. The price can’t reflect real market supply and demand and its tendency, thus the price can hardly play the role of “market barometer”. In particular, when tax rate is regulated, the change of price only reflects the change of tax revenue. The problem that market signal comes apart market supply and demand will become more severe.

It looks that, for the turnover tax in China, it is necessary to totally change the system of taxes included in price matching planned price to the system of taxes not included in price matching market price. It is different from the systemof taxes included in price in which tax is a part of price. In the system of taxes not included in price, turnover tax which is not a part of tax is levied by tax exclusive price, and the tax is the added value of price. Taxes unhook the formation mechanism of price, and they are decided in different places. Market supply and demand decide price, and tax is the product of government’s economic policy. The boundary line between tax and price is clear and each one performs its own functions, and the price actually reflects the change of market supply and demand. Basically, it is the basic condition that market mechanism plays the role of resource distribution.

It is necessary to point out that, proposing to change the taxes included in price to taxes not included in price and let the tax unhook the formation mechanism of price doesn’t mean giving up tax regulation on production and consumption. On the contrary, tax regulation is necessary. However, in the writer’s opinion, tax regulation must be the “second regulation” based on market regulation, and tax regulation can’t disturb or distort the formation mechanism of market price.

• Policy transparency is an important principle for GATT. According to it, as the contracting party, the laws, regulations, policy measurements, rules and corresponding data and material about foreign trade should be opened to the other parties. To establish the “transparency” of the tax system, it should be noticed that it has made great progress on the new tax system and made significant achievement in the construction of a legal system concerning taxes. The problem is how to follow this tendency to normalize the construction of a legal system concerning taxes and unify the tax policy throughout the whole country.

For example, it is well known that the force of law concerning tax is poor in China. Although there are various reasons, including few formal decrees about tax and incomplete legal system concerning tax, the most important reasons are lax enforcement and flexible interpretation about tax law. It is obvious that, if these problems can’t be solved effectively, even it speeds up the legislative process of tax law and completes the legal system concerning tax, the “transparency” of the tax system is just a meaningless term. Therefore, on condition that various tax codes are issued successively and tend to be advanced, solving the problems about lax enforcement and flexible interpretation about tax law is the task which should be put on the agenda as soon as possible.

The existence of large “indigenous methods” concerning tax revenue reflects that tax system in China lacks transparency. Some time ago, in order to attract foreign investment, many local governments issued relevant rules and regulations to provide tax preferences; thus, there was a new climate to reduce tax on enterprises and allow them to retain more profits in the whole country. It is a signifi-cant example. Obviously, with no uniformity or seriousness of tax system and no transparency of tax system, it is hard to build a good image of unified government decree and stable policy, and it even hinders the process of rejoining the GATT. Therefore, in order to rejoin the GATT, it is necessary to unify tax policy and

centralize legislative authority of tax to form a complete, explicit, authoritative,

detailed and practical tax code as soon as possible for tax reform.

• On condition of severe market after rejoining the GATT, many enterprises in manufacturing, service and other industries will be unprecedentedly impacted. It is unavoidable that some enterprises might have to close down, to be merged, or even to go bankrupt. The consequence is that unemployment will increase greatly, and the lives of those who suffer survival crisis after bankruptcy should be taken into consideration. In order to solve this problem, the urgent affair is to build a social security system relying on social security tax as the main capital source.

In fact, with the development of reform of the enterprise system, establishing a social security system has been proposed repeatedly. And rejoining the GATT causes this issue to come to a head. It means that establishing a social security system is not only the requirement for rejoining the GATT, but is basically also the important measure to develop a socialist market economy. Because the establishment of a social security system needs a corresponding capital source, it is necessary to follow the standard international practice and begin to collect earmarked taxes called social security tax when facing the financial constraints, as well as tax loss caused by rejoining the GATT.

(Originally published inTaxation Research, Vol.12, 1994)

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The evolving foreign-related preferential t...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• Foreword for the Chinese edition
• Acknowledgments
• 1 China’s taxation after rejoining the GATT
• 2 The evolving foreign-related preferential tax policy in China
• 3 Overall accounting and detailed accounting: consideration of China’s current fiscal policy
• 4 Selection of tax policy against the background of deflation: discussion of current tax cut claims
• 5 Prevention and control of SARS and arrangement of finance and taxation: influence and countermeasures
• 6 Proactive fiscal policy pursuits for both philosophical and initiative breakthroughs
• 7 Icebreaking prudent fiscal policy: analysis of the current orientation of China’s fiscal policy
• 8 A new round of proactive fiscal policy: progress review and tendency forecast
• 9 Current economic situation and 2012 fiscal policy
• 10 Macroeconomic policy options against the background of a complicated and volatile economy
• 11 Remain calm in the face of declining growth of financial revenue
• 12 Promotion of local government debt to the “new normal” by in-depth reform
• 13 Profound knowledge in the “new normal” of finance
• Index