between beijing and shanghai ④｜lv bingyang: the essence of fiscal sustainability is the country's fiscal capacity
2024-09-26
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editor’s note
"see shanghai in beijing", "the paper afternoon tea/between beijing and shanghai" series was officially launched on may 17, 2024. "between beijing and shanghai" aims to analyze central policies and explore shanghai's ideas.
the first seminar discussed shanghai's strategy in china's economic transformation. the second seminar focused on the construction of an international financial center. the third seminar focused on technology finance. the fourth seminar focused on new tax systems and new business formats.
we invited yang zhiyong, director of the fiscal and taxation research center of the chinese academy of social sciences, lv bingyang, executive director of the institute of finance and taxation of renmin university of china, li ming, dean of the school of government at the university of international business and economics, and zhang junwei, second-level inspector and researcher of the macroeconomic research department of the development research center of the state council.
the following is the essence of lv bingyang’s speech. lv bingyang analyzed the advantages and disadvantages of the “one region, one system” fiscal system, the characteristics of china’s tax system and the direction of reform.
lv bingyang, executive director of the institute of finance and taxation at renmin university of china, the paper reporter quan yi photo
fiscal incentive system and the fiscal system of “one region, one system”
the third plenary session of the 18th cpc central committee has repeatedly proposed the reform of intergovernmental fiscal relations, such as appropriately strengthening the power of the central government, increasing the proportion of central fiscal expenditure, increasing local autonomous financial resources, expanding local tax sources, and optimizing the proportion of shared taxes. in my country, intergovernmental fiscal relations are called the fiscal system, which consists of fiscal power, financial power and transfer payments. intergovernmental fiscal relations are the core system to mobilize the enthusiasm of governments at all levels. it will profoundly affect the behavior of governments at all levels, shape the relationship between government and the market, and affect the provision of public products, economic development, regional balance and even political stability. although the fiscal system can achieve multiple goals, my country's long-term development orientation centered on economic construction has made the fiscal system pay more attention to mobilizing the enthusiasm of local governments at all levels to develop the economy, thereby forming a fiscal incentive system with unique chinese characteristics, which is reflected in a large number of fiscal system documents.
the "decision on the implementation of the financial contracting system by localities" issued by the state council in 1988 pointed out that the financial contracting system "has mobilized the enthusiasm of local governments to increase production and save, increase revenue and reduce expenditure, and promoted the development of the national economy", and pointed out that further reform is "to stabilize the financial relationship between the central and local governments and further mobilize the enthusiasm of local governments."
the "decision of the state council on implementing the tax-sharing fiscal management system" issued in 1993 pointed out that the tax-sharing system "correctly handles the distribution relationship between the central and local governments and mobilizes both enthusiasms" and "takes into account local interests and mobilizes the enthusiasm of local governments to develop the economy, increase revenue and reduce expenditure."
the "transition plan for adjusting the division of central and local value-added tax revenues after comprehensive implementation of the business tax-to-vat pilot program" issued by the state council in 2016 pointed out that "appropriately increasing the proportion of value-added tax shared by local governments based on the place of tax payment will help mobilize local enthusiasm for economic development and cultivating financial resources, and alleviate the current downward pressure on the economy."
the "reform plan for adjusting the division of central and local revenues after implementing larger-scale tax and fee reductions" issued by the state council in 2019 pointed out that it is necessary to "maintain a stable 50-50 sharing ratio of value-added tax" in order to "encourage local governments to cultivate and expand tax sources in economic development, enhance the 'blood-making' function of local finances, and create an environment for proactiveness, competitive development, and hard work in promoting business."
from the perspective of china's reality, the provincial government occupies an important position among the four levels of government. it can negotiate with the central government on the distribution ratios of various distributions, and can dominate the distribution ratios of various levels of government below the province. under the premise that the tax revenue distribution ratio structure between the central government and the province is relatively fixed, more frequent negotiations can be conducted between the province and the local governments to stabilize the share of the tax revenue distribution at the provincial level. the system will be transmitted layer by layer, and there will be corresponding fiscal systems applicable to each region between prefecture-level cities and their districts and counties, and between counties and towns. in addition, due to the diversity of fiscal revenue sources, the fiscal system will adopt different inter-governmental revenue distribution methods for different taxes, different fees or fund revenues, and different industries. this makes it almost possible to say that the fiscal system is "one system for one region" from the perspective of municipal and county governments. the advantage of this "one system for one region" approach is that it can mobilize the enthusiasm of local governments according to the conditions of each region, but the system cost is high, leading to a series of problems.
first, fierce tax competition among regions has hindered the construction of a unified large market.this fiscal system, which is mainly based on mobilizing local enthusiasm for economic development, has more advantages than disadvantages when china's economy is in the stage of rapid growth. therefore, the predictability of economic development at that time was relatively clear, and the economic growth mode mainly relied on factor input. each local government had a better understanding of local resource endowments. the government was able to attract investment based on the economic and social conditions at that time, and the benefits of promoting local economic growth outweighed the overall resource allocation efficiency loss. however, when china's economy enters the stage of high-quality development, and shifts from factor-driven growth to innovative growth and to a dual circulation pattern to promote growth, the fiscal incentive system will cause a wider range of resource allocation efficiency losses due to vicious tax competition.
second, large amounts of non-political tax rebates reduce the level of financial resources available to the government.in order to attract foreign companies to invest locally, local governments often give companies a certain amount of informal tax refunds. since it is called "informal", it means that local governments will flexibly use a variety of fiscal expenditure methods to return taxes to companies, and it is difficult for them to stop this behavior through tax inspections. as the return on corporate investment decreases, companies will increasingly seek to gain competitive advantages in the form of tax incentives. there is currently no public data to measure the scale of informal tax refunds, but through information from various sources, its scale is astonishing. this has led to a reduction in the formal financial resources available to governments at all levels and the non-standardization of tax operations.
pay close attention to fiscal sustainability
one of the important subtexts in the third plenary session of the 18th cpc central committee is to enhance fiscal sustainability. fiscal sustainability reflects the survival status or capacity of a country's finances. the strength of fiscal sustainability is related to the extent to which the fiscal role as the foundation and important pillar of national governance is played, and thus to major issues such as the realization of national development strategies, the performance of functions of governments at all levels, and economic and social development. after china has implemented large-scale tax cuts, fee reductions, and tax refunds for many years, the slowdown in the growth rate of fiscal revenue, the growth of rigid fiscal expenditures, and the continued inversion of revenue and expenditure have led to an extremely sharp contradiction between fiscal revenue and expenditure. fiscal security is the most bottom-line security, and the strength of fiscal sustainability is a key link in ensuring fiscal security.
fiscal sustainability is the core of current and future policy making. the discussion in the decision on strengthening fiscal resources and budget coordination, unifying budget allocation rights and local tax issues all focus on achieving long-term fiscal health. taxes are the main source of fiscal revenue, and taxes are the core of discussions on fiscal sustainability. this involves discussions on the macro tax burden. regarding the size of the macro tax burden, the focus of social controversy is mainly on the large-scale government revenue sources and statistical scope. to avoid controversy, i prefer to use the national income distribution pattern framework for analysis, because it truly reflects the disposable income levels of the government, enterprises and residents. statistical results show that in the past decade, the share of the government and residents in the national income distribution pattern has declined, while the share of enterprises and the financial sector has increased. this change in the national income distribution pattern will inevitably have an important impact on investment, consumption and other behaviors. the decline in the proportion of government disposable income has also imposed greater constraints on the performance of the functions of governments at all levels.
an important reason for the decline in the proportion of government disposable income is the overemphasis on the regulatory role of taxation. this is reflected in two aspects:first, at the local government level, local governments overemphasize the role of informal tax refunds in attracting investment.of course, it is reasonable from the perspective of each local government, because it brings benefits to the local area after all, but local optimality may lead to global losses, which is actually a manifestation of the "prisoner's dilemma".second, at the industrial policy level, too much emphasis is placed on promoting industrial development through tax incentives.at present, there are many preferential tax policies, which tend to be patched and fragmented. overemphasizing the regulatory role of taxation will not only reduce the government's available financial resources, but also may not bring about improved economic efficiency from a global perspective, because it will lead to inconsistent tax treatment among different industries and enterprises, violating the principle of tax neutrality. this diversity of preferential policies will have an impact on the business decisions and resource allocation of enterprises, and also increase the complexity of the tax system.
in addition, the issue of corporate income tax leakage is also worthy of attention.relevant statistics show that there is a large discrepancy between the tax payable rate and the actual tax paid by chinese companies, and the reasons for this need to be further studied. differences in corporate tax rates may be caused by a variety of factors, including tax incentives, differences in tax laws and accounting standards, and annual tax adjustments. these factors work together to form the diversity of tax rates among companies. in order to deeply understand this phenomenon, in-depth empirical research is needed, rather than just relying on a single numerical indicator to make judgments.
policy analysis and reform suggestions for key tax categories
in recent years, there have been many policy adjustments on vat, such as reducing the standard vat rate, raising the threshold for small-scale taxpayers, raising the identification standards for general taxpayers, and increasing the vat refund, etc., with the aim of stimulating corporate vitality by reducing corporate costs. from the perspective of global research on vat, many questions have not been accurately answered in theory. for example, what is the direction and extent of vat transfer? is vat borne by enterprises or consumers? will tax transfer be affected by the economic situation and price levels? will vat reduction reduce corporate costs? is the impact mechanism of vat reduction on enterprises to increase the marginal benefits of corporate investment or increase cash flow? even if cash flow is increased, in the economic downturn, should the increase in corporate cash flow be used for debt repayment or investment first? and so on.
the formulation of tax policies should be based on a deep understanding of the economic environment and corporate behavior. tax policy adjustments should not be hastily implemented without a full understanding of the impact of tax policies on the economy. in the context of unclear theories, the function of vat in raising fiscal revenue should be brought into play.
in addition,in the long run, vat is a tax type whose tax source may tend to shrink. there are several reasons: the tax base of consumption-based vat is narrower than that of production-based vat; the identification standard of general taxpayers is high, and there are many small-scale taxpayers; the proportion of service industry will increase in the future, and the proportion of manufacturing industry will decrease relatively; consumption and service forms tend to be diversified, and the tax source of taxable forms is reduced.value-added tax is the largest tax in my country. if value-added tax revenue declines, it will have a significant impact on fiscal sustainability, which deserves our high attention.
the third plenary session of the 18th cpc central committee proposed to "promote the backward shift of the consumption tax collection link and steadily transfer it to local governments", and the issue of consumption tax reform has attracted widespread attention. in theory, consumption tax includes selective consumption tax and general consumption tax. selective consumption tax is imposed on specific goods or services by implementing differential tax rates, aiming to achieve regulatory functions. it is usually used as a central tax to ensure the uniformity and effectiveness of policies. general consumption tax uses a uniform tax rate to tax a wide range of goods and services. it is suitable as a local tax because it can provide local governments with stable fiscal revenue. in china, selective consumption tax is currently implemented, not general consumption tax. there are differences in tax policy design between the two. therefore, the strategy of shifting the consumption tax collection link to the retail stage and using it as a local tax is only applicable to limited tax items, and in the implementation process, it is necessary to carefully consider multiple factors such as tax competition, collection and management costs, uneven tax distribution among regions, tax evasion by small-scale taxpayers, and the possible encouragement of the manufacturer's direct sales model.
at the same time, the revenue sources and size of consumption taxes may change due to changes in consumer preferences.for example, with the rise of e-cigarettes, the consumption of traditional tobacco may decrease, which may affect the revenue of consumption tax. similarly, changes in alcohol consumption may also affect the revenue structure of consumption tax. according to the "guiding opinions on the development of china's liquor industry in the 14th five-year plan (draft for comments)", the growth potential of liquor consumption is much lower than that of wine and rice wine.
when discussing the functions and reform directions of personal income tax, we must first clarify its position in the fiscal system. the core positioning of personal income tax should be to raise fiscal revenue, supplemented by precise regulation, rather than being mainly a tool for income redistribution. the experience of various countries shows that income distribution is mainly regulated by public policies such as social security, minimum wage laws, narrowing the urban-rural gap, and narrowing regional gaps. even when considering the role of personal income tax in regulating income distribution, it mainly relies on increasing the average tax rate of personal income tax rather than increasing the progressivity of taxation. in other words,the effect of personal income tax in regulating overall income distribution depends mainly on the expansion of the taxpayer group, rather than on continuously increasing the progressive tax rate for the existing taxpayer group.currently, many people in society are advocating raising the personal income tax threshold and increasing the special deduction standards. in fact, they do not understand the personal income tax adjustment mechanism for income distribution and the distribution of taxpayers. the reform proposals they put forward are actually the opposite of what they want to achieve.
the "decision" proposes to "optimize the sharing ratio of shared taxes", but the direction of optimization is not clear.from the current fiscal system, whether to increase or decrease the proportion of shared tax, there are both advantages and disadvantages, which requires careful study. in addition to optimizing the sharing ratio, we can also consider optimizing the sharing principle. at present, local governments share taxes according to the principle of production location. we can also consider sharing taxes according to the principle of consumption location, population principle and extraterritorial principle. the principle of consumption location is based on the total amount of consumption generated locally. its advantage is to guide local governments to improve the consumption environment and narrow the regional financial gap. the population principle is based on the total local population, which helps to encourage local governments to improve public services and narrow the regional financial gap. the extraterritorial principle is to divide the sales of products into sales within the jurisdiction and sales outside the jurisdiction based on the information of value-added tax invoices. this ratio is used as the basis for sharing value-added tax. the former belongs to the central government and the latter belongs to local governments. the advantage of the extraterritorial principle is that it is easy to calculate and can protect local enthusiasm while avoiding vicious tax competition between regions.
characteristics of the tax system structure and the direction of reform
china's tax system has two characteristics: first, taxation is concentrated in the upstream links of the national income cycle; second, taxation is mainly levied on corporate taxpayers.
in most developed countries, taxes are mainly concentrated in the middle and lower reaches of the national income cycle, namely income, consumption and accumulation, while china's taxes are mainly concentrated in the production stage. this tax system is conducive to improving the efficiency of tax collection and management, but it is not conducive to improving economic efficiency, because the production stage is the link of value creation, and taxation concentrated in this stage will inhibit corporate competitiveness and economic efficiency.
however, it is not a simple matter to shift the tax collection link downwards. it involves a deep-level reform of the tax system. taxation is not only a means for the government to raise fiscal revenue, but also an important link for the interaction between the government and society and the coordination of interests among various social groups. adjustments to the tax system may affect the interests of different social groups. therefore, when designing the tax system, it is necessary to consider its impact on various social classes.
the reform direction of the tax system structure can start from the following aspects: improve the ability of taxation to raise fiscal revenue; transfer the taxation link to the downstream of the national income link; increase the proportion of residents' tax payments; and transfer the tax base to consumption (services) and wealth. with the advent of the era of mass consumption and the aging of the population, we can explore the introduction of a general consumption tax (or retail tax).
there is no contradiction between a strong country and a rich people. schumpeter, the pioneer of fiscal sociology, believed that "only a strong government based on the broadest political foundation, a government that the public can feel has real power and leadership, will dare to try to overcome all obstacles encountered". it is important to realize that enhancing fiscal sustainability is not easy, and this process needs to be based on public recognition and broad social consensus. when studying the economic and fiscal relations of various countries, the famous economist acemoglu found that the higher the level of economic development, the stronger the fiscal power. when explaining this phenomenon, he proposed an interesting term - "consensus-based strong government". finance is a complex collection of systems. almost every system is a microcosm of the relationship between superior and subordinate governments, the relationship between government and society, and the relationship between government and the market. these fiscal systems are combined to form a fiscal and taxation system, which makes the proposition that "finance is the foundation and important pillar of national governance" possible, and makes fiscal and taxation system reform play a huge role in building a "consensus-based strong government". obviously, reform cannot be achieved overnight, it is a long and arduous task.
lü bingyang/executive director of the institute of finance and taxation of renmin university of china xie qiuyi/compiled
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