Taxing consumers less

Why has the rate of growth of China's tax revenue long outgrown the rate of growth of people's income levels?

This is a question one has to ask to understand the double-digit growth of the Chinese economy for most of the past three decades.

More important, the answer may define the progress of the country's ongoing economic transformation toward less investment-fueled and more consumption-led growth.

Liu Chuanzhi, a famous Chinese entrepreneur, raised such a "sharp" question for Finance Minister Lou Jiwei at the China Development Forum held in Beijing on Sunday.

As a successful businessman who co-founded Lenovo, the world's largest PC maker and seller, Liu's concern about the long-term growth gap between the public coffers and the people's purchasing power must be widely shared among domestic and foreign enterprises eager to see domestic demand released.

Statistics show that Chinese families' average income increased by around 7.5 percent annually between 1978 and 2012. That is remarkable. But even more remarkable the country's fiscal revenues soared by more than 100 times to 11.7 trillion yuan ($1.9 trillion) in 2012, up 14.6 percent annually.

The growing tax burden has obviously added to the difficulties facing policymakers in trying to persuade domestic consumers to loosen their purse strings.

However, the technical answer that the finance minister offered shed some light on the puzzling long-term gap between the growth in income and the growth in tax.

Because most taxes are indirect ones based on the level of present prices, it is natural that tax revenues increased faster than the overall economy during the years of double-digit growth. With inflation slowing and the producer price index continuing to fall month-on-month between January and February, it is unlikely now that fiscal revenue will outgrow both GDP and income levels.

In other words, a cyclical deceleration in tax growth may automatically narrow the growth gap between fiscal revenues and families' incomes.

However, such a passive response is far from enough to effectively boost domestic consumption at a time when slowing investment and export growth are putting a drag on the country's growth momentum.

Admittedly, the finance minister has to worry about the government's fiscal preparation for the rapid aging of the world's largest population.

Yet, to make consumption-led growth a sustainable engine, Chinese policymakers need to drastically tilt the distribution of national wealth in favor of domestic consumers by cutting direct and indirect taxes.