Boost household incomes, says top economist

The headquarters of the Ministry of Finance in Beijing. The ministry is responsible for China's taxation policies. Provided to China Daily

It is high time to rein in the income of the government and corporate sector and boost household incomes, a prominent economist has suggested.

Liu Kegu, former vice-president of China Development Bank and a member of the Chinese People's Political Consultative Conference National Committee, the country's top political advisory body, said the income of the government is already high and should not be raised anymore.

"When many pundits say China's tax burden level is not high, standing at 19 percent, it is misleading because this measures the narrowest scope of tax, the general public finance," the outspoken fiscal expert said at the just-concluded China Economic Annual Conference, hosted by the China Center for International Economic Exchange.

A number of key quasi-taxes are not included, according to him. A social security fund in most countries is counted as a tax but is disguised as a "fee" in China. Land transfer fees, a large chunk of government revenue that accounted for more than 6 percent of the country's gross domestic product, is also not included.

"Many argue that when the government earns fees from land transfers, it loses its land and this does not result in a change in its balance sheet. But does the government really lose its land? It is merely offering a 70-year property lease on the land. The land transfer fee should be regarded as 70 years of rent for the land," he said.

Combining these funds, China's real tax burden as a share of GDP should be 31.57 percent, according to Liu, a level a little higher than the average among the world's upper-middle-income countries. China is counted by the World Bank as an upper-middle-income country.

"What does this mean? It means the government income as a share of national income should not be raised any more. It means the goal of 1994 fiscal reform has been realized," he said.

Liu participated in the overhaul of China's fiscal system in 1994. The reform set out to solve two critical flaws in China's fiscal system: the overly low fiscal revenue-to-GDP ratio and the overly low central government revenue-to-overall revenue ratio. The reform significantly boosted the disposable revenue of central government and was regarded as a watershed for China's economy.

In 1993, before the reform materialized, central government revenue accounted for only 22 percent of total fiscal revenue. In 2012, it climbed to 47.9 percent. In 1993, the fiscal revenue to GDP ratio was 11.2 percent. In 2012, it was 22.6 percent.

The rise of government income ratio was accompanied by a decline in the household income ratio. According to Song Guoqing, a Peking University economics professor and an academic member of the central bank's monetary policy committee, the share of household income in the national income pie was 67.5 percent in 2000. It steadily declined to 58.3 percent, the lowest point in history, before it picked up a bit to 60.8 percent in 2011.

The fall of the household income ratio was considered by many economists as the underlying reason for China's excessively low household consumption ratio, which now stands at 35 percent of GDP, way behind international norms.

Zhu Min, vice-president of the International Monetary Fund, has said that raising the household income ratio is key to rebalancing the country's economic growth model.

"Investment to GDP ratio has reached nearly 50 percent. What's worrying is the steady decline of the marginal return of investment. That means adding investment could do very limited good for growth," Zhu said.

The only way to boost domestic demand is to create more money-making opportunities for people, according to Zhu. This can be realized by boosting the service industry and tilting government expenditure toward livelihood areas instead of big investments.

However, Song said raising the household income share should not only be viewed from a "boosting consumption" perspective, which he said sounds like "feeding the cow with the purpose of milking it".

"Gaining income for households in itself is a purpose. Whether they spend it or save it, it is their decision," said Song.

Liu said to make way for a better household income ratio, the corporate income ratio should be reduced. Reform should be implemented to squeeze the incomes of resource and monopoly corporations.