By Gao Anming (China Daily)
Updated: 2008-03-21 07:23

For most people, this seems rather like a joke: Xing Pu, a member of the CPPCC Shanghai Committee, proposed last month that the government, fresh from a hefty increase in financial revenue, hand out 1,000 yuan ($142) to each citizen as a subsidy against soaring inflation.

Although the proposal is very like the $168 billion package President George W. Bush signed into law last month that gives each adult US citizen $600 in tax rebate, it has never been heard of in this country before, let alone put it into practice.

For me, such a proposal is not feasible. But it does raise the question, which has sparked heated debate in recent months: should the government cut taxes when its annual revenue growth triples that of the GDP?

In 2007, the government collected 5.13 trillion yuan, representing a yearly increase of 32.4 percent, or a whopping 1.25 billion yuan, and a surplus of 174 billion. In comparison, GDP grew 11.4 percent, and per capita disposable income of urban and rural residents rose 12.2 percent and 9.5 percent respectively, deducting inflation.

For years, the country's GDP has been expanding at double-digit pace, creating a China miracle. But what is more spectacular, however, is that financial revenue has grown by about 10 percentage points more. The per capita income growth of urban and rural residents during the last five years, on the other hand, was 9.8 and 6.8 percent respectively.

The authorities have been painstakingly explaining that China's taxation level is not at all high compared with many countries, advanced or developing. They might be right. But any such argument pales against the fact that the government is taking an increasing share of the newly generated wealth.

Another example constantly cited to underscore the need for a tax cut is stamp duty. The government levied 200.5 billion yuan on securities transactions last year, an astonishing 10-fold increase year-on-year, and 20 billion yuan more than the dividends paid by all the listed companies. The amount nearly equaled that of all such levies imposed during the last 16 years since the opening of the stock market.

As the world's largest developing economy, China does need fat revenues to sustain its "people-first" development, particularly in areas like social security, education, medical care and infrastructure construction. But as it transfers from a planned economy to a market economy, it is necessary for the government to readjust its functions and let market forces play a bigger role. A disproportional swelling of fiscal revenue against economic growth would hinder that process.

This is not a debate between the Keynesians and the supply-siders because even the former would not support public powers to replace the creativeness of businesses and individuals.

Cutting taxes on businesses creates a more favorable environment for them to invest, innovate and employ more people, which would in turn enlarge the tax base and somehow relieve the government from having to spend heavily on services that could be provided by the private sector. It could also help compensate increasing labor costs as a result of government-sponsored programs to protect workers, such as the implementation of the Labor Contract Law.

And cutting individual income tax or further raising the lowest taxable base would mean higher disposable income, which would lead people to spend more. With increasing trade frictions with the United States and the European Union, China has to take concrete measures to stimulate domestic consumption. Tax cuts or rebates should at least be part of the official policy package.

People have been voicing strong discontent against soaring property prices, but not many know that nearly one-third of those prices consist of taxes and fees. If the government levies less on the developers, who have been demonized recently by angry house buyers, property prices might well fall.

Tax cuts would also push the government to exercise more restraint in formulating fiscal policies. Budgetary discipline is crucial for any government, and in China, the problem is just as pressing. A scene that many lavish buildings are often government offices betrays the fact that there is much room for budgetary control.

E-mail: gaoanming@chinadaily.com.cn

(China Daily 03/21/2008 page8)