Now is the time to cut taxes, say economists

By Wang Xu (China Daily)
Updated: 2008-08-13 07:38

The nation's ballooning State coffers offer an opportunity for tax cuts, which would benefit both enterprises and residents trying to cope with a slowing world economy and rising inflation.

"Now it's the time to cut taxes," said Bai Chong'en, professor of the Economics Department of Tsinghua University at a recent forum organized by the National Bureau of Statistics. "The move could both help mitigate the inflationary pressure and help maintain a steady economic growth."

China has enjoyed brisk fiscal revenue growth over the years, thanks to its booming enterprises and the growing affluence of its residents. The government's fiscal revenue grew 33.3 percent year-on-year to 3.48 trillion yuan in the first half, much faster than the government's projected increase of 14 percent for the whole year.

Despite the government's growing fiscal sinews, local enterprises have been complaining about falling profit margins due to surging costs in labor, energy and raw materials. Meanwhile, the real income growth of the Chinese largely lagged behind the government's revenue expansion, despite rising consumer inflation.

"A tax cut looks to be the most realistic move to help local businesses," said Zhou Qiren, professor of the China Center of Economic Research of Peking University. "The profit margin of local businesses has been sliding for the first half. A further economic slowdown could only worsen matters."

In the first half, China's economic growth slowed to 10.5 percent, compared with 11.9 percent for the whole of 2007. In the meantime, the profits of large-scale industrial enterprises expanded 20 percent year-on-year. Although the growth still looks robust, it's only about half of the rate compared with the same period in 2007.

According to officials from the National Development and Reform Commission (NDRC), more than 67,000 small and medium-sized enterprises with a sales revenue of over 5 million yuan went into bankruptcy in the first half. Among them, 10,000 belonged to the labor-intensive textile sector, which is the most vulnerable to rising costs. It's estimated that more than 20 million textile workers were laid off during the period, while two -thirds of textile enterprises that stayed on will have to restructure their businesses.

China in late July raised the rebates for some textile and garment exporters. Moreover, it also increased the lending quotas to quench the credit thirst of local businesses in July.

"It's time to extend the reform of the value-added tax across the nation," said Mao Yushi, a researcher from the Beijing Unirule Institute of Economics. "Previous experience shows the reform could increase the vitality of local businesses and it won't lead to a significant loss of the government's fiscal revenue."

China introduced a pilot reform of the value-added tax system in Northeastern provinces including Liaoning, Jilin and Heilongjiang in 2004. The new policy exempts an enterprise from the 17 percent value-added taxes levied on production equipment and raw materials.

Between 2004 and 2007, the new policy led to a 5 percent decrease in Liaoning province's total income of value-added taxes. Yet, the province's total fiscal revenue growth expanded more than 20 percent for 2005 and 2006 and 32.4 percent for 2007.

"The policymakers have been considering extending the reform across the nation for a while," said Su Ming, vice-director of the Research Institute for Fiscal Science under the Ministry of Finance. "And we will see the move very soon."

Experts also say it's necessary to increase the threshold for individual income tax, as customers have already felt the pinch of surging inflation.

According to the National Bureau of Statistics, the average income of urban residents increased 14.4 percent in the first half. But the growth shrunk to 6.3 percent after being adjusted for inflation.

Meanwhile, the consumer price index is still hovering around a high level, although its eased to 6.3 percent in July from 8.7 percent this February. Analysts say the government will have to relax the price controls on an array of public utilities such as electricity and gasoline, which is likely to lead to a rebound in consumer inflation.

"The rising inflation is increasing the burden on the low-income group," said Mao. "It's unreasonable for individual income to lag behind the government's fiscal revenue for so many years."

China raised the threshold of personal income tax from 1,600 yuan per month to 2,000 yuan in March. The change is said to have reduced government revenue by 30 billion yuan a year, according to official statistics.

Yet, the nation's total personal income tax expanded 27.3 percent year-on-year in the first half, rather than taking a dive after the tax cut.