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How Long Can the High Growth of China’s Tax Revenue Go On
2005-02-11
Mi Jianguo, Development Research Center of the State Council
Research Report No.178, 2004
After the policy to carry out tax sharing system reform in 1994 was implemented by the State, an extraordinary increase of tax revenue at various localities in 1993 was witnessed. At that time, many people asserted this high rate of increase could not be sustained. In fact, the intrinsic effect of the tax sharing system in boosting tax revenue has been maintained for 10 years. China’s GDP (calculated according to current price) grew by 12.9% annually on average from 1993 to 2003; during the same period, the annual growth rate of tax revenue was 17.4% on average, 4.5 percentage point higher than that of GDP. In the first three quarters of this year, an accumulated tax revenue of 1.9257 trillion renminbi nationwide has been realized, which was an increase of 401.4 billion renminbi, and grew by 26.3% compared with the same period of last year, 8.6 percentage point higher than the 17.7% growth rate of GDP during the same period calculated according to current price. An increase of 500 billion renminbi of tax revenue this year is guaranteed; moreover, the momentum of higher growth of tax revenue than that of the GDP will not be changed much in the next three to five years.
I. The Reasons behind the High Growth of Tax Revenue
1. Solid foundation for the growth of tax revenue
Economic growth determines fiscal revenue. China’s economy on the whole has kept the momentum of stable, rapid and sustainable development, which has laid the solid foundation for the rapid growth of tax revenue. Firstly, many years of large amount of investment in fixed assets and technological innovation in the 1990s has created huge production capacity; secondly, the four-year long proactive fiscal policy has greatly enhanced the economic infrastructure level for the development of the national economy; thirdly, the reform of State-owned enterprises has been put on the right track of"giving back powers and creating profits"and establishing a modern enterprise system from the limbo of "delegating powers to lower levels and conceding profits", with their vitality being constantly strengthened;fourthly isthe vigorous development of the private sector. As a result of these factors, China’s national economy has entered a new development cycle since 2002, economic growth has accelerated markedly, entering the stage of rapid growth. The same year, the GDP grew by 8.3%; even the SARS epidemic in 2003 could not obstruct the progress of high economic growth with the GDP growing by 9.3%. And, this year the growth rate could be even higher.
2. Quality of the economic development improved greatly
Fundamentally, the current high growth of China’s tax revenue stems from the improvement of the quality of the operation of the economy and increased benefits brought about by system reform, change of mechanism and structural optimization and upgrading. It should be attributed to the efficiency of allocating resource under the market economy; it is the manifestation of gradually released potential production capacity by deepening the reforms in various fields, the real reflection of independent growth capability of the economy formed under the new development system, and also the recognition of the effectiveness of various macroeconomic control policies promulgated by the central leadership of the Party and State Council as a result of correct assessment of the situation. At the same time when the foundation of economic growth was solidified, economic scale expanded, the quality of China’s operation of the economy was improved further, which is especially prominent in the field of the industrial sector–the main source of national tax revenue.
When measuring the quality of the industrial sector, the indicator of total assets contribution rate is normally adopted. Total industrial assets contribution rate reflects profit-making ability of the total assets of industrial enterprises, fully revealing a company’s operational, performance and management levels. The operation of the industrial economy since 1992 shows that the industrial growth quality indicator keeps increasing. It was 100 in 2000, 62.75 in 1992, and reaching 108.88 in 2002. Especially since 2000, not only the profits of State-owned industrial enterprises and large-scale (annual sales revenue exceeding 5 million Renminbi) non-State-owned industrial enterprises have increased by a large extent, up from 228.8 billion Renminbi in 1999 to 815.2 billion Renminbi in 2003; but their tax payment also grew by 63% in the four years, reaching 729.5 billion Renminbi. This is a clear indication that the growth pattern of China’s industrial economy is making the transition in the new century, gradually from "quantity-oriented" to"quality-oriented"，from "traditional industrialization"to"modern industrialization".
3. Improvement of collection and management level
It is undeniable that the high increase of tax revenue in recent years is directly related to the improvement of tax collection and management level. It was not long before, tax dodging, tax evasion, illegal tax reduction and exemption, falsification of value-added tax invoices have been the main avenues for some companies to gain illegal profits. Although under the tax sharing system, tax revenue in 1994 rose further by 20.5% after the extraordinary increase in 1993; but the tax collection rate was only 54.3% in 1994, as much as 45.7% of collectable tax revenue was lost accounting for 84% of revenue received. Along with the intensified and accelerated construction of taxation informatization in the country, and with the close cooperation of various government departments of finance, industry & commerce, customs and public security etc., tax authorities vigorously implemented the Golden Tax Project, tackling problems at the source, conducting process control and tax inspection to realize the separation of levies, management and checks, thus strengthening the scientific and detailed management of taxation affairs, to unfold an unprecedented new situation of tax governance according to law. The Golden Tax Project not only greatly increased value-added tax collection rates to raise its proportion in the GDP, but also controlled the cheating of export tax rebate to some extent. It is estimated in the ten years of implementing the Golden Tax Project, the tax collection rate in China has risen from 54.3% in 1994 to 66.74% in 2003.
4. Enhanced awareness of honestly paying tax
A very complicated relation of benefit distribution exists between the country, enterprises and individuals. Besides law, credit is also a very important issue in dealing with the conflict of interest among these parties. The biggest damage to China caused by the Cultural Revolution not only is reflected in terms of productivity, but is more destructive and serious in terms of credibility. For quite a while, honesty and reliability were considered foolish, causing serious disorder to social and economic activities. In the field of taxation, its baneful influence is translated into the large-scale and widespread presence of tax dodging, tax evasion and tax cheating. The lack of tax payments can be described by the two"rarities". First, those who voluntarily report and pay taxes are basically large and medium-sized enterprises; it is very rare for small companies and private economy to do so. Second, even for those enterprises or private companies that report and pay taxes; it is rare for companies which report and pay the full amount of taxes. Market economy is credit-based economy. Faced with the dearth of tax payments, the government has taken the issue of honest tax payment as the main content of building an honest society and a market economy system; the relevant measures taken in terms of law and ethics have shown some obvious effect. With respect to law, the conduct of tax dodging, tax evasion and tax cheating are penalized according to law; with respect to ethics, credit dossiers shall be set up in financial and taxation departments to implement a credit rating system. Currently, the tax payment rate of large-scale enterprises has exceeded 99%, with the rate of full tax payment no less than 70%; the rate of full tax payment of the private economy is also on the upward trend.
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