Transformation of the Fiscal and Taxation Systems

This book elucidates the murky realities of China's taxation system today, and advocates bold plans for change. Theorizing finance and taxation in relation to a national political system, the authors explain the current tangled-up realities of China's creaky, inherited and uneven tax system- and put forward a plan for radical change. This book will be of interest to finance professionals, economists, and scholars of the Chinese economy. The focus is to properly handle the three basic economic and social relations between the government and the market (and the enterprises as the main market entities), between the central and local governments, and between the public power system and the citizens. This book follows the research context of problem orientation {u2013} goal orientation - practical operation, and puts forward the ideas, basic goals and paths of fiscal system reform that adapt to the modernization of national governance. Jia Kang is Ph.D. Advisor and Research Fellow at Chinese Academy of Fiscal Sciences. He is a member of the National Committee of CPPCC and Member of Subcommittee of Economy, CPPCC. His has extensively published monographs and chapters such as New Supply: Chinese Innovation in Theory of Economics, Supply-Side Reform - China New Supply-Side Economics, Ten Topics of Supply-Side Reform, and Crucial Challenge in front of China: How to Escape Mid-income Trap. Liu Wei has a Ph.D. in Economics and is Associate Research Fellow and Graduate Instructor at Chinese Academy of Fiscal Sciences (originally, Research Institute for Fiscal Science, the Ministry of Finance, P.R.C.). He is also Adjunct Professor of East China University of Political Science and Law and is mainly engaged in the research of financial theory and policies, government investment and financing, government budget performance Series Editor’s Preface: The Year 2020—A Historic Choice of Economic Transformation and Upgrading 6 Contents 9 List of Figures 16 List of Tables 18 1 Introduction 20 1.1 New Stage and New Challenges for China to Achieve Its Strategic Goal of Modernization and an Inevitable All-Round Reform 21 The Requirement of the Times to Continue to Promote Economic and Social Transition Under the Concept of “Modern National Governance” 21 The Realistic Need for Fiscal and Tax Reform to Support Comprehensive Reform Under the New Normal of Economic Development 21 1.2 Philosophical Thinking and Path Choice for Linking the Strategic Goals of Modernization with Inclusive Growth 25 Strategic Thinking and “China’s Choice” from a Strategic Perspective 25 The Illusion of “Government Can Do Everything” Is False, and the Process of “Welfare Catch-Up” Is Difficult to Avoid Haste 25 The Rational Premise of Fiscal and Taxation Services: “Let the Market Fully Play Its Role” 25 1.3 Support for Comprehensive Reform of Public Finance: Review and Prospect 31 Landmark Significance and Historic Contribution of Tax Distribution Reform in 1994 31 The Tax Distribution System Should Be Consistent with the Market Economy 31 A Complete and Accurate Understanding of Several Important Points That Should Be Clarified in the Tax Distribution System 31 The Proposal of Public Finance and the Construction of Public Finance System 31 1.4 The International Practice of Tax Distribution System and Reference to China 62 The Basic Situation of the US Tax Distribution System 62 Basic Situation of German Tax Distribution System 62 Basic Information of Japan’s Tax Distribution System 62 Inspiration from Tax Distribution System of Market Economy Countries 62 Overview of Fiscal and Tax Management Systems of the Republic of Korea and Hong Kong, China 62 2 Problem Orientation: Prominent Problems Facing China’s Fiscal and Taxation System 127 2.1 Problems to Be Straightened Out of China’s Current Fiscal System of Tax Distribution 128 Issues Concerning Administrative Power and Expenditure Responsibility 128 Inter-governmental Income and Taxation Issues 128 Problems in the Transfer Payment System 128 Financial System Problems Below the Provincial Level 128 2.2 Insufficient Support of Management System Needed for Policy Optimization and Performance Improvement 165 Full-bore Budget Problem 165 Performance Management and Accountability Mechanism 165 The Reform of Government Accounting System 165 Imperfect Audit and Supervision System 165 2.3 Issues Related to Fiscal Sustainability 168 The Economic Slowdown Has Brought Down the Growth Rate of Fiscal Revenue 168 The “Lewis Turning Point” Appears and the Demographic Dividend Disappears 168 Infrastructure Investment Space Is Still Considerable, Social Spending Pressure Increased 168 Accumulation of Financial Risks 168 2.4 Analysis of Resistance and Obstacle Factors of the Reform 172 Solidification of the Concept/Understanding 172 Legal Restriction and Absence 172 Constraints/Generated by Path Dependence 172 Resistance from People with Vested Interests 172 3 Goal Lead: The General Idea, Basic Goal and Path of Fiscal and Taxation System Reform 177 3.1 General Idea 178 3.2 Basic Goal 179 Clearly Define Government Functions and Responsibilities and Financial Functions 179 Improve the Division of Governmental Powers and Expenditure Responsibilities 179 Reasonably Divide the Tax Base/Tax Rate in Combination with Tax Reform 179 Adjust the Fiscal Relationship Between the Central and Local Governments and Improve the Transfer Payment System 179 Improve the Budget Management System and Improve the Government Budget System 179 3.3 Path 184 Take the Government Flattening Reform as the Framework 184 The Matching Logic Is Based on Reasonable Adjustment of Power 184 Drive Tax Reform and Inter-governmental Income Distribution Reform with the Construction of Local Tax System 184 Embody the Principle of Priority of Power in a Standard Transfer Payment System 184 Establish a Modern Public Budget Management System as the Basic Support 184 Taking the Administration of Creditor’s Rights and Property Rights as Important Elements 184 4 Practical Operation: Build a Modern Fiscal and Taxation System Suitable for the Modernization of National Governance 191 4.1 Form a Scientific and Standardized Inter-governmental Financial Distribution Relationship 192 Clearly Define the Functions and Responsibilities of the Government, and Scientifically Divide the Inter-governmental Powers and Expenditure Responsibilities 192 Improve the Division of Government Revenue to Meet the Needs of Changing the Growth Model 192 Further Deepen Reform of the Fiscal System at and Below the Provincial Level 192 Improve the System of Transfer Payments and the Mechanism for Ensuring Grassroots Financial Support 192 4.2 Improve the Budget Management System and the Government Budget Management System 247 Continue to Deepen Reform of the Full Bore Budget Management 247 Improve the Annual Budget Control Method and Establish a Cross-annual Budget Balance Mechanism 247 Vigorously Promote Budget Openness and Establish a Transparent Budgeting System 247 Clear Up and Standardize the Linkage Mechanism, and Optimize the Allocation Structure of Fiscal Funds 247 Further Improve the Treasury Payment System and Treasury Cash Management System 247 Strengthen Budget Implementation Management and Actively Promote Budget Performance Management 247 Accelerate the Construction of an Information System for Fiscal Revenues and Expenditures 247 4.3 Deepen Tax Reform and Accelerate the Establishment and Improvement of the Local Tax System 276 The Basic Principles and Roadmap for Deepening Tax Reform 276 Make the Tax System More Progressive and Give Play to the Role of Taxation in Adjusting Income Distribution 276 Reduce Tax Distortions and Promote Steady Economic Growth 276 Improve the Local Tax System and Enhance the Revenue Capacity of Local Governments 276 Implement Tax Collection and Administration Reform and Improve the Efficiency of Tax Collection and Administration 276 Supporting Reform Measures to Promote Tax Reform 276 4.4 Further Deepen Reform of the Management of Government Expenditures 302 Improve the Structure of Government Expenditures 302 Optimize the Pattern of Government Expenditures and Improve the System of Spending Quotas and Standards 302 Strengthen the Performance Evaluation of Fiscal Expenditure 302 Improve the Government Procurement System and Actively Promote the Government to Purchase Public Services 302 4.5 Improve the Government Debt Management System 316 Establish and Improve the Local Debt Management System 316 Improve the Operation of National Debt and the National Debt Balance Management System 316 5 Risk Prevention and Control and Supporting Linkage 342 5.1 Evaluation of the Basic Situation of Financial Risks 343 Local Government Debt has Increased Substantially, and the Overall Risks are Under Control 343 Outstanding Problems Existing in Local Government Debt 343 A Fundamental Approach to Local Government Debt 343 5.2 The Framework and Key Points of the Financial Risk Prevention System 349 Speed up the Improvement of the System and Eliminate the Mechanism of Local Governments’ Improper Borrowing 349 Govern the Stock and Control the Increase, and Establish a Sunshine Local Debt Classification Management System 349 Build a Standardized Sunshine Financing System for Local Governments as the Basic Point to Promote the System Construction 349 Establish and Improve the Local Debt Risk Control Mechanism of “Central Regulation + Market Constraint” 349 5.3 Coordinate and Promote Fiscal and Tax Reform and Other Reforms 383 Price, Tax and Fiscal Reform Linkage 383 Establish a Reasonable Sharing Mechanism for the Proceeds from the Transfer of Public Resources 383 Establish a Complete Financial and Tax Information Data System with Big Data 383 Actively Deepen Reform of the Administrative System 383 Deepen the Reform of the Land System and Establish a Virtuous Circle of Land Finance 383 Accelerate financial Reform and Coordinate with Fiscal and Taxation Reform 383 Establish a Mechanism for Coordinating International Fiscal Policies 383 Postscript 391 References 393