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Zhang Xiaoying (School of Finance and Taxation, Capital University of Economics and Business)

Tang Zijie (School of Finance and Economics, Renmin University of China)

Chen Haiyu (School of Finance and Taxation, Henan University of Finance and Economics)

The reform of moving the collection of consumption tax to a later stage should follow the principle of "stability". The implementation of the principle of "stability" should be reflected in two aspects: on the one hand, the collection of consumption tax items that are moved to a later stage and transferred to local governments should be controllable and should not affect the regulation function of consumption tax; on the other hand, the "fixed base and adjusted increment" plan should be conducive to alleviating the difficulties in local fiscal operation under the premise of ensuring the basic stability of central and local financial resources.

I. Consumption tax items suitable for postponing collection and delegating to local governments

1. Specific items that can be subject to tax collection and control

At present, my country's consumption tax is mainly levied at the production stage. If the collection stage is moved to the retail stage, the tax authorities will face a large number of scattered taxpayers, which will increase the difficulty of collection and may cause a large loss of tax sources. Therefore, to promote the reform of moving the collection stage of consumption tax backward, we must first ensure that the collection and management of the consumption tax items moved backward are controllable.

In my country, cigarettes and firecrackers are subject to monopoly management, and tax authorities can use this to obtain sales information of cigarettes and firecrackers; motorcycles, cars and yachts are subject to motor vehicle and ship registration management systems, and tax authorities can share the registration information of motorcycles, cars and yachts with vehicle and ship registration management departments; the real quality assurance system based on the "Zhenzhi Code" technology can realize one wine one code, and track and trace the source of each node in the process from materials to circulation (Zhou Bo et al., 2021a); ​​the intelligent tax control system of gas stations installed in various places can accurately, completely and in real time collect the types and sales quantity information of gas stations (Lin Ying et al., 2022). It can be seen that moving the collection link of these consumer goods to the retail link can basically achieve controllable collection and management. At the same time, for luxury goods such as high-end cosmetics, high-end watches, precious jewelry and jewelry, golf balls and golf equipment, consumers have a relatively strong awareness of requesting invoices and vouchers, which also helps tax authorities to grasp the sales information of consumer goods and provide collection and management guarantees for the collection of consumption tax at the retail link.

The supervision system for other consumer goods is not perfect. If consumption tax is levied at the retail stage, the collection and management costs of the tax authorities will increase. Therefore, before a mature supervision system is established, the collection stage of relevant items should not be postponed.

(II) Items that do not affect the regulatory function of consumption tax

In addition to the function of raising fiscal revenue, consumption tax also has a regulatory function. In comparison, many countries attach more importance to the regulatory function of consumption tax (Zhang Deyong, 2021). Therefore, consumption tax items that are suitable for postponing the collection link and delegating to local governments must not only meet the conditions for postponing the collection and management, but also ensure that the reform does not affect the regulatory function of consumption tax. Generally speaking, shifting the collection link of consumption tax from the production link to the retail link will help increase consumers' "negative tax sense" and thus strengthen the regulatory function of consumption tax. However, after some consumption tax items are delegating to local governments, local governments may interfere with business operations in order to obtain more consumption tax revenue (Zhou Bo et al., 2021b), thereby weakening the regulatory function of consumption tax. For example, if the consumption tax on tobacco and alcohol is delegating to local governments, local governments may actively introduce preferential policies to encourage residents to consume more tobacco and alcohol in order to increase fiscal revenue. This is not only not conducive to the health of residents, but also restricts the regulatory function of consumption tax in guiding consumption. Therefore, it is not appropriate to delegating consumption taxes such as tobacco and alcohol to local governments.

To sum up, taking into account the controllable and regulatory functions of tax collection and management, the specific consumption tax items that are currently suitable for moving the collection link back and transferring to local governments include refined oil, automobiles, motorcycles, yachts, high-end cosmetics, high-end watches, precious jewelry and jade, golf balls and golf equipment, firecrackers and fireworks, etc.

2. "Setting the base and adjusting the increment" plan

Among the specific consumption tax items mentioned above that are suitable for postponing the collection process and transferring them to local governments, the consumption tax revenue of items other than refined oil and automobiles accounts for a relatively low proportion, and the impact of transferring them to local governments on local finances is relatively small. Therefore, this article only discusses the "fixed base, adjusted increment" plan for transferring refined oil and automobiles, which account for a relatively high proportion, to local governments.

Under the requirement of "ensuring the stability of the existing financial structure of the central and local governments", the plan of "fixing the base and adjusting the increment" needs to follow two principles: first, ensuring the stability of the central government's financial resources, not affecting the healthy operation of the central government's finances, and not affecting the central government's macro-control capabilities; second, ensuring that local financial resources are stable and improving, and not causing negative impacts on local fiscal revenues due to reasons such as the postponement of the consumption tax collection link and the transfer of the base to the central government. This should be reflected in the following aspects.

1. On the selection of the “base year” in “fixing the base number”

In order to ensure the stability of the central government's financial resources, the conventional practice of "fixing the base" is to use the consumption tax revenue of the base year as the base for local governments to pay to the central government. However, since the annual consumption tax revenue of each province (including autonomous regions and municipalities, the same below) fluctuates to a certain extent, if the year before the reform year is used as the base year and its consumption tax revenue is paid to the central government, then the incremental consumption tax revenue of some provinces in the early stage of the reform (the difference between the consumption tax revenue and the base paid to the central government) may be negative, which is not conducive to the stability of local finances. Therefore, in order to avoid the problem of "negative growth" in the consumption tax revenue of each province after the reform due to the fluctuation of the consumption tax revenue of each province, a more prudent and reasonable approach is to use the years before the reform (such as the first three years) as the "base year" in the "fixing the base".

2. On the choice of “base” in “fixed base”

In theory, the "base" in "fixed base" should be the consumption tax revenue of each province in the "base year" as the base for the local government to pay to the central government, that is, if the "base year" is the three years before the reform year, the average of the provinces in the three years before the reform year should be used as the "base". In addition, the base for the local government to pay to the central government should be the consumption tax revenue estimated after the consumption tax collection link is moved to the retail link - the principle of collection at the place of consumption, rather than the current consumption tax revenue collected according to the consumption tax production link - the principle of collection at the place of production. This is because if the consumption tax revenue collected by each province according to the principle of production is paid to the central government, for provinces that are large producers of consumer goods subject to consumption tax but not large consumers, the consumption tax revenue they obtain in the year of reform may be far less than the base that needs to be paid to the central government, which will further aggravate the fiscal imbalance problem of the province.

(III) Treatment of changes in local tax revenues caused by changes in consumption tax-related taxes and fees due to the postponement of consumption tax collection

The changes in consumption tax-related taxes and fees caused by the shift of consumption tax collection are reflected in two aspects. On the one hand, after the consumption tax collection is shifted from the production stage to the retail stage, the consumption tax surcharge will be transferred from the production site to the consumption site. On the other hand, when the consumption tax collection is shifted from the production stage to the retail stage, the part of the value-added tax revenue and its surcharges generated by the consumption tax as part of the value-added tax base will also be transferred from the production site to the consumption site (Cui Huiyu et al., 2022). Both aspects will affect the vested interests of provinces that are major consumer goods producers but not major consumer provinces that levy consumption tax.

To this end, the central government can establish a transfer payment system that matches the consumption tax reform in the early stages of the reform, and provide certain compensation to major production provinces but not major consumption provinces for the financial resources lost due to the postponement of the consumption tax collection link, so as to ensure that these provinces can maintain financial stability during the consumption tax reform. In a certain sense, the establishment of a supporting transfer payment system is also to buy time for these provinces to improve the consumption environment and cultivate consumption potential, so as to change the problem of negative tax growth that may be caused by the postponement of the consumption tax collection link. Through the following estimation, it can be seen that the establishment of a supporting transfer payment system has a very limited impact on the central government's financial resources, and the central government's financial resources can still remain basically stable.

(IV) Regarding the definition of “increment” in “incremental adjustment”

Intuitively, the "increment" in "incremental adjustment" refers to the increment of local consumption tax revenue caused by consumption tax reform, that is, the difference between local consumption tax revenue and the base amount of remittance. However, as can be seen from the previous analysis, consumption tax reform will also lead to the transfer of consumption tax surcharges from the place of production to the place of consumption, and the transfer of consumption tax from the production link to the retail link, resulting in the transfer of value-added tax revenue and its surcharges from the place of production to the place of consumption. Therefore, the more general "increment" should take into account the incremental changes in consumption tax surcharges caused by the backward shift of consumption tax collection links and the incremental changes in consumption tax-related value-added tax and its surcharges. Therefore, when analyzing the impact of the "increment" formed by consumption tax reform on local finances, this article adopts the broad definition of "increment".

In summary, assuming that 2021 is the "Reform Year", the "fixed base, adjusted increment" scheme designed in this paper is as follows: the average of consumption tax revenue under the principle of consumption location in the three years before the "Reform Year" (2018-2020) is used as the base for local remittance, and the incremental part belongs to the local government. At the same time, a supporting transfer payment system will be established within three years after the reform to compensate for the financial gap that may be caused by the postponement of the collection link. Carrying out consumption tax reform according to this plan can ensure the basic stability of central financial resources, while stimulating local vitality and promoting steady progress in local finance.

III. Calculation of the base amount of local government expenditures to the central government

1. Calculation of consumption tax revenue of refined oil products based on the principle of place of consumption

This article uses the estimated consumption tax revenue of gasoline, diesel and fuel oil to represent the consumption tax revenue of refined oil. Since refined oil is levied on a per-liter basis when the consumption tax is levied, and the statistics of refined oil consumption are in units of 10,000 tons, it is necessary to convert the units first. This article calculates the consumption tax revenue of refined oil under the principle of consumption location according to the conversion method of Tang Ming et al. (2020).

Gasoline consumption tax revenue under the consumption location principle of a province = gasoline consumption in a province (10,000 tons) × 10,000 × 1,428.57 (liters/ton) × 1.52 (yuan/liter)

Diesel consumption tax revenue under the consumption location principle of a province = diesel consumption in a province (10,000 tons) × 10,000 × 1,190 (liters/ton) × 1.20 (yuan/liter)

Fuel oil consumption tax revenue under the consumption location principle of a province = fuel oil consumption in a province (10,000 tons) × 10,000 × 1,129.954 (liters/ton) × 1.20 (yuan/liter)

Observing the data on refined oil consumption, it is found that the sum of refined oil consumption in each province is different from the national total, which is mainly due to repeated calculations between different regions (Jiang Yunyun et al., 2018). To correct this deviation, this paper draws on the approach of Jiang Yunyun et al. (2018) to first calculate the refined oil consumption tax revenue before adjustment under the consumption location principle of a certain province, and then calculate the refined oil consumption tax revenue after adjustment under the consumption location principle of a certain province (revenue of refined oil consumption tax under the consumption location principle of a certain province).

Revenue from refined oil consumption tax before adjustment under the principle of consumption location in a certain province = Revenue from gasoline consumption tax under the principle of consumption location in a certain province + Revenue from diesel consumption tax under the principle of consumption location in a certain province + Revenue from fuel oil consumption tax under the principle of consumption location in a certain province

Revenue of refined oil consumption tax under the consumption location principle of a province = Revenue of refined oil consumption tax before adjustment under the consumption location principle of a province ÷ ∑ Revenue of refined oil consumption tax before adjustment under the consumption location principle of each province × Revenue of refined oil consumption tax nationwide

Among them, the consumption data of gasoline, diesel and fuel oil are from the "China Energy Statistical Yearbook", and the national refined oil consumption tax revenue data are from the "China Taxation Yearbook".

2. Calculation of automobile consumption tax revenue under the consumption location principle

Due to the lack of sales data on taxable cars in each province, this paper draws on the approach of Jiang Yunyun et al. (2018) and uses the number of newly registered civilian cars to represent the retail volume of cars to estimate the car consumption tax revenue under the consumption location principle of a certain province.

Automobile consumption tax revenue under the consumption location principle in a province = the number of newly registered civilian cars in a province ÷ ∑ the number of newly registered civilian cars in each province × the national automobile consumption tax revenue

Among them, the data on the number of newly registered civilian cars comes from the "China Automobile Market Yearbook", and the data on national automobile consumption tax revenue comes from the "China Taxation Yearbook".

3. Calculation of consumption tax revenue and the base amount that local governments pay to the central government under the principle of place of consumption

When only considering the local allocation of consumption tax for refined oil and automobiles, the consumption tax revenue under the consumption place principle of a province is the sum of the consumption tax revenue for refined oil and the consumption tax revenue for automobiles under the consumption place principle of a province.

Consumption tax revenue under the consumption location principle of a certain province = Consumption tax revenue of refined oil under the consumption location principle of a certain province + Consumption tax revenue of automobiles under the consumption location principle of a certain province (1)

The average of consumption tax revenues of each province under the consumption place principle from 2018 to 2020 calculated according to formula (1) is the base for each province to remit to the central government, see column (2) of Table 1 (omitted).

IV. Calculation of local tax revenue increments from consumption tax reform

As mentioned above, the increase in tax revenue in various provinces caused by the consumption tax reform is mainly composed of two parts: one part is the consumption tax revenue after the local governments remitted it to the central government due to the backward shift of the consumption tax collection link (consumption tax revenue was a central tax before the reform), that is, the difference between the consumption tax revenue under the consumption place principle of each province and the remitted base, which is also called the direct increase in local tax revenue caused by the consumption tax reform; the other part is the increase in consumption tax surcharges and fees formed by the regional transfer of consumption tax revenue after the consumption tax was transferred from the production link to the retail link, the increase in value-added tax revenue with consumption tax as a component of the tax base and its surcharges, which can also be called the indirect increase in local tax revenue caused by the consumption tax reform.

1. Calculation of direct increments

The calculation formula for direct increment is as follows:

Direct increase in a province = Consumption tax revenue under the consumption location principle of a province - Base amount of remittance in a province (2)

The method for calculating consumption tax revenue under the principle of consumption location can be derived from the previous article. The consumption tax revenue of each province under the principle of consumption location in 2021 calculated by this method is shown in column (3) of Table 1 (omitted). Subtracting it from the base of the upper settlement in column (2) of Table 1 (omitted) can obtain the direct increase of each province in 2021, as shown in column (4) of Table 1 (omitted) for details.

From the results of the calculation in column (4) of Table 1 (omitted), it can be seen that all provinces can obtain positive direct increases in this reform, with an average direct increase of 2.412 billion yuan. More than 70% of the provinces will have direct increases higher than 1 billion yuan, with Hunan, which has the highest direct increase, obtaining nearly 10 billion yuan.

2. Calculation of indirect increments

Since taxes and fees such as urban maintenance and construction tax, education surcharge and local education surcharge are both additional taxes and fees on consumption tax and additional taxes and fees on value-added tax, for the convenience of calculation, this article first calculates the increase in value-added tax revenue in a certain province caused by the backward shift of the consumption tax collection link when calculating the indirect increase, and then calculates the increase in additional taxes and fees on consumption tax and value-added tax, and finally adds the two together.

1. Calculation of the incremental value-added tax revenue. When the consumption tax collection link is moved from the production link to the retail link, the consumption tax revenue will be transferred from the production site to the consumption site, and the portion of the value-added tax revenue generated by the incremental consumption tax revenue transfer as the tax base will also be transferred from the production site of the taxable consumer goods to the consumption site. It can be seen that in order to calculate the incremental value-added tax revenue generated by the backward shift of the consumption tax collection link in each province, it is necessary to first calculate the incremental value-added tax revenue transfer in each province, and then calculate the incremental value-added tax revenue generated by this incremental value-added tax revenue.

(1) Calculation of the incremental transfer of consumption tax revenue. The calculation formula is as follows:

The incremental transfer of consumption tax revenue of a province = the consumption tax revenue of a province under the principle of consumption location - the consumption tax revenue of a province under the principle of production location (3)

Consumption tax revenue under the production location principle of a certain province = Consumption tax revenue of refined oil under the production location principle of a certain province + Consumption tax revenue of automobiles under the production location principle of a certain province (4)

Among them, the consumption tax revenue of refined oil products under the principle of production in a certain province is calculated according to the calculation method of consumption tax revenue of refined oil products under the principle of consumption in the previous article, except that the consumption of gasoline, diesel and fuel oil is replaced by the production, and the consumption tax revenue of gasoline, diesel and fuel oil under the principle of production can be obtained - the consumption tax revenue of refined oil products. The production data of gasoline, diesel and fuel oil are from the "China Energy Statistical Yearbook". Similarly, the consumption tax revenue of automobiles under the principle of production in a certain province is calculated according to the calculation method of consumption tax revenue of automobiles under the principle of consumption in the previous article, except that the number of newly registered civilian cars is replaced by automobile production, and the consumption tax revenue of automobiles under the principle of production can be obtained. Automobile production data are from the website of the National Bureau of Statistics. According to formula (4), the consumption tax revenue of each province under the principle of production in 2021 can be obtained, as shown in column (5) of Table 1 (omitted). Then according to formula (3), the transfer increment of consumption tax revenue of each province in 2021 can be obtained.

(2) Calculation of the incremental VAT revenue. Since VAT is a shared tax between the central and local governments, and the central and local governments share revenue in a 50:50 ratio, the calculation formula for the incremental VAT revenue of a province after the consumption tax collection link is moved back is as follows:

The increase in VAT revenue of a province = the increase in consumption tax revenue transferred from a province × 13% × 50%

2. Calculation of additional tax increments. Additional taxes and fees for consumption tax and value-added tax include urban maintenance and construction tax, education surcharge and local education surcharge. Therefore, the calculation of additional tax increments for a province is as follows:

The increase in additional taxes and fees in a province = (the increase in consumption tax revenue transfer in a province + the increase in value-added tax revenue in a province × 2) × (city maintenance and construction tax rate + 3% + 2%)

3. Calculation of indirect increment. The calculation formula is as follows:

Indirect increase in a province = Increase in VAT revenue in a province + Increase in additional taxes and fees in a province (5)

The indirect increase of each province in 2021 calculated according to formula (5) is shown in column (6) of Table 1 (omitted). The results show that when the consumption tax collection link is moved from the production link to the retail link, the indirect increase of tax revenue in 15 provinces is positive, and the indirect increase of tax revenue in the remaining 15 provinces is negative, and the number of provinces with net transfers in and out is the same.

3. Calculation of local tax revenue increment

The calculation formula is as follows:

Tax increase of a province = direct increase of a province + indirect increase of a province (6)

According to formula (6), the tax revenue increment of each province in 2021 can be estimated, as shown in column (7) of Table 1 (omitted). The results show that in the year of reform, except for the seven provinces of Liaoning, Jilin, Shandong, Guangdong, Guangxi, Shaanxi and Gansu, which experienced negative growth in tax revenue, the remaining 23 provinces (accounting for about 77%) achieved positive growth in tax revenue, among which 19 provinces saw an increase in tax revenue of more than 1 billion yuan, with Hunan still seeing the largest increase, reaching 14.021 billion yuan.

V. Evaluation of the effect of consumption tax reform on alleviating local fiscal difficulties

As can be seen from the previous article, for most provinces, consumption tax reform is conducive to promoting the growth of local fiscal resources, but the extent of fiscal growth in each province is different. Furthermore, this article draws on the approach of Tang Ming et al. (2022) and uses the fiscal deficit reduction rate (tax increase/fiscal deficit) to measure the degree to which the consumption tax reform alleviates the difficulties in local fiscal operation. From the estimated fiscal deficit reduction rate of each province in 2021, see column (9) of Table 1 (omitted). Except for the seven provinces with negative tax growth such as Liaoning, the fiscal deficit of the remaining 23 provinces in 2021 will be reduced by an average of 1.12%, among which Hunan Province has the highest fiscal deficit reduction rate (2.76%).

For seven provinces, including Liaoning, Jilin, Shandong, Guangdong, Guangxi, Shaanxi and Gansu, the reason why the consumption tax reform will lead to a decline in their revenue is that these provinces are major producers of refined oil or cars, but not necessarily major consumers, which leads to a decline in their consumption tax revenue after the consumption tax collection link is moved back. For example: Shandong, Liaoning and Shaanxi are major producers of refined oil but not major consumers; the production of cars in Liaoning and Shaanxi is also higher than their consumption; although Shandong's car consumption is higher than its production, since the consumption tax revenue of cars is less than 1/4 of the consumption tax revenue of refined oil, Shandong has also suffered more losses in the consumption tax reform simulated in this article. In order to ensure that the reform does not reduce the financial resources of the provinces, the central government can establish a supporting transfer payment system during the transition period (such as the first three years after the reform) to provide certain financial compensation to provinces with negative growth in tax revenue. It can be seen from column (7) of Table 1 (omitted) that the total amount of reduction in the seven provinces that will experience negative revenue growth due to the consumption tax reform in 2021 is estimated to be RMB 14.512 billion. If the central government makes up for this gap through transfer payments, this amount will only account for about 2.95% of the base amount remitted by local governments to the central government, that is, the total of RMB 491.323 billion in column (2) of Table 1 (omitted), which will not have a major impact on the central government's finances.

Although the effect of shifting the collection of consumption tax to a later stage on the local fiscal deficit was not significant in the first year of the reform (the maximum reduction rate for the local fiscal deficit was 2.76%), the consumption tax reform is conducive to encouraging local governments to further improve the consumption environment, tap consumption potential, and expand the consumer market, thereby increasing local consumption tax revenue. Therefore, the long-term effect of consumption tax reform on the local fiscal deficit is more prominent than the short-term effect. This paper roughly estimates the fiscal deficit reduction rate of each province five years after the reform. The estimated results are shown in column (10) of Table 1 (omitted): Five years after the reform, the average fiscal deficit reduction rate of each province can reach more than 6%, and the fiscal deficit reduction rate of Shanghai can even exceed 30%; Moreover, Shandong and Guangdong, which needed central transfer payments to compensate for financial resources in the first year of the reform, can also reduce their fiscal deficits by 10.33% five years after the reform. This shows that in the long run, the consumption tax reform can play a good role in alleviating the difficulties in local fiscal operation.

(This article is an excerpt from the original article published in Tax Research, Issue 7, 2024.)

Please cite in the following format:

Zhang Xiaoying, Tang Zijie, Chen Haiyu. Thoughts on the reform of shifting the collection of consumption tax to local governments[J]. Tax Research, 2024(7): 39-45.