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Tax cut not a good idea in changed scenario

By Mei Xinyu (China Daily)
Updated: 2008-06-03 10:00

[The author Mei Xinyu is a researcher with the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.]

Recently, the State Administration of Taxation announced that it would waive taxes worth 20.2 billion yuan ($2.9 billion) to support the reconstruction in the regions affected by the earthquake in Sichuan on May 12.

This tax reduction has more or less ignited the public expectation of a further tax cut, especially in view of the fact that the growth in the government income has outpaced the GDP growth in the last several years.

Admittedly, the State coffer seems to be quite full at this moment. The government income in 2007 was 5.13 trillion yuan, 723.9 billion ($104.9) more than the budgeted annul income.

In the first three months of 2008, the tax income was 1.51 trillion, 33.8 percent higher than the same time last year.

However, the State affluence should not automatically lead to a tax cut.

Behind the more-than-expected government income in 2007, there were several special elements that may not be repeated.

The railway transportation enterprises turned over to the central government 19.6 billion yuan from the proceeds of their sale of State assets, and that was a one-time only source of revenue.

Since the transactions on the securities market were very active in 2007 and the stamp tax rate on securities transactions was raised from 0.1 percent to 0.3 percent, the tax revenue from this sector rose by 182.6 billion yuan. After the stamp tax rate was cut back again to 0.1 percent in April this year, the income from this tax item is unlikely to be as high as it was in 2007.

Moreover, the special surcharges on oil sales were collected for the whole year, which totaled 50.14 billion yuan, an increase of 12.9 billion yuan over 2006 when they were collected for only two quarters.

Facing the increasing crude oil price on the international market, the State would not allow the domestic oil refiners to raise the prices of their products for fear of worsening the inflation pressure in the country. Thus, the government has to offer special subsidies, increase the tax rebate rate and raise the deductible sums when collecting the special surcharges on oil sales.

On top of all those, the government faces other pressures threatening its income growth. After the domestic and the foreign invested enterprises follow the same enterprise income tax code, the overall income tax drops dramatically.

And it has a long list of items waiting for the State financial input, including compulsory education, rural development, medical care, low-rent houses and many other measures to improve the common people's life.

The May 12 earthquake would also incur big costs for the government. The quake has caused nearly 70,000 deaths, nearly 20,000 missing and over 360,000 hurt. The property losses amounted to hundreds of billions.

The central government is paying for relief, medical care and reconstruction. According to the Ministry of Finance, governments at all levels have paid 16.6 billion yuan on disaster relief by May 26.

But more is to come soon. Compensation would be given to those who lost their family members. Capital would be needed to build 1 million sets of temporary dwelling houses in three months. And more financial resources would be put in recovering the road, telecommunication and other public facilities in the quake-zones.

The government might also pay for the losses of some businesses, like the written-off mortgage loans bought on the property that collapsed in the quake.

The taxation authorities are working on plans of cutting taxes to facilitate the relief work and the reconstruction. The donations to charity could be deducted from the taxes of the businesses as well as individuals according to existing tax regulations. And the quake-affected businesses could also have tax waived for their losses in the quake.

When all these factors are added together, the fiscal deficit of the central government is definitely to exceed the budgeted 180 billion yuan.

More importantly, the snowstorm and the earthquake have all reminded us of one simple fact: China is a country prone to natural disasters. We should mainly rely on ourselves, instead of international aid, for the resources and talents in fighting disasters and organize relief work hereafter. And the government, instead of donation from businesses or individuals, would be the major source of capital in this regard.

When the government income is relatively high, it is a responsible attitude for the policymakers to fix a long-reach plan on the usage of this money, including the unexpected costs in the future.

After all, a universal tax-cut is actually more beneficial to the rich than to the poor, thus widening the already dramatic gaps between different groups.

Instead of a tax-cut policy, what we need at this moment is to streamline the structure of government expenditure and enhance the internal and external supervision on the government budget.