Published: 2008-05-07

From News, page 3, issue no. 366, May 5, 2008
Translated by Zuo Maohong
Original article: [Chinese]

Chinese policymakers are drafting proposals that would redirect a significant portion of taxes that were being collected at the local level to China's central government.

The National Development and Reform Commission (NDRC) and the Ministry of Finance (MOF)are both drafting schemes which aim to increase the central government's share of taxes.

The MOF suggested that income taxes, both corporate and individual, should go to the central government completely to improve its ability to redistribute wealth nationwide. Recently, the state's share of income taxes stood at 60%.

In addition, the MOF plan would raise local government's share of value-added taxes from 25% to 35%.

The NDRC, however, proposed the central government should receive 100% of value-added taxes, the biggest tax windfall in the nation. To guarantee value-added tax revenues, it explained, local governments often push the development of manufacturing companies, wasting natural resources.

Local governments should stress public services more and let the central government handle their economic development, it suggested.

Local tax officials have responded that such a reform was "inconceivable", as value-added taxes usually comprise half of their total tax revenues.

To avoid bankrupting local governments, the two formulas both included suggestions for improving local tax codes. The NDRC formula suggested taxes on sales, real estate, resources and vehicles as potential major sources for local government revenues.

Though classified as a local tax, sales taxes from parent companies of the railway system, banks and insurers were currently submitted to the national treasury. The NDRC thus suggested the tax be made a true local tax.

In addition, it advised to levy special taxes in different areas, such as a butcher tax in pig-farming counties.

The NDRC scheme would be completed by June, while the MOF would outline the first draft of the scheme by the end of May, the EO has learned.

To some local officials, the tax reform seemed headed in the opposite direction they had expected. Recent years have seen many complaints over local financial plights and calls for more local share in taxes, which the central government had promised to react to.

At a seminar on tax reform organized by the NDRC last year, whether to tighten or loosen the central control of tax collection became a heated debate. Shortly thereafter the 17th National Congress of the Chinese Communist Party responded--in Chairman Hu Jingtao's report to the Congress, he proposed building up a tax system where "financial power matched administrative power".

As wealth and development among provinces and regions differed, the gap between their revenues would continue to widen, said Zhao Quanhou, director of the financial research office of Research Institute for Fiscal Science under the MOF. If more taxes were state-controlled, he explained, wealth disparity could be better dealt with.

Moreover, it was generally accepted by academics that compared with adjustments to financial power, to centralize revenue income would be more feasible and efficient.

A combined version of the two schemes was expected to be worked out for discussion in the next half of the year, Zhao said.