School of Economics, Fudan University Economic Growth, Tax Hikes and China’s Future Road to a...

School of Economics, Fudan University

Economic Growth, Tax Hikes and China’s Future Road

to a Rechtsstaat

Weisen Li（韦森）Professor in Economics

School of Economics,

Fudan University


Today we will discuss the following three questions:

1, Economic Growth and Tax Hicks in China in recent years

2. Economic Side-Effects of the Tax Hikes 3. The Statutory Taxation and the Construction of

the Constitutional Democracy in China


1. Economic Growth and Taxes Hicks

in China in recent years


Since 1978, China has embarked on its economic and social reforms for more than 30 years. China’s reforms have been incremental and evolutionary but exerted some tremendous impacts on the contemporary Chinese society. In economic side, China’s 30 years of reform has brought about a fast annual average GDP growth rate of 9.8% since 1978, and 8.2% of average growth of GDP per capita.


Figure 1, China’s GDP and Growth Rate since 1978

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Figure 2, A Comparison of China’s GDP with Japan

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Japan


During the time of fast growth of the Chinese economy, the government’s taxation revenue and the government’s total fiscal revenue has grew even much faster that has been nearly double of GDP growth rate in most years since 1994.


Due to the continual tax hikes in recent years, the Chinese government’s fiscal revenues has kept a steady high rate of increase which is of almost double of China’s GDP growth rate (see Figure 3, Figure 4 and Figure 5). For example, in 1998, the total fiscal revenue of the Chinese government was about 987.6 billion Yuan, but in 2006, it is 3873.1 billion Yuan which is almost 4 times of 1998. Consequently, from 1998 to 2006, the proportion of the Government revenues in GDP in China rose from 11.7 % to 18.4%. In 2007, both the Chinese Government’s Tax revenue and the Government’s fiscal Revenue increased 31.4% with 5100 billion Yuan in total. In 2008, the tax revenues grew more than 23% further and reach a new height of more than 6000 billions even if in the second half of year the Chinese economy has sign of gradual slow-down.


Figure 3. Growth Rates of Government’s Fiscal Revenue and GDP in China


Figure 4. The Growth of Fiscal Revenue of the Chinese Government

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Figure 5. Growth of the Chinese Government’s

Taxation Revenue in Recent Years


As the a result of the fast growth of the government’s tax revenues, China ranks the third among the world's most heavily taxed nations, according to the latest "Tax Misery Index" chart released by Forbes. [1] China, with an index of 152, was eight points below the figure of 2005 which was ranked the second in the world. In 2006, France and Belgium lead the pack with 166.8 and 156.4 respectively on the 52 country list (See Figure 6).

[1] "Forbes Tax Misery Index", reflects how much of your paycheck you will take home after the government takes its cut.


Figure 6 ． Forbes Tax Misery Index


2. Economic Side-Effects

of the Tax Hikes


The possible three kinds of economic side-effects of tax hikes: Firstly, a tax hike and a new tax levy will reduce the

wealthy of households and enterprises and thus hold back investment of firms and consumption spending of households. According to an empirical study of the World Bank on the relationships between taxation and economic growth which was conducted several years ago, when the macro-tax burden at a level of 10.3-30.9%, 1% increment of tax levy will reduce domestic investment of 0.66% and thus slow down the growth rate of GDP by 0.36%.


The World Bank experts give three explanations:

(1) the tax hike of enterprises’ returns will reduce the profitability of enterprises and thus damage their competitiveness, particularly in a international arena;

(2) any tax hike of individual income will reduce the marginal return of labor and thus constrain the supply of labor;

(3) hikes of the value-added taxes and sale taxes will check the household consumption.


Figure 7 ， Government Fiscal Revenue and disposable

incomes of urban and Rural dwellers


Due to the factor that the Government’s tax and fiscal revenue have been keeping a very fast rate of growth, household consumption has dropped dramatically in recent year. For example, from 1995 to 2007, government revenue grew 16% on average (adjusted for inflation), while urban disposable income just increased 8% and rural net income increased 6.2%. Consequently, in 2007, China’s ultimate consumption rate is 36% down from 55.4% in 2003. In sharp contrast, the world average is 77%. This phenomenon was called “sluggish individual and household consumption” by some Chinese economists.


Secondly, from a point of views of microeconomics or say welfare economics, some economists, especially neoclassical economists, argue that all taxation will create market distortion and result in economic inefficiency. For example, an introduction of a new product tax, a resource tax, or a hike of the current tax generally speaking will reduce market demand or supply and thus results in some “deadweight loss”.


Thirdly, In addition to the negative economic effects of tax hikes in the current arrangement of China’s political system, another serious fact should be paid more attention. It is where and how the government spend the huge tax revenue collected. The huge government fiscal revenue and the lack of transparency of the government’s spending have led to government officials’ corruption and inequality of income distribution.


Government officials’ corruption: Figures from Mr. Jia Chunwang, the former Procurator-General of China's Supreme People's Procuratorate.

1. In 2004, a total of 18,000 government officials were charged corruption, among those 2,900 are the high-class officials of above county-governors level.

2. In 2005, a total of 1,932 above-county-governor-level-officials were charged corruption, among those provincial high officials 178, and 6 of minister-level high officials.

3. In 2006, a total of 2736 above-county-governor-level-officials were charged corruption, among those provincial high officials 202, and another 6 of minister-level high officials.

4. From 2002 to 2007, total of 13,929 county-governor-level-officials were charged corruption, among those provincial high officials 930, and 35 are minister-level high officials.


Income inequality: 1. According to official figure, China’s Gini Coefficient is currently 0.47

which is closing to the average level of Latin American countries. 2. According to a survey in the central party school of CCP, by the early

of 2006, among 3220 richest families with assets above 100 millions Yuan, 2932, i.e. more than 90%, come from high class government officials and their children.

2. According to figures from Asian Developing Bank, the average income of top 20 percent families is 11.37 times of that of lowest families in China which is much higher than 5.52 times of India and Indonesia and 9.11 times of Philippine.

3. According to a study from the World Bank, 0.4% of population take 70% of total social wealth in China and in comparison, in USA, 5% of population take 60% of wealth and thus the study reaches a conclusion: China ranks No. One in wealth concentration in the world.

Above factors have result in some social unrests in China recently, particularly in 2008.


3. The Statutory Taxation and

the Construction of the Constitutional Democracy in China


From a point of views of political theory and the theory of constitutional law, there are some more serious questions :

Because taxes are a kind of compulsory levies and are unrequited and in nature they are infringements of the government’s public power upon taxpayers’ private rights, to protect the taxpayers from the arbitrary tax levies of the sovereign and the government has becoming a basic demand and core value of constitutional democracy movement since the Magna Carta in 1215.


In a modern society, protection of the rights and entitlements of taxpayers through tax laws and legal process has become a basic and core value of the modern constitutional democratic polity and thus the statutory taxation has become the common practices in a state with constitutional democracy. According to the theory of the statutory taxation, in order to prevent the government to abuse power, it is designed to limit power by power.


Hence in most democratic countries, it is designed that the government’s decisions-right to collect taxes must be granted and approved by the Parliament. Only in such an arrangement, people can believe that their private rights cannot be arbitrarily infringed by the government. In summary, the limited ability of government’s collection of tax subjected to approval of the parliament is the basic content of the statutory taxation.


According to the principle of the statutory taxation, in most democratic countries, if the government wants to introduce a new tax, or raise a tax levy, it is often not a easy task. It usually takes time to go through the parliament’s debate and often encounter taxpayers’ resistant, protests even demonstrations on the street. In many countries with constitutional democracy, for instance in Canada, New Zealand and Australia, it often happened that one tax (for example, the GST in Canada, NZ and Australia) could not be levied through a few of governments’ propositions and long time of hot debates in the parliament.


However, in the current arrangement of China’s political system, it is not such a story. Because most Chinese people have no idea of the statutory taxation, while the legislative power of tax laws was entrusted to the government’s administrative body, this actually always gives a green light to the CMF and the SAT to arbitrarily introduce a new tax or arbitrarily hike taxes without debate and stipulation of the Chinese People Congress. Under such a political arrangement, the CMF and the SAT can actually in anytime, anywhere and randomly introduce a new tax levy or hike an existing tax with any consultations of the CPC.


The present course of actions of the Chinese Ministry of Finance (CMF) and the State Administration of Taxation (SAT) obviously are against the principle of the statutory taxation in the modern constitutional democracy thus made the taxpayers can do nothing to protect themselves from the “grabbing-hands” of the government. It also clearly show the fact that China has long way to go towards a constitutional democracy.


In conclusion, to clearly clarify the legislative power of tax law, to let the government’s tax revenues and where and how the tax revenues spend to be discussed and debated and finally stipulated by the Chinese Peoples’ Congress through some formal legislative processes, and to protect the taxpayers’ basic rights from the government’s arbitrary “grabbing-hands”, are some urgent tasks of the construction of the constitutional democracy in China.


Thanks！

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