Policy Implications and Suggestions
The year 2015 is important for implementing a series of reforms and advancing the rule of law. It is the last year of the country's 12th five-year plan, and the economy is stepping into a new stage of development under the new normal. China's economy will continue in the downward direction following the fallout from the global financial crisis. The domestic economy is still under restructuring, and the positive effects of the comprehensive deepening reforms has not percolated completely. However, the Chinese economy has explored a new development space. Tough market conditions in China after the international financial crisis prompt the Chinese companies to make a determined effort to adjust the structure change the ideas and ways of development. After China became an upper-middle-income economy, the service-oriented economy opens up a new demand area for economic development. Since the global financial crisis, the government has put forward massive investment stimulus plans and micro-stimulus policies; the authorities should have an indepth understanding and grasp of the characteristics of China's economy under the “new normal.” All these together have brought the Chinese economy the necessary conditions and foundation to step into a new stage of development.
The new stage of development for the Chinese economy is a transitional phase from the upper-middle-income levels to a modern developed economy. Obviously, in the new stage of development, the pattern and experience of economic development of the past is no longer applicable. The new stage of development and the new task of development call for new developmental ideas.
The new developmental ideas are based on the implementation of the resolutions made in the Third and Fourth Plenary Session of the 18th Central Committee. The basic direction is to implement all the measures of the comprehensive deepening reforms and let the market decide the allocation of resources.
To let the market really decide the allocation of resources, we must consider seriously how to better play the role of government in the new situation.
Of course, the government needs to maintain an appropriate infrastructure investment growth to stabilize the economy. However, to stabilize the economic growth
Fig. 5.1 China's incremental capital-output ratio (Note: Incremental capital-output ratio (I/△GDP), that is, the ratio of investment to incremental output. ICOR is used to measure the amount of investment needed to measure per unit of output growth. In general, the higher the ICOR of an economy, the lower are its investment efficiency and productivity. Data source: calculated according to CEIC)
and to expand, government investment can only be a supplementary measure for periodic use compared to social investment. Since 2008, one of the side effects of the large-scale investment stimulus plan and micro-stimulus policy is further raising the incremental capital-output ratio (ICOR) of the national economy (Fig. 5.1), reducing the efficiency of investment.
In the long run, we should start with the fundamental measures to stabilize economic growth. These measures can stimulate the economic vitality, promote the independent innovation of market players, and improve the efficiency of the use of resources. The long-term government-led economic and revenue growth rate is substantially higher than the economic growth rate for 15 years, resulting in a too large ratio of government disposable financial resources to GDP (Table 5.1), irrational tax structure, and so on. The policy simulation confirms once again that in order to free up more space for the market to allocate resources, we need to reform the taxation system, adjust of the taxation structure, and reduce the national economic tax burden.
From the above analyses, our research team proposes the following policy recommendations:
1. The overall tax reduction policy should be taken as an important fiscal and taxation system reform option; it should focus on the “increases and decreases” between all tax types and reduce the indirect taxes by adjusting the marginal tax rate. This is feasible as well as necessary and urgent. The fiscal and taxation reform over the past few years is obvious to all. However, whether the ratio of fiscal revenue to GDP or the ratio of government revenue in a broader sense to GDP remained at a high level, the proportion of nontax revenue even increased contrarian. When the transformation of this development stage takes place, the
Notes: Government revenue = public finance income + governmental fund income + income of state-owned capital management budget + social insurance fund income. General government revenue = government revenue + state-owned enterprises' profits. Resources under government control/GDP (1) = (generalized government revenue + balance of local government debt increment)/ GDP. Resources under government control/GDP (2) = (generalized government revenue + balance of national government debt increment)/GDP
The national government debt data of the National Audit Office updates only up to June 2013, after which there is no data
Data source: calculated by the research team
macroeconomic policy-making authorities should start from the fundamental situation in which the market plays a decisive role in the allocation of resources. They should consider the reasonable ratio of fiscal revenue, and government revenue in a broader sense, to GDP. They should make a determined effort to overcome all difficulties through an overall institutional tax reduction to help people, reduce the burden on business, stimulate social and economic vitality, promote the independent innovation of market players, improve the efficiency of resource utilization, recreate the growth potential, stabilize investment, and stimulate consumption.
2. Accelerate the replacement of business tax by VAT. Further, expand the range of the replacement to the construction and real estate sector, finance and insurance, life services, etc. Simplify taxes, determine the criteria of the general taxpayer reasonably, and build a suitable tax environment for the development of the service economy. Let VAT adapt to the operational characteristics of manufacturing as well as services and promote the tax system to the entire country to form a unified value-added tax system of goods and services as soon as possible. Then, reduce the value-added rate significantly, exempt the tax of some low-end goods and services in the retail process to realize the goal of reducing the proportion of indirect taxes, and free up enough space for adjusting the proportion of direct taxes.
3. Improve the consumption tax system. To adjust the scope of consumption tax, the government should not only include high-energy-consuming products and high-polluting goods within the tax scope but also enlarge the tax scope of luxury goods. In addition, the government should raise the consumption tax rate of luxury and high-end consumer goods and services, such as private yachts, private planes, and certain types of battery. Consumption tax should be levied at the retail link, rather than the production link or import link, on some consumption goods such as cigarettes, white spirit, and firecrackers. In this way, the tax will clearly embody the purpose of the government not to encourage, or to limit, such consumption. The government should levy a tax that is excluded from price instead of one that is included in price. The original distribution pattern by which the consumption tax belongs totally to the central government should be amended so that the tax forms part of the local government's financial resources.
4. Reform the current real estate tax system and establish a system that can be levied at the holding link. Specifically, tax exemption based on the rule of personal nonbusiness use of real estate and taxation according to rent should be abolished and be replaced by taxation based on the value of real estate. Real estate tax currently calculated on the original value should be calculated on the market value. The government should appropriately adjust the real estate tax rate and properly determine the exemption amount.
5. Carry forward the reform of personal income tax (PIT) and adhere to the timely levy of inheritance tax. The government should establish a system that combines the comprehensive type of PIT and the categorical type of PIT, properly integrate the tax items, improve the pretax deduction system, and ensure that the taxes match the national income level and cover people's real living costs. At the same time, the government should optimize the tax rate structure, introduce the household spending declaration system, and effectively adjust the tax burden level among different social ranks, further reflecting the fairness of financial burden. As an important part of property tax, inheritance tax plays a vital role in maintaining fair market competition, narrowing down the wealth gap, and promoting the effective disposal of resources. By implementing the real estate registration system, the inheritance tax legislation can be put on the agenda as soon as the time is ripe for levying inheritance tax.
6. Improve the resource tax reform. Accelerate the reform of the resource tax that is replaced by ad valorem tax on resources like rare earth, tungsten, titanium, and nickel. Compare the tax with the clearing fee principles of the reformed coal resource tax, and clean up and regulate the relevant charges and funds.
Following the proposals made at the Third Plenary Session of the 18th Central Committee of the CPC, the government should take the features of the relevant characters of the resource tax into account and gradually expand the levying scope of resource tax to include certain natural resources such as water flows.
7. Optimize the structure of fiscal expenditure, cut down administrative expenses, and improve efficiency of utilizing government funds. The total amount of social security, medical, and educational expenditure in public fiscal expenditure gradually rose from 29.5 % in 2010 to 31.7 % in 2014. The proportion of expenditure on people's livelihood improved but still remains low compared with developed countries. The expenditure on competitive fields should be cut down and efforts made to strengthen the fundamental social public service fields that have active demand but lacks in investment. At the same time, open, just, and fair market order should be emphatically maintained, and entrepreneurship and the market's innovative potential and vitality should be released.
8. Advance the administrative power list and responsibility list system and strengthen power supervision. The establishment of a power list system is not a simple combination of administrative power but a correct definition of power boundary. It solves the problem of separation of power between the government, market, and society, between the governmental levels, and between the departments to reconstruct an organizational system and business process and promote governmental management level. Responsibility lists should also be formulated, and the system of illegal administrative accountability should be completed accordingly. Besides, the omission and misplaced behaviors in power exercise should be accounted for. In the meantime, it has to continue to revise and improve the market admittance negative list, implement the enterprises' investment autonomous right, reduce prior approval, intensify pre-event and after-event supervision, and perfect the market supervision system.
9. Intensify the construction of free trade zone, accelerate the promotion of reform experience, and promote China's international trade level and status. Free trade zone is a new opportunity to open up to the outside world when China's development enters a new stage and its reform enters a hard time and abyssal region. Proactively accepting and participating in formulating a new rule system for international trade and forming high-standard free trade zone networks facing the world are conducive to overcoming external constraints, the obstructions caused by vested interests and sluggishness within the system, and driving the reforms. The spirit for more initiatives and reforms should be adopted in the future. Systems such as regulation consistency, the competitive neutrality principle of state-owned enterprises, intellectual right protection, openness of the service industry, environmental and labor rules, and uniform market admittance, which do not necessarily need to be experimented in domestic and foreign free trade experimental parks, should be popularized and carried out in China as soon as possible.
10. Advance capital cooperation between the government and society, reform of relevant systems, and acceleration of state-level legislation. With the gradual clearness of the local debt management framework, future local governmental debt is mainly composed of general governmental debt, special governmental debt, and PPP debt. From the calculation of the Ministry of Finance, the expected financial demand for urbanization of China in 2020 is about 42 trillion yuan. It can be seen that the PPP mode is given great expectation to respond to capital demand of urbanization in several decades. However, now there are no laws and regulations specifically relevant to PPP, leading to this manner difficult to be effectively boosted in a large scale. Policy guideline and detailed supporting rules should be rapidly introduced to promote PPP development and overall guide the popularization and application of PPP. Meanwhile, undertake state-level legislation and propel formulation of national franchise law. Explore new financing mode including establishing PPP fund, effectively expand financing source, and lower the transaction cost of investors.
In advancing the reform of financial and taxation system, optimizing the structure of the tax system is not to reduce tax, but to drive production and consumption and go Dutch in occupancy and consumption of resources and eliminate cross subsidization. At the same time, we need to improve the local tax system; consider the property behavior tax items such as real estate tax, consumption tax, resource tax, and deed tax as important sources of local tax; promote the matching of financial resources and the authority of office to achieve organic unification of the market playing a decisive role in resource allocation and the government playing its role better; and strengthen the growth potential. From the perspective of international experience, it is a better and more effective way to allocate resources, a more favorable way to improve living quality, a more favorable way for the public to participate in public management, a way to supervise governmental behavior, and a more favorable way to cultivate local self-government, autonomous management, and civic awareness.
-  In 1996–2012, the average growth rate of China's fiscal revenue is higher than economic growth rate of 5.5 %. See our research team's “China's macroeconomic forecasting and analysis – the autumn of 2013 report.”
-  In 2011, the EU-27's spending on health, education, and social protection together accounted for 47.8 % of the central (federal) government spending. In 2013, the US social security, Medicare, and Medicaid spending accounted for 48.0 % of federal fiscal expenditure
-  Li Wenpu, Chen Tingting, Li Hao (2015) From the special economic zones to the free trade zone – on the opening up promoting the third wave of reform. Southeast Acad 1. pp. 19–27
-  In the 2014 National Financial Work Conference on scientific research, Wang Baoan, the Vice Minister of Finance, said that China's urbanization rate was 53.6 %, which is expected to reach 60 % by 2020, and that the resulting demand for investment will be 42 trillion yuan