Statutory taxation: a step forward for modern China

Along with an open budget, statutory taxation - that is, taxation that is passed as law via the NPC - is the foundation of a country and its finance.

At a news conference of the NPC on Mar 4, a reporter questioned the legitimacy of raising the tax on fuel while the price of crude oil kept dropping. The spokeswoman of the NPC Fu Ying replied that if the revised Legislation Law was approved during the "two sessions", all new taxes would have to be approved by the NPC and written into law. The goal is that statutory taxation will be fully achieved before 2020.

In August and December 2014, the Standing Committee of the NPC has twice discussed the draft of the revised Legislation Law. The ongoing session of the NPC will be the third time it is discussed. If approved, the nation's top legislature would take back the power of making tax laws. Statutory taxation is the foundation of justice - even if you have 100 justified reasons for imposing taxes, if this creates a single doubt about the fairness of the taxation, the single doubt would outweigh them.

Chaotic eras in history have been characterized by messy tax systems and laws. In medieval France, tax farming, selling official titles and expelling creditors by force were adopted for a long time to close the deficit left by the king. Without proper control, dignitaries found themselves increasingly bound by the rising national debt. Britain underwent the bloody and barbaric Middle Ages as well, but many laud the modern British system, because it has long laid out a set of practical rules to ensure statutory taxation.

Of the 18 taxes in China now, only the personal income tax, corporate income tax, and vehicle and vessel tax were written into law by the NPC and its standing committee. All the other 15 were passed on the back of temporary rules made by the State Council, and they account for 70 percent of total tax revenue. In the 1980s, China's economic system underwent a dramatic change and there was not much time to set up detailed laws. Therefore, in 1984 and 1985, the NPC and its standing committee twice authorized the State Council with the power of lawmaking, and the "regulations" or "temporary rules" became the legal basis of most of the taxes, and the system was effective until now.

Under the present taxation system, different regions began competing for faster economic development. However, the negative effects of this competition manifested themselves in eroding property rights through the willful imposing of taxes, increasing environmental degradation, and a failure to form a universal market in the country. As different regions competed to provide similar products, this resulted in homogeneity and the ironic blunting of their comparative advantages. The emergence of hundreds of financial centers and technological centers is just the tip of the iceberg.

Restoring statutory taxation would be a historic move and needs to be done urgently. Statistics show that different regions in the country have about 50 different preferential tax policies, occurring in almost every provincial area. During meetings with government officials last week, some business owners expressed their concerns that lifting the preferential tax policies would lead to a withdrawal of investment, plunging the regional economy into stagnation. They also talked about the unforeseen risks caused by large scale unemployment. Is statutory taxation truly irreconcilable with preferential tax policies?

It is true that some businesses have started to respond by withdrawing their investments. On Dec 9, the State Council ruled to abolish preferential tax policies which are illegal or unfair. Regional governments were asked to report their results to the Ministry of Finance before the end of March, and then to the State Council.

Even during the ongoing "two sessions", some deputies or members proposed preferential tax policies: Yan Bingzhu, president of Beijing Bank and deputy director of the economic committee of the nation's top political advisory body, called for preferential tax terms for small loans to consumer finance companies; NPC deputy Dai Birong proposed to use preferential tax policies to boost the employment of people with disabilities; Chen Dongzheng, a national political adviser and former councilor of Shenzhen Stock Exchange advised to improve the taxation policies on PE. Other suggestions for preferential terms for small companies kept rolling in.

There are preferential tax policies for small- and medium-sized companies and those investing in elder care in the developed countries, but will China remove them all? It is a misconception that she will, as statuary tax does not mean taking back all powers of making tax law. It will clarify if policies could be decided by ministries or regional governments. The procedure for setting up a preferential policy must be standardized by law, and the regional tax policies must be approved by regional congresses. A preferential tax policy supported by law is much better than a rash decision by government authorities.

Ensuring fair lawmaking procedures is the starting point of real justice. There might be concerns about the qualifications of the deputies if the NPC takes back the power of making tax laws. Nevertheless, statutory taxation is the foundation of a country ruled by law.

The author is a popular economist and media commentator. The views do not necessarily reflect those of China Daily.