Ex­perts cast doubt on tax cut ra­tio­nale

China Daily (Canada) - - CHINA - By ZHENG YANGPENG zhengyang­peng@ chi­nadaily.com.cn

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

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 ideawas­called into ques­tion by Gao Peiy­ong, di­rec­tor of the Na­tion­alA­cade­my­ofE­co­nomic Strat­egy un­der the Chi­nese Academy of So­cial Sci­ences, whodoubt­ed­whether 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 in­China is theVAT, 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 as­muchas 1 tril­lion yuan, but the re­form stalled well­be­lowthis­tar­get,” Gao­said.

“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 theUS, 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 LyuWang­shi, 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.

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