China's dramatic increase in fiscal revenue this year has sparked
debates over a possible tax cut.
In
my view, an all-round tax reduction is not in the country's best
interests, but a slight tax readjustment caters to the current
economic situation.
In
the first half of this year, the national tax revenue hit 758.5
billion yuan (US$91.4 billion), a 27 percent increase year on
year.
Many factors, including sustained economic recovery and improvement
in corporate profits, contributed to the increase.
In
the first half of the year, the production and marketing of the
industrial sector have seen further improvement from last year. The
profit of State enterprises significantly increased, and strong
export and import activity raised people's incomes
substantially.
The economic upturn has provided ample tax sources. Strengthened
tax management, which has effectively prevented tax evasion, has
also contributed to the rising tax revenue.
The debt-equity swap campaign, which transfers the debt of State
enterprises in the red to relevant debt management companies, has
progressed successfully with 80 percent of the 580 involved firms
now operating in the black.
The increased tax revenue signifies that the proportion of social
resources the government possesses has remarkably increased.
By
2000, the ratio of China's fiscal revenue to its gross domestic
product (GDP) had risen to 15 percent from 10.7 percent in
1995.
The rise reflects the shifting of resources possessed by
non-governmental sectors to the government.
However, farmers, laid-off workers and repositioned redundant
personnel have experienced significant declines in disposable
income, which translates into stagnant consumption demand.
Non-public enterprises, including collectively owned firms, private
enterprises, individual businesses and shareholding companies, have
also been affected by the shift in resource allocation.
Compared with the public enterprises, the disposable incomes of
private sectors have decreased, evidenced by diminishing investment
and output value.
The increased fiscal revenue may also possibly squeeze out private
investment, which is vital to the vigor of the national
economy.
There are debates in the academic circle as to whether increased
government tax revenue and the issuance of treasury bonds will have
a squeezing-out effect on private capital. In my opinion, this may
lead to the forced exit of private capital from some investment
fields.
According to economic theory, an increase in governmental
investment will push up the interest rate of capital and thus raise
the costs of private investment. Theory speculates that increased
costs will affect the expected profits of private investment and
dampen their enthusiasm.
The interest rate in China is controlled by the government and
fluctuates little. In view of this, a squeezing-out effect is
unlikely to result when fiscal revenue increases.
But when considering the overall capital in the market, the
increased tax revenue will lead to a decrease in the disposable
capital of non-governmental sectors, especially some private
enterprises, which will lessen their investment accordingly.
This is the fourth year that the government has continued its
proactive fiscal policy. The pouring of governmental investment
into infrastructure, State-owned enterprises and the less developed
western area to stimulate the economy is in reality an adjustment
of industrial structure.
Given the long-term nature of infrastructural construction, the
implementation of the policy requires the support of ample fiscal
revenue.
If
the policy continues, the economic structure is likely to change,
with the proportion of the infrastructural sector and related
industries, such as iron and steel, cement and building materials,
rising significantly.
Given the impact of the fiscal revenue increase on the economy, the
government should consider partially cutting taxes.
Tax cuts in certain industries will stimulate private investment
and push forward economic restructuring.
The government should also attach importance to solving lingering
economic problems, such as the non-performing loans of banks.
While issuing large amounts of treasury bonds to support
infrastructural construction, the government must be cautious as to
whether its fiscal capacity can support the payment of the debts in
the long term.
Another potential problem is that the market has not played its
full role in allocating social resources.
The government-led economic restructuring may lean towards public
projects, State enterprises and the monopolized industries. If the
role of the government in economic restructuring is overstressed
though, the economic structure faces the danger of being
distorted.
For this reason, efforts should be made to bring out the role of
the market in economic structuring.
(The author is a researcher with the Development Research Center
under the State Council.)
(China
Daily 09/22/2001)