Tax distribution reform is overdue

The Chinese government must expedite the tax distribution reform between the central and local governments, says an editorial in the Southern Metropolis Daily. Excerpt:

The last tax distribution reform between the central and local governments was in 1994. Before the reform, the central government's revenue accounted for about 22 percent of national government revenue. After the reform, the central government revenue's share rose to more than 50 percent.

According to the budget law passed in 1994, local governments are not allowed to raise money and have deficits. But local governments undertook the responsibilities of providing many public services in housing, social security and education. The central government pays the local governments in the form of transfer payments to subsidize the local authorities' expenses. Power is concentrated in the central government.

As a result, local governments attach more importance to promoting local industrial development to collect the product taxes. That's why excess productivity of many backward industries is a problem that's hard to solve in China.

Land transfers and the value-added tax of the land market become two important revenue sources for local governments, pushing housing prices higher.

The county and town governments are the main executors of many government policies. But they do not have the necessary revenue sources to help them do their jobs. Arbitrary fees become common. And the lower-level officials have to please their bosses to secure enough financial support.