Reforms of tax system should encourage innovation and green economy while boosting revenue growth of local governments

The proposed increase in the minimum threshold of personal income tax, from the current 2,000 yuan ($308) to 3,000 yuan, has put the country's latest draft amendment to the Personal Income Tax Law in the spotlight.

The high degree of public attention has highlighted the necessity of the country reforming its public fiscal and taxation system to lighten ordinary people's tax burdens and improve their living conditions. This is especially true as the central government is committed to promoting growth in people's incomes at a rate no lower than the growth rate of the country's gross domestic product during the 12th Five-Year Plan (2011-2015) period.

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Under these circumstances, how to push forward some sweeping and effective reforms of the country's fiscal and taxation system to make it more adaptable to the needs of the national economic and social development remains an urgent task.

The country should first try to build a more reasonable revenue and tax distribution system, by reducing the current five-layer structure to a triple-layer structure comprising the central, provincial and county-level governments - China's current fiscal make-up includes the prefecture and township levels.

Reducing the fiscal structure from five to three would be more compatible with market economic principles and China's current economic and social development stage. It would also push forward the country's long-awaited comprehensive reforms aimed at reducing its administrative levels and lowering its administrative costs. The formation of such a simplified and clarified administrative, fiscal and tax distribution system would also boost the performance and efficiency of the three levels of government.

Following the construction of such a triple-layer fiscal framework, the country should then clarify and more clearly demarcate their administrative powers and responsibilities. For example the central government should mainly be involved with large-scale and long-term projects, such as national defense, while local governments should concentrate on the provision of public services.

The formation of a fiscal power for governments at various levels that can match their administrative power remains the key to whether the country can successfully reform its central government-tilted public fiscal system during the 12th Five-Year Plan period. It will also provide an institutional guarantee for the government's endeavors to promote the balanced distribution of public services and perfect the country's socialist market economic system. As a move in this direction, the country should try to promote more reasonable fiscal and tax distribution among different levels of governments and implement real estate and resource taxes to consolidate the local fiscal foundation.