Experts cast doubt on tax cut rationale

Updated: 2016-01-28 08:07

By Zheng Yangpeng(China Daily)

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China's tax system is a burden on companies and should be reformed, Liang Jianzhang, economist and co-founder of online travel service argued at a recent symposium held at Tsinghua University.

He said his company, the country's largest travel website, paid its employees 10,000 yuan ($1,520) a month on average, but after tax deductions and social insurance payments this figure was reduced to less than 6,000 yuan.

Liang said taxes should be cut to benefit workers, but the idea was called into question by Gao Peiyong, director of the National Academy of Economic Strategy under the Chinese Academy of Social Sciences, who doubted whether ordinary consumers would benefit from such a move.

"When it comes down to it, you'll find that no single tax is easy to cut," said Gao, adding that 90 percent of China's tax revenues come from corporate entities and more than 80 percent from indirect taxes.

Any proposal to cut tax is always hugely popular, he said, but cooler heads should ask: Such a move is desirable, but is it feasible?

The single largest source of tax revenue in China is the VAT, or value-added tax, which in 2014 accounted for 22 percent of the total, or 3.085 trillion yuan.

In a bid to prevent repeat taxation, since 2012 the government has moved to replace business tax with a VAT in the economy's service sectors, effectively cutting taxation by 484 billion yuan. Yet this reform has not been applied to the property, construction, financial or consumer services sectors of the economy - despite a previous target to achieve this by the end of 2015.

Deteroriating fiscal conditions and "technical difficulties" were cited as reasons for the delay.

"VAT reform was planned to cut taxes by as much as 1 trillion yuan, but the reform stalled well below this target," Gao said.

"There are many technical reasons for this but in essence it was because public finances may not be able to take the hit," he said.

In a system such as China's, which is dominated by indirect taxation, even substantial cuts may not directly benefit end consumers.

But in other economies such as the United States where income and corporation tax - known as direct taxes - dominate, tax cuts can directly benefit individual households.

"In the US, taxation can be a powerful tool to narrow the gap between rich and poor, but in China the role of taxation in redistributing income is minor. In some ways the tax system is unfair to the poor," said Lyu Wangshi, a researcher with the Fiscal Research Institute.

He cited the VAT as an example of this unfairness because all consumers pay the same rate of tax, regardless of their ability to pay.