Improving the Tax System amid the Rule-of-Law China 9789811670329, 9789811670336, 9811670323

Table of contents :
Acknowledgements
Contents
Authors and Translators
About the Authors
Translators
1 An Overview of China’s Tax System
1.1 Research Background and Significance
1.1.1 Background
1.1.2 Research Significance
1.2 Literature Review
1.2.1 Logical Relationship Between Rule of Law and the Improvement of the Tax System
1.2.2 Research on the Relevant Theories of Tax System Reform
1.2.3 Research on Tax Structure Amid Rule of Law
1.2.4 Tax-Sharing System Under the Rule of Law
1.2.5 Research on Local Tax Under the Rule of Law
1.2.6 Research on Tax Collection and Management Amid Rule of Law
1.2.7 Conclusion of Literature Review
1.3 Research Design and Research Methods
1.3.1 Research Design
1.3.2 Research Methods
1.3.3 Research Difficulties
1.4 Research Structure and System
1.4.1 Technical Roadmap
1.4.2 Research Framework
1.5 Innovations and Deficiencies
1.5.1 Innovations
1.5.2 Inadequacies
2 Rule-of-Law China and Its Requirements for the Tax System
2.1 Building a Rule-of-Law China: The Only Way to Modernize the National Governance System
2.1.1 National Governance and the Modern National Governance System
2.1.2 The Modernization of the National Governance System and the Construction of the Rule of Law in China
2.1.3 National Governance Under the Law: The Only Way to Modernize the National Governance System
2.2 Rule-of-Law Taxation: A Requisite to Build a Rule-of-Law China
2.2.1 Connotations and Essence of Rule-of-Law Taxation
2.2.2 Rule-of-Law Taxation: An Inevitable Requirement of a Rule-of-Law China
2.3 Relations to be Handled to Promote Law-Based Taxation
2.3.1 Optimizing the Tax Structure
2.3.2 Improving the Tax-Sharing System
2.3.3 Perfecting the Local Tax System
2.3.4 Improving the Tax Collection and Administration System
3 China’s Tax System Structure: Issues and Solutions
3.1 Theoretical Analysis of the Tax Structure Optimization
3.1.1 Connotations and Classifications of the Tax Structure
3.1.2 Theoretical Basis and Assessment of Tax Structure Optimization
3.1.3 Tax Structure Model and Selection of Main Tax Categories
3.1.4 Administrating Tax According to Law as the Ultimate Goal of Tax Optimization
3.2 Analysis of the Tax Structure Based on International and Domestic Standards
3.2.1 Analysis Based on the Organization for Economic Cooperation and Development Standards
3.2.2 Analysis Based on World Bank Standards
3.2.3 Analysis by Green Tax Standard
3.2.4 Analysis Based on Direct and Indirect Tax Standard
3.2.5 Analysis of the Causes of the Changes in China’s Tax Structure
3.3 The Mathematical Relationship of the Influence of China’s Tax Structure on Economic Growth and Income Distribution Against the Background of Rule of Law
3.3.1 Empirical Analysis of the Impact of China’s Tax Structure on Economic Growth
3.3.2 Empirical Analysis of the Influence of China’s Tax Structure on Income Distribution Under the Rule of Law
3.4 Lessons from Tax Structure Reforms Abroad
3.4.1 Diachronic Analysis of Tax Structures in Other Countries
3.4.2 Synchronic Analysis of Tax Structure in Different Countries
3.4.3 Implications of Those Changes for the Optimization of China’s Tax Structure
3.5 Principles and Policy Suggestions for Optimizing China’s Tax Structure
3.5.1 Principles for Optimizing Tax Structure
3.5.2 Policy Recommendations
3.5.3 Policy Recommendations to Optimize the Tax Structure
4 Improving the Tax-Sharing System Amid Rule-of-Law China
4.1 Relationship Between the Tax-Sharing System and the Rule of Law
4.1.1 The Juristic Basis of the Tax-Sharing System
4.1.2 The Juristic Significance of the Tax-Sharing System
4.1.3 The Tax-Sharing System: An Important Part of China’s Move Toward the Rule of Law
4.2 China’s Current Tax-Sharing System: Tax Revenue Sharing Game Between Central and Local Governments
4.2.1 A Reexamination of the Purpose of the Tax-Sharing System
4.2.2 Tax Revenue Game Between the Central and Local Governments Due to Information Asymmetry
4.3 The Experiences of Tax-Sharing Systems Based on the Rule of Law in Typical Countries
4.3.1 An Examination of Tax-Sharing Systems in Typical Countries
4.3.2 Lessons from Developed Countries Practising Tax-Sharing Systems
4.4 Basic Ideas of a Law-Based Tax-Sharing System
4.4.1 Regulating Intergovernmental Tax Distribution in Accordance with Law
4.4.2 Building a Tax System in the Form of Law
4.4.3 Establishing a Legal System Supervising Budget Management
5 Local Taxes: Issues and Solutions
5.1 Theoretical Analysis of Local Tax Reform Under the Rule of Law
5.1.1 Connotations of Local Taxes and the Local Tax System
5.1.2 The Principle of Local Tax Reform Under the Rule of Law
5.2 The Changes and Current Situation of Local Taxation Toward Rule of Law in China
5.2.1 Changes in Local Taxation Toward Rule of Law
5.2.2 Achievements in Rule-of-Law Local Taxation
5.2.3 Obstacles on the Way of Local Taxation Toward the Rule of Law
5.3 Lessons from Law-Based Local Taxation in Typical Countries
5.3.1 Foreign Local Taxation Systems
5.3.2 A Comparison of Local Tax Power Systems in Foreign Countries
5.3.3 A Comparison of Local Tax Lawmaking in Foreign Countries
5.4 Suggestions for Rule-of-Law Local Taxation in China
5.4.1 The Goal and Framework of Rule-of-Law Local Taxation in China
5.4.2 Suggestions for Tax Revenue Division Under the Law
6 Tax Collection and Administration: Issues and Solutions
6.1 Review on the Reform of Tax Collection and Administration in China
6.1.1 The Tax Collection and Administration System and Its Changes
6.1.2 The Reform of China’s Tax Collection and Administration System
6.2 Issues in Building Rule-of-Law Collection and Management in China
6.2.1 Tax Administration by Law to be Improved
6.2.2 Paying Taxes According to Law to be Reinforced and Awareness of Paying Taxes to be Improved
6.2.3 Protection of Taxpayers’ Rights and Interests to be Regulated
6.2.4 Legal Environment of Taxation to be Improved
6.3 International Experiences and Suggestions in Tax Collection and Administration
6.3.1 International Experiences in Tax Collection and Administration
6.3.2 Implications
6.4 Policy Suggestions for Improving China’s Tax Collection and Administration System
6.4.1 Improving Tax Law, Optimizing Administration and Service, and Strengthening Rule-of-Law Tax
6.4.2 Raising Citizens’ Awareness of Paying Taxes According to Law
6.4.3 Improving Tax Relief System to Protect Taxpayers Rights
6.4.4 Improving Tax Collection Administration, the Tax System, and the Legal Environment
Conclusion
Postscript
References

Citation preview

Qiao Wang Weiqun Xi

Improving the Tax System amid the Rule-ofLaw China

Improving the Tax System amid the Rule-of-Law China

Qiao Wang · Weiqun Xi

Improving the Tax System amid the Rule-of-Law China

Qiao Wang Jiangxi University of Finance and Economics Nanchang, China

Weiqun Xi Jiangxi University of Finance and Economics Nanchang, China

Translated by Zhang Jianli, Li Chunchang and Xiao Lin

Funded by Chinese Fund for the Humanities and Social Sciences (project number:18WJY008) ISBN 978-981-16-7032-9 ISBN 978-981-16-7033-6 (eBook) https://doi.org/10.1007/978-981-16-7033-6 Translation from the Chinese language edition: 法制中国背景下的税收制度建设研究 by Qiao Wang, and Weiqun Xi, © People’s Publishing House 2017. Published by People’s Publishing House. All Rights Reserved. © People’s Publishing House 2022 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Acknowledgements

Improving the tax system amid Rule-of-Law China, one of the key National Social Science Fund projects, was published by the People’s Publishing House in China in 2017. In 2018, the book was chosen and financially supported by the Chinese Fund for the Humanities and Social Sciences to be translated into English (18WJY008). The translation was much harder than we had expected, as the book contained a substantial amount of jargon and culturally specific features. Its completion would not have been possible without the support from the China Social Sciences Planning Office. We would like to thank the People’s Publishing House, especially Ms. Feng Yanling, for getting us through all the formalities and paperwork so that we could fully devote ourselves to this translation. Ms. Feng’s patience and understanding helped us through the most difficult period of the coronavirus. We feel much indebted to the authors of the book, Wang Qiao and Xi Weiqun. Their trust was sincere, their academic contribution was immense, and their financial support was generous. All these things will continue as a legacy long after the completion of this translation is published. We appreciate what Gao Xuan, a Chinese tax official affiliated with the National Tax Bureau in Xianyang City, Shaanxi Province, contributed to the translation work. She is generous and patient to share with us her professional insider views on Chinese tax policies and practices. We are grateful to Christine Young, an international teacher from Canada, for her hard work in revision. Her keen insight and brilliant writing often shine through the revision into the translation. It’s been a great privilege to work with her and let her polish our translation.

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Furthermore, thanks go to our graduates, Ni Ziqian, Chen Lin, Jiang Qifan, and Zhang Xiao. Their parallel text alignments were amazing and laid a solid foundation for our translation. Their work made it possible for us to finish the translation earlier. April 2020

Zhang Jianli Li Chunchang Xiao Lin

Contents

1 An Overview of China’s Tax System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Research Background and Significance . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.2 Research Significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.1 Logical Relationship Between Rule of Law and the Improvement of the Tax System . . . . . . . . . . . . . . . . . 1.2.2 Research on the Relevant Theories of Tax System Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.3 Research on Tax Structure Amid Rule of Law . . . . . . . . . . . . 1.2.4 Tax-Sharing System Under the Rule of Law . . . . . . . . . . . . . . 1.2.5 Research on Local Tax Under the Rule of Law . . . . . . . . . . . 1.2.6 Research on Tax Collection and Management Amid Rule of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.7 Conclusion of Literature Review . . . . . . . . . . . . . . . . . . . . . . . 1.3 Research Design and Research Methods . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 Research Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.3 Research Difficulties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Research Structure and System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1 Technical Roadmap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.2 Research Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Innovations and Deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.1 Innovations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.2 Inadequacies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Rule-of-Law China and Its Requirements for the Tax System . . . . . . . 2.1 Building a Rule-of-Law China: The Only Way to Modernize the National Governance System . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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2.1.1 National Governance and the Modern National Governance System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 The Modernization of the National Governance System and the Construction of the Rule of Law in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.3 National Governance Under the Law: The Only Way to Modernize the National Governance System . . . . . . . . . . . 2.2 Rule-of-Law Taxation: A Requisite to Build a Rule-of-Law China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Connotations and Essence of Rule-of-Law Taxation . . . . . . . 2.2.2 Rule-of-Law Taxation: An Inevitable Requirement of a Rule-of-Law China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Relations to be Handled to Promote Law-Based Taxation . . . . . . . . . 2.3.1 Optimizing the Tax Structure . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Improving the Tax-Sharing System . . . . . . . . . . . . . . . . . . . . . 2.3.3 Perfecting the Local Tax System . . . . . . . . . . . . . . . . . . . . . . . 2.3.4 Improving the Tax Collection and Administration System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 China’s Tax System Structure: Issues and Solutions . . . . . . . . . . . . . . . 3.1 Theoretical Analysis of the Tax Structure Optimization . . . . . . . . . . 3.1.1 Connotations and Classifications of the Tax Structure . . . . . 3.1.2 Theoretical Basis and Assessment of Tax Structure Optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3 Tax Structure Model and Selection of Main Tax Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.4 Administrating Tax According to Law as the Ultimate Goal of Tax Optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Analysis of the Tax Structure Based on International and Domestic Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Analysis Based on the Organization for Economic Cooperation and Development Standards . . . . . . . . . . . . . . . . 3.2.2 Analysis Based on World Bank Standards . . . . . . . . . . . . . . . 3.2.3 Analysis by Green Tax Standard . . . . . . . . . . . . . . . . . . . . . . . 3.2.4 Analysis Based on Direct and Indirect Tax Standard . . . . . . . 3.2.5 Analysis of the Causes of the Changes in China’s Tax Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Mathematical Relationship of the Influence of China’s Tax Structure on Economic Growth and Income Distribution Against the Background of Rule of Law . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Empirical Analysis of the Impact of China’s Tax Structure on Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Empirical Analysis of the Influence of China’s Tax Structure on Income Distribution Under the Rule of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3.4 Lessons from Tax Structure Reforms Abroad . . . . . . . . . . . . . . . . . . . 3.4.1 Diachronic Analysis of Tax Structures in Other Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 Synchronic Analysis of Tax Structure in Different Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.3 Implications of Those Changes for the Optimization of China’s Tax Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Principles and Policy Suggestions for Optimizing China’s Tax Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 Principles for Optimizing Tax Structure . . . . . . . . . . . . . . . . . 3.5.2 Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.3 Policy Recommendations to Optimize the Tax Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Improving the Tax-Sharing System Amid Rule-of-Law China . . . . . . 4.1 Relationship Between the Tax-Sharing System and the Rule of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.1 The Juristic Basis of the Tax-Sharing System . . . . . . . . . . . . . 4.1.2 The Juristic Significance of the Tax-Sharing System . . . . . . . 4.1.3 The Tax-Sharing System: An Important Part of China’s Move Toward the Rule of Law . . . . . . . . . . . . . . . . 4.2 China’s Current Tax-Sharing System: Tax Revenue Sharing Game Between Central and Local Governments . . . . . . . . . . . . . . . . . 4.2.1 A Reexamination of the Purpose of the Tax-Sharing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2 Tax Revenue Game Between the Central and Local Governments Due to Information Asymmetry . . . . . . . . . . . . 4.3 The Experiences of Tax-Sharing Systems Based on the Rule of Law in Typical Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 An Examination of Tax-Sharing Systems in Typical Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Lessons from Developed Countries Practising Tax-Sharing Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Basic Ideas of a Law-Based Tax-Sharing System . . . . . . . . . . . . . . . . 4.4.1 Regulating Intergovernmental Tax Distribution in Accordance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.2 Building a Tax System in the Form of Law . . . . . . . . . . . . . . 4.4.3 Establishing a Legal System Supervising Budget Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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5 Local Taxes: Issues and Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 5.1 Theoretical Analysis of Local Tax Reform Under the Rule of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 5.1.1 Connotations of Local Taxes and the Local Tax System . . . . 190

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5.1.2 The Principle of Local Tax Reform Under the Rule of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 The Changes and Current Situation of Local Taxation Toward Rule of Law in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 Changes in Local Taxation Toward Rule of Law . . . . . . . . . . 5.2.2 Achievements in Rule-of-Law Local Taxation . . . . . . . . . . . . 5.2.3 Obstacles on the Way of Local Taxation Toward the Rule of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Lessons from Law-Based Local Taxation in Typical Countries . . . . 5.3.1 Foreign Local Taxation Systems . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 A Comparison of Local Tax Power Systems in Foreign Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.3 A Comparison of Local Tax Lawmaking in Foreign Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Suggestions for Rule-of-Law Local Taxation in China . . . . . . . . . . . 5.4.1 The Goal and Framework of Rule-of-Law Local Taxation in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 Suggestions for Tax Revenue Division Under the Law . . . . . 6 Tax Collection and Administration: Issues and Solutions . . . . . . . . . . . 6.1 Review on the Reform of Tax Collection and Administration in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.1 The Tax Collection and Administration System and Its Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.2 The Reform of China’s Tax Collection and Administration System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Issues in Building Rule-of-Law Collection and Management in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 Tax Administration by Law to be Improved . . . . . . . . . . . . . . 6.2.2 Paying Taxes According to Law to be Reinforced and Awareness of Paying Taxes to be Improved . . . . . . . . . . . 6.2.3 Protection of Taxpayers’ Rights and Interests to be Regulated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.4 Legal Environment of Taxation to be Improved . . . . . . . . . . . 6.3 International Experiences and Suggestions in Tax Collection and Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 International Experiences in Tax Collection and Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 Policy Suggestions for Improving China’s Tax Collection and Administration System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.1 Improving Tax Law, Optimizing Administration and Service, and Strengthening Rule-of-Law Tax . . . . . . . . . 6.4.2 Raising Citizens’ Awareness of Paying Taxes According to Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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6.4.3 Improving Tax Relief System to Protect Taxpayers Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 6.4.4 Improving Tax Collection Administration, the Tax System, and the Legal Environment . . . . . . . . . . . . . . . . . . . . . 264 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277

Authors and Translators

About the Authors Qiao Wang is a Professor of public finance and Chair Professor of the Finance and Taxation Research Center at Jiangxi University of Finance and Economics. His research interests are financial policy and theories. He is now an expert on the Discipline Assessment Committee of the National Social Science Fund and a member of the National Education Steering Committee for Graduate Education of the taxation professional degree. He is the Standing Director of the China Taxation Society, Deputy Director of the Academic Committee, and Standing Director of the China Finance Society. He is one of the academic vanguards of universities in Jiangxi Province and the leading talent of the “Ganpo Talent 555 Project”. He has been engaged in the teaching and scientific research of theory and policy of finance and taxation for many years, and his scientific research achievements have been awarded numerous times at both the provincial and ministerial levels. In recent years, he has published more than fifty papers in taxation research and other taxation-related academic journals. He has presided over major projects, key projects, and general projects of the National Social Science Fund as well as projects of the National Natural Science Foundation of China. In addition, he has presided over numerous projects of the World Bank, the Ministry of Finance, and the Social Science Planning Project of Jiangxi Province. He has won excellent achievement awards many times at the provincial and ministerial levels. He has published nine monographs and edited many textbooks, such as China’s Tax System and Comparative Tax System. Weiqun Xi is a Professor of public finance, Director of the Finance and Taxation Research Center of Jiangxi University of Finance and Economics, and a Doctoral Supervisor of the School of Finance, Taxation, and Public Management. Her research interests are financial theories and China’s financial policy. In recent years, she has published more than 100 papers in professional journals such as Taxation Research. She has presided over two projects of the National Social Science Fund, joint projects of the Ministry of Finance, and more than ten Social Science Planning Projects of

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Jiangxi Province. She has published five monographs, served as the Chief Editor and Deputy Editor of six textbooks, and participated in the compiling of three textbooks. She has won excellent achievement awards many times at the provincial level.

Translators Zhang Jianli is an Associate Professor of the School of Foreign Languages of Jiangxi University of Finance and Economics. She graduated from Shanghai International Studies University with a bachelor’s degree in English and from New York Institute of Technology with a master’s degree in Business Administration. She previously served as the Director of Department No. 1 of the School of Foreign Languages. She serves as an interviewer of the Certificate Examination for Teachers of Chinese to Speakers of Other Languages with the Confucius Institute Headquarters in China. She has published ten papers in academic journals at home and abroad. She has presided over and participated in one academic translation project granted by the Chinese Fund for the Humanities and Social Science. She has translated one book, served as the Deputy Editor-in-chief of one textbook, and participated in the compilation and translation of five textbooks and works of literature. She has participated in five teaching research projects of higher education in Jiangxi Province. She was honored as one of the Top Ten Teachers of Jiangxi University of Finance and Economics in 2006 and one of the Top Ten Model Teachers of Jiangxi University of Finance and Economics in 2009. Li Chunchang is a Professor of English and received his MA in English from Henan University and his Ph.D. in English Poetry and Poetics from Sun Yat-sen University. Being the author of Ezra Pound’s Utopia and translator of Francis Bacon’s Of the Wisdom of the Ancients, and Jonathan Swift’s The Battle of the Books and A Tale of a Tub, he focuses on the relationship between twentieth-century American poetry and China and on the idea of progress in seventeenth and eighteenth centuries’ England. He was a visiting scholar at the University of Cambridge (2013–2014) and the University of Florida (2019–2020). He teaches British literature and English writing and is working on a China Social Science project, “Jonathan Swift’s idea of classics”. Xiao Lin received her Ph.D. in Foreign Linguistics and Applied Linguistics from Peking University. Being the author of two books, Speech Communication from the Sociolinguistics Perspective and Speech Act as Investment, she has a broad interest in language and society, including sociolinguistics, discourse analysis, intercultural communication, translation ability development, etc. She was a visiting scholar at the State University of New York (2014–2015). She teaches Sociolinguistics, English Grammar, English Lexicon, and Academic Writing. She is currently working on three projects about MTI students’ translation ability development through a sociolinguistic lens. She has been a volunteer translator for Cochrane since 2018.

Chapter 1

An Overview of China’s Tax System

1.1 Research Background and Significance 1.1.1 Background At the beginning of 2013, in an instruction on how to accomplish political and legal work in the new situation, General Secretary Xi Jinping proposed building a “rule of law China” for the first time. In November of the same year, the Third Plenary Session of the 18th CPC Central Committee (CPCC) established “Promoting a-Ruleof Law China” as the new goal of building the rule of law in the new period of China and as the major part of comprehensively deepening the reform. From October 20th to 23rd, 2014, the Chinese Communist Party (CCP) held the fourth plenary session of the 18th CPC Central Committee to discuss major issues such as how to “govern the country according to law.” This was the first plenary session in CPC history focusing on “ruling the country by law”. The Plenary Session adopted the Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning the Comprehensive Promotion of Ruling the Country by Law (hereafter referred to as “Decision”).1 In the decision, it was proposed that China should further promote administration by law and push the government toward by law. The Fourth Plenary Session of the CPC Central Committee was an epoch-making landmark session both in CPC history and China’s legal history. This plenary mapped out how to modernize the national governance system and governance capacity aimed to “promote the rule of law in an all-round way”. This was regarded as the “inevitable requirement” to “advance the modernization of the national governance system and governance capacity”. Jurisprudentially, the decision established the necessary relationship between “the rule-of-law country” and “the modernization of the national governance system and governance capacity”, essentially proposing the precedence

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Lai, Zaoxing. The Connotation of Rule of Law in the Modernization of National Governance System and Capacity, GuangMing Daily, May 14, 2014.

© People’s Publishing House 2022 Q. Wang and W. Xi, Improving the Tax System amid the Rule-of-Law China, https://doi.org/10.1007/978-981-16-7033-6_1

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of the rule of law over the modernization of the national governance system and governance capacity. In other words, modernization of the national governance system and governance capacity would not succeed without legally defined national governance system or governance capacity. In October 2015, General Secretary Xi Jinping reiterated that “the rule of law was the fundamental way of governance”, which raised the rule of law to a new height of importance. For the national governance system and governance capacity to modernize, the rule of law should be taken as a strategy to promote national progress and civilization. As the cornerstone of governance, the rule of law played a prominent role in national and social governance. It was not only a reflection and summary of the legal system building in the past 30 years of reform and opening up but also a continuation and development of it. It consolidated and conserved the achievements of 30 years of reform and opening up, safeguarding the comprehensive deepening of reform in China initiated by the 18th CPCCC Third Plenary Session and laying a solid foundation for the rule of law in “national governance”. The current situation of China’s economic development shows that the economic growth rate has fallen into medium–high speed, and the elimination of backward production capacity and industrial structural adjustment are moving ahead. At present, China’s economic operation is in a “shifting period”. The key task of China’s current macroeconomic regulation is how to ensure a smooth transition to the “new normal”, heralding the arrival of a more long-term stage where it is more difficult, in this sense, to stabilize than to increase. Under the “new normal” economy, China’s development is facing multiple risks and challenges as well as new opportunities. At present, all parties in China should take the initiative to adapt to and lead the “new normal” of economic development. As both the foundation and the important pillar supporting national governance, finance should make corresponding adjustments the earliest possible to adapt to the current new economic development and lay a good foundation for the stable transition of the economy into the new normal and the smooth start of the 13th Five-Year Plan. Therefore, it is an important topic in current research on how to promote China’s economic development amid “a rule-of-law China”. Law-based tax administration is an essential part of rule-of-law governance. It is also the basic requirement of rule-of-law governance for taxation and the basic standard by which to measure the quality of taxation. Therefore, this book aims to push forward tax system building in agreement with the new situation and new changes. At present, when aiming to advance the modernization of the national governance system and governance capacity, China’s rule-of-law should be focused on fully performing government functions in accordance with the law, improving the legal system of administrative organizations and administrative procedures, and promoting law-based institutions, functions, power, procedures, and responsibilities, thus marking out new and clear requirements for China’s tax system.

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1.1.2 Research Significance With the advancement of the reform and opening up, China’s economic and social development has made remarkable achievements. With the fulfillment of the “Four Modernizations”, China’s governance is moving on the right track with the rule of law, and a socialist legal system with Chinese characteristics is being established and improved. The basic frame of China’s current legal system has been laid down. However, there are still many problems in law enforcement and implementation, and public awareness of the rule of law has yet to be raised. There are still many problems in society, and the discords in the political field are also glaring. For example, democratic elections, democratic decision-making, democratic management and the democratic supervision system are far from perfect. Economic development has brought about imbalances in industrial structure and conflicts between economic and social benefits; there is much room for improvement in socialist core value promotion, cultural management, cultural building, cultural market systems and service systems. Discords arise when society questions the effective use of ecological natural resources and ecological conservation and compensation. To shape a modern national governance system, China should not only update the outdated systems and mechanisms but also establish new systems and mechanisms and formulate laws and regulations that can meet the requirements of the times. Systems that do not answer to the time shall be abolished according to law, and systems that do shall be implemented in accordance with law. In the course of modernization, China needs to improve governance capacity based on practice, institutionally raise legal awareness among the public, effectively use national systems and laws, and incorporate institutional advantages into national administrative efficiency to advance governance capacity. The 18th CPCC Fourth Plenary Session made comprehensive arrangements for governing the country according to law, which involved many reforms in the field of taxation. A mature government fiscal system is the basic guarantee for the government to make up for market failures and perform its fiscal functions. The financial development since the reform of the tax-sharing system shows that the current tax system is inefficient due to mismatches between the tax structure and the economic development, imperfections in the system itself, inefficient tax law enforcement and the tax legislation, imbalances between the central and local financial and administrative powers, absence of main local taxes, and inability of the tax collection and administration to meet the modern needs, posing great barriers to China’s socialist market economy. The current tax system also makes an inherent demand for ruling the country according to law. Playing a dominant role in supplying public goods, the government needs to establish a sound and standard tax system to promote a sound and legal fiscal system and to deepen the reform of the tax-sharing system, which is also an important step from the institution of a socialist market economy to public finance.

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1.2 Literature Review 1.2.1 Logical Relationship Between Rule of Law and the Improvement of the Tax System 1.2.1.1

Rule of Law as the Cornerstone of the Modern National Governance System

The study of relations between the rule of law and the state began in Europe in the 20th century. The researchers’ discussion was mainly made between “monism” and “dualism” in terms of the law and the state. As early as 1945, as an advocate of monism, Hans Kelsen, an American Austrian jurist, proposed monism in pure theory of law, which clarified the relationship between the rule of law and the state for the first time. Monism emphasizes the high degree of unity between the state and the rule of law, which are merely two sides of the same coin. The state, as a political organization, exercises state power through the law. For the first time, monism recognized a high degree of internal connection between the state and the law, which is of great significance in the quest for the common development of the rule of law and national building. However, monists overestimate the role of the state in the formulation of laws and tend to replace the law with the state and neglect the important role of the rule of law in national construction, which restrains the growth of the rule of law. F. A. Hayek formulated his dualistic legal view and neo-liberal legal philosophy based on an epistemology of human ignorance and evolutionary rationalism. He proposed the dualistic theory of the rule of law and the state, advocating the idea that the rule of law and the state were independent of each other while having a close internal mutual relationship. He distinguished two types of social order and deduced two different social rules accordingly. Hayek emphasized the inner rules that were more critical to protecting the highest value of “freedom” that was uniquely defined and opposed the expansion of external rules to encroach on the internal rules.2 According to China’s basic national conditions, some scholars have also carried out research on the relationship between the state and the law. In studying the similarities and differences between capitalism and socialism in terms of rule of law, Buyun Li (1997) believed that the rule of law was of overall significance to a country and should be treated as a basic principle of national governance. The socialist countries needed the rule of law as much as the capitalist countries did, but a ruleof-law socialist country needed to have a legal system with socialist characteristics. The socialist legal system was a method of governing the country with the socialist

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Wang, Baoming. Hayek’s Dual Legal View and its Significance to the Rule of Law in China. Journal of Shaanxi Provincial School of Economics and Management and Shaanxi Provincial Administrative College, No. 18, 2004.

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attribute of “maintaining the dominant role of public ownership to develop productive forces and achieve the common prosperity of the people”.3 Zeyuan Zhuo (2002) analyzed the relationship between the rule of law and state based on the combination of monism and dualism and proposed that a rule-of-law country should be the goal of China’s economic and social development and would ultimately be turned to a rule-of-law society, thus emphasizing the important role of the rule of law.4 “Ruling the country by law” was the necessary guarantee for the long-term stability of the country and the basic principle and policy of governing the country. It was necessary to combine the functions and attributes of the law with democratic politics and the market economy in modern socialist society. The rule-of-law economy was the only way to build a modern socialist market economy. The law could establish a fair and orderly market order to guarantee the free, equal and fair trade of a pluralistic economy in the market. The rule of law is the only way for a modern market economy to take toward economic development. That is, a rule-of-law economy is necessary for the healthy development and normal operation of the market economy.5 In recent years, scholars have carried out research on the rule of law and national governance from different perspectives. Zhiyong Lan and Ming Wei (2013) explored the theoretical paradigm of establishing a modern governance system in China by reviewing the experiences of modern countries and political theories and proposed that China’s current socialist governance system should require a top-level design and that complex systems need to be built and improved to establish a complete set of theoretical and practical strategies. The establishment of authority in the country requires democracy and the building of the rule of law. The rule of law is based on the ability to effectively supply public services and the ability of institutions to manage economic and social activities effectively. From the perspective of management, Xiaoping Jiang (2014) proposed that it should be necessary to give full play to democracy and the rule of law in both national and social governance. The fundamental content of a basic political system in a socialist country was to fully promote democracy and the rule of law. Democracy must be adhered to in the process of state and social governance, and the rule of law can fundamentally guarantee democracy.6 Long Li (2014) proposed that the rule of law system should be a solid foundation for modern national governance. To better promote a modern national governance system and governance capacity, China must take the legal system as the foundation and an important pillar. A good legal system was the foundation for national governance and the way to a powerful country. It was also the necessary foundation on which to promote fairness, people-orientedness and democracy. “Exercising power according to law and a sound legal system” were the core of the rule-of-law system 3

Li, Buyun. The Trans-century Goal: Ruling the Country by Law and Building China’s Jurisprudence of Socialist Rule of Law. China Legal Science, No. 6, 1997. 4 Zhuo, Zeyuan. On a Rule of Law Country. Modern Legal Science, No. 5, 2002. 5 Li, Buyun. The Trans-century Goal: Ruling the Country by Law and Building a Rule of Law Socialist Country. China Legal Science, No. 6, 1997. 6 Jiang, Xiaoping. Innovation of the Social Governance System in Modernizing National Governance. Chinese Public Administration, No. 2, 2014.

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under modern national governance. It was necessary to maintain the integration of the country ruled by law, the government ruled by law and the society ruled by law and to promote the judicial system.7 Wenxian Zhang is a chief scientist of the National Judicial Civilization and Collaborative Innovation Center and Director of the Academic Committee of the Chinese Law Society. He published “the Rule of Law and Modern National Governance” (2014) in the journal of China Legal Science, which analyzed the relationships between the rule of law and the national governance system and governance capacity and proposed that there should be both internal relationships and external agreements between them. In the national governance system, the rule of law reflects five values: A. Order. The fundamental purpose of law was to maintain national governance and to establish a harmonious and orderly society. B. Fairness. The inherent requirement of socialism with Chinese characteristics was to guarantee and promote social fairness and to meet the demands of the public, which concurred with the core values pursued by the modern rule of law. C. Human rights. Human rights were the basic rights of citizens. Modern national governance was essentially respect for and protection of human rights. With the development of the national economy, citizens’ appeal for human rights has been rising politically, spiritually and culturally, and the rule of law was a response to this appeal. D. Efficiency. As the core value of society, efficiency could be reflected by the rule of law, and the rule of law was more efficient and sustainable than the rule of man. E. Harmony. National development inevitably leads to social contradictions. Disharmony might occur between the state and citizens, between groups, between classes, between regions, between countries and between citizens. The rule of law was one of the foundations for a harmonious society.8

1.2.1.2 (i)

Logic Relationships Between Rule of Law and the Tax System

Rule of Law: Basis for the Improvement of the Tax System

Xuren Xie (2007) proposed that the rule of law should be embodied in taxation, and it was the basic policy of rule-of-law governance. The social progression from primitivism to civilization showed that the rule of law was the basic part of a harmonious socialist society and the inevitable product of development. At present, the rule-oflaw taxation in China still needs to be improved in an all-round way. China’s taxation should conform to the trend of the times and play an important role in guaranteeing national economic development. Tax administration most basically required “law enforcement for the people”, which should be the purpose of taxation, and it needed

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Li, Long. The Rule of Law is a Basic Project to Promote a Modern National Governance. Modern Law Science, No. 3, 2014. 8 Zhang, Wenxian. The Rule of Law and Modern National Governance. Modern Legal Science, No. 3, 2014.

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to be guided by the rule-of-law spirit. Therefore, the rule of law was supposed to run through taxation.9 (ii)

Rule of Law Guides the Improvement of the Tax System

Jianwen Liu (2010) borrowed Aristotle’s explanation to define the rule of law. The law itself should be soundly formulated, and well-formulated laws could serve the public well. The “two features” of the Constitution, fairness and justice, were also the core elements of tax laws. Taxes could be collected on the presupposition that taxation was regulated by law. The rule of law ran through taxation to ensure civil rights. The tax system must be improved under the “good law”. The “good” was based on whether it was fair and just. The Constitution was based on fairness and justice, thus effectively protecting the basic rights of the people. Only the use of this principle could guide taxation on the way toward rule of law.10 (iii)

Tax Laws Promote Rule of Law

Jianwen Liu, a professor at Peking University Law School (2003), studied the constitutions of Japan, Britain, France, the United States, Italy and other countries. He found that thinkers and theorists in developed countries emphasized tax issues in the rule of law from various perspectives. On the basis of international research, he proposed that law-based taxation should play an indispensable role in China’s progress toward the rule of law. Under the current socialist market economy conditions in China, the rule of law was often neglected in taxation. The making of tax laws and tax procedural laws could push forward the rule of law nationwide and promote the better realization of the rule of law in the country. Tax laws, therefore, were a breakthrough in building a society ruled by law.11

1.2.2 Research on the Relevant Theories of Tax System Reform As early as 2007, when the CPC Seventeenth National Congress was in session, President Hu Jintao summarized the new characteristics of China’s economic and social development in the report “Holding high the great banner of socialism with Chinese characteristics and striving for a new victory in building a well-off society in an allround way”, which might be summarized as follows: The comprehensive national power had been enhanced, but the productivity remained relatively low; China fell far short of developed countries in innovative capacity; Problems continued in terms 9

Xie, Xuren. Vigorously Promoting Tax Administration by Law and Improving the Tax Law in an All-round Way, China Taxation. No. 8, 2007. 10 Liu, Jianwen. Implementing Taxation according to Law, Promoting Fairness and Justice and Realizing the Rule of Law in Taxation.China Taxation, No. 7, 2010. 11 Liu, Jianwen. Law-based Taxation: A Starting-point to Construct a Rule-of-law Society. Journal of Law, No. 3, 2003.

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of extensive economic growth and industrial structural imbalances; The market economy system achieved initial success, but obstacles remained to the development of the market economy, and further reform would meet deeper contradictions and problems; The people’s lives were greatly improved, but the income gap was increasing with unbalanced regional development featured by poor rural areas and large numbers of underprivileged people and low-income families; More coordination and overall consideration needed to be done before any success could be made. The report deemed that to encourage the rapid and sound development of China’s national economy, it was necessary to deepen the reform of taxation, finance and other systems and improve the macrocontrol system. By improving the public finance system, China would improve public services, promote the construction of major functional zones, take institutional steps to match central and local financial resources and powers, enhance the fiscal system below the provincial level, and improve the public sector capacity of primary-level governments. China would also intensify the reform of the budget system, strengthen budget supervision and management, create a transparent and standard fiscal transfer payment system, and implement a financial system conducive to scientific development. Hong Ma (1994) studied the socialist market economy and its current problems and situation. He believed that the reform was being implemented in various aspects, and the macro-control system had taken its initial form and played a regulatory role in fiscal and monetary policies. Tax system reform was being explored, and the tax rate played a regulatory role in economic activities to a certain extent. However, the reform entered a bottleneck in the financial system, financial market and state-owned enterprises because the government’s excessive intervention in the economy restrained the market mechanism. At present, China’s economy is complicated, and it is necessary to continue to strengthen the role of market mechanisms to solve deep-seated problems. Ma proposed that macroeconomic regulation should be improved as soon as possible and that the government needed to shift its direct economic management to indirect management to set up coordination mechanisms between macrocontrol, public finance and finance. A sound division of administrative powers and financial powers also needed to be made between the central, provincial and subprovincial governments. Yixuan Qiang (2015) analyzed weak employment in China and explored measures to solve current employment problems, including how to use financial policies to lower the unemployment rate. He believed that in a serious unemployment situation, it was necessary to ease employment difficulties and increase the employment rate through policies such as tax adjustment and financial subsidies. In terms of taxation, tax policy should be combined with national industrial policy to promote industries encouraged by the state to absorb the surplus labor force and affect the demand structure of labor under industrial adjustment. Tax regulation could stimulate government and private investment, promote economic growth and increase employment. At the same time, for the surplus labor force and college graduates, the government should provide certain financial subsidies and tax preferential policies to support entrepreneurship and reemployment. In addition, employment could be

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promoted through fiscal transfer payments. First, China needed to increase financial transfer payments in this regard. Second, China needed to selectively increase transfer payments to areas with a high unemployment rate and low income. Jeffrey Owens (2015), a professor at the Institute of Tax Law and International Tax Law at Vienna University of Economics and Business in Austria, believed that China’s tax system should agree with economic development. At present, China’s tax system reform faced five major challenges: In international trade competition, the Chinese government should protect the tax base, taxes Chinese enterprises and individuals were willing to pay in accordance with the regulations; It was necessary to consider the transformation of China from a capital importing country to a net capital exporting country when the tax system was adjusted; The tax system might be improved to better the environment and narrow the gap between the rich and the poor; China could create a China-led international tax system.12 Junpei Wu and Fan Zhang (2015) analyzed the problems in China’s tax system at the macro and micro levels based on tax management and proposed that the basic principles of law-based taxation should be integrated into the specific implementation plan in the design of tax reform. At present, China’s macro tax burden is relatively high. The division of China’s tax system did not concur with the principle of tax neutrality. It was urgent to adjust macrotax burdens to ensure stable tax burdens and balance local fiscal revenues and expenditures to strengthen local financial management. Currently, tax reform should fully serve all areas of national economic activities and play the role of “expanding the tax base, stabilizing the tax burden, and sound decentralization and optimal structure” to effectively regulate resource allocation.13 Regarding the development of China’s tax reform, Yao Chunyun (2015) pointed out that there were two problems in China’s tax system reform: an unreasonable tax structure and an unreasonable tax system. The former was mainly manifested in the tax system design and an uneven tax burden among industries, while the unreasonable tax system was seen in the loopholes in tax collection and supervision.14 Shumin Yue and Lei Yin (2015) studied the reform of China’s tax system from the perspective of tax capacity and compared the compatibility of tax capacity with the tax structure, the tax system and the tax collection and control system. A comparison and analysis of China’s tax capacity showed that neglecting China’s tax base led to imbalances in the tax system and that resource allocation in the market was ineffective. The assessment of the taxation capacities of income tax, property tax and commodity tax revealed that the tax capacity of the property tax was seriously mismatched with the tax base. The tax capacity of corporate income taxes was more sound, but the tax capacity of personal income tax was relatively weak. 12

Jeffrey, Owens, Li Na. Maintaining Synchronization between Tax System and Economic Development: Challenges for China’s Tax Reform in the Next 20 Years. International Taxation, No. 1, 2015. 13 Wu, Junpei, Zhang Fan. Discussion on Tax Reform in China Based on Tax Management. Journal of Central University of Finance and Economics, No. 1, 2015. 14 Yao, Chunyun. Reflections on the Development of China’s Tax Reform. People’s Forum, No. 2, 2015.

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The commodity tax category should further promote the replacement of the business tax (BT) with a value-added tax (VAT) to adjust the corresponding tax capacity to match it. The separation of powers between the central and local governments restrained the local tax capacity and acquisition of tax information. Inefficient tax collection, management and supervision weakened the tax collecting capacity.15 In the article “the Momentum and Trend of China’s Recent Tax Reform”, Peiyong Gao (2015) proposed that the tax system should adjust reforms in accordance with the country’s development since the current national development was experiencing a turning point. China should establish a modern tax system that matches “a modern national governance system and governance capacity” proposed by the CPCCC Third Plenary Session. He suggested policymaking in three aspects: China was supposed to establish a comprehensive and classified individual income tax system, create real estate tax and levy inheritance and gift tax to gradually increase the proportion of direct taxes and reduce the proportion of indirect tax to total tax revenue by replacing BT with VAT; To build normative local tax, China should consider real estate tax as the main type of “future” local tax, promote the restructuring of resource tax and replace fee with tax in terms of environmental protection to increase the proportion of local tax revenue in total tax revenue; A gradual shift needed to be made toward a modern tax collection and administration.16 Jing Li (2015) put forward a specific reform plan according to the basic requirements of the 18th CPCCC Third Plenary Session on tax reform. His detailed plan of tax reform, known as “six plus one”, covered VAT, consumption tax, resource tax, environmental protection tax, real estate tax and individual income tax and local taxes. To improve legislation, she proposed VAT reform, smooth replacement of BT with VAT, and legislation of environmental protection tax, tax collection, and administration laws to ensure law-based tax administration and a fair and effective tax system for all.17

1.2.3 Research on Tax Structure Amid Rule of Law Guoqiang Ma (2015) redefined the tax structure diachronically and synchronically. He proposed that a modern tax structure should be based on the integration of urban and rural tax systems when China was developed. As a result, the characteristics of the tax structure would be changed. While setting up tax categories and transforming tax structures, China must follow economic laws instead of merely discussing the change between direct taxes and indirect taxes. The structure of the current tax system could 15

Yue, Shumin, Yin Lei. China’s Tax system Reform from the Perspective of Taxation Capacity. Journal of RenMin University of China, No. 6, 2015. 16 Gao, Peiyong. Recent Tendency and Trend in China’s Tax Reform. International Taxation. No. 1, 2015. 17 Li, Jing. Key Points and Arrangements of China’s New Round of Tax System Reform. Macroeconomics, No. 1, 2015.

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not properly demonstrate the characteristics of various types of tax subsystems. To optimize China’s tax structure, it was a necessary and feasible scheme to optimize the combinations of tax types and improve the relative position of tax types. Commodity taxes and income taxes might be mutually independent, complementary and equally allocated. With the values of 3, 2 and 1 in the original tax structure as a benchmark, structural adjustment of China’s tax system was quantified through the five-point method to formulate the basic plan for reforming the tax structure.18 Zhiyong Yang (2014) believed that the current tax structure dominated by indirect taxes faced many challenges and was unsustainable. The tax structure, either narrow or broad, showed that VAT needed to be recreated, and individual income tax and real estate tax needed to be reformed to optimize the current tax structure and increase the proportion of direct taxes, as the increase of overseas consumption pushed down consumption tax and the rising land income led to the replacement of direct taxes. Recreated VAT could further expand VAT neutrality by including more fixed assets as taxable items. The original single VAT rate could be adjusted to two rates. The individual income tax needed to be the focus when the enterprise income tax was modified. The reform needed to aim at the combination of classification and integration in terms of the individual income tax system.19 Jing Guo and Ximing Yue (2015) conducted an empirical analysis of the tax structure to promote economic growth and proposed a tax system reform plan. Shaorong Li and Ying Geng (2005) believed that in the current tax structure, increasing tax share would contribute to overall economic expansion with a top-down impact order: behavior tax, resource tax and income tax types, whereas property tax and specific purpose taxes might reduce the overall size of the economy. The research data showed that the tax share of the turnover tax had no significant impact on the overall size of the economy. Sheng Li (2015) analyzed the deep-seated problems of the current tax structure based on vertical and horizontal taxation. He believed that China’s taxation had a series of problems, such as unreasonable distribution of the tax burden, unclear role of taxation, and failure of the local tax system to achieve normal efficiency. He put forward a plan to optimize the structure of China’s tax system. The current tax burden needed to be stabilized by optimized distribution; The proportion of direct taxes needs to be increased by increasing the proportion of individual income tax and real estate tax; The current local tax system needed to be built and improved; The definition of the tax burden needed to be horizontally optimized to promote a more efficient local tax system. In the short run, the resource tax could be used as the main local tax after further adjustment of business income tax and VAT; in the long run, the main local taxes should continue to consist of sales tax dominated by consumer spending and tax levied on real estate as.20 Upholding efficiency and fairness in the adjustment 18

Ma, Guoqiang. Research on Basic Theory of Tax System Structure, Taxation Research. No. 1, 2015. 19 Yang, Zhiyong. The Current Situation of Tax Structure and Optimizing Path Selection. Taxation Research, No. 6, 2014. 20 Li, Sheng. Study on Optimizing Tax System Structure Based on Tax Burden Destination. Taxation Research, No. 1, 2015.

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of the tax structure, Hu Liu (2012) thought that the excessive income gap was one of the reasons for national instability, social unrest and economic instability. In the current tax structure, the distribution of the public consumption tax burden is uneven because of the different marginal consumption tendencies of high-income and lowincome people, which leads to an excessive proportion of indirect tax and serious absence of property tax and fails to give full play to the regulating role of taxation.21 Yi Qin (2013) determined the excess burden of VATs based on Harberger’s triangle and Cobb–Douglas utility function by investigating the compensatory demand elasticity and price elasticity of the basic public goods of 30,000 urban residents. It was concluded that the macrotax burden in China was on the high side and that the tax burden was increasing annually. Then, he made several suggestions: taxes needed to be further reduced for small and microenterprises and in production and circulation; structural tax reduction and tax burden relief might improve the tax structure and further increase its elasticity to reduce the net loss of society and resource misallocation.22 Chongjun Tan and Moru Yang (2013) analyzed China’s near- to mid-term tax structure by using the actual tax rate and tax proportion, the business income tax rate, the stability of consumption tax in the economic cycle, and the principles of fairness and efficiency. They proposed that, based on the principle of risk resilience and fairness and efficiency, the near- to mid-term tax structure should have consumption taxation as the main tax to maintain potential consumption taxation growth.23 Peiyong Gao (2014) pointed out that the tax structure could reflect the tax burden and distribution among members at all levels of society, and it was an important reflection of the civilization of national taxation development. Humans’ pursuit of fairness and justice in taxation had never been interrupted. The current structure of direct taxes and indirect taxes in China was unreasonable because it failed to follow the principle of the fairness of taxation and did not agree with the current economic development and taxation development in China. Therefore, the tax structure in China still needs to be adjusted.24 Yin He and Gaoming Shen (2009) examined income tax and turnover tax and collected data about how individual income tax, BT, VAT and business income tax had an impact on China’s economic development. Based on Arnold’s model (2008) and side effects on the economy by increasing the tax burdens of different kinds of taxes, they concluded that rising business income tax and turnover tax had the least negative impact on economic growth and, compared with other taxes, increasing the tax burden of individual income tax had the most negative side effect on economic development, with VAT coming the second. Rongcang Liu and Shuanyou Liu (2002) analyzed the impact of different taxes on China’s labor, consumption expenditures 21

Liu, Hu. Tax Structure and Income Distribution: Theory, Status Quo and Suggestions. Taxation Research, No. 11, 2012. 22 Qin, Yi. Overload of China’s Current VAT and the Efficiency of Tax Structure. Economic Perspectives, No. 3, 2013. 23 Tan, Chongjun, Yang Mo. Analysis of China’s Tax System Structure in the Near and Medium Terms with VAT as the Foundation. Public Finance Research, No. 2, 2013. 24 Gao, Peiyong. From Adapting to the Market Economy System to Matching National Governance: a Discussion of the New Round of Financial system Reform. Finance and Trade Economics, No. 3, 2014.

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and capital income and sought an effective way of taxation. By simulating the relationship and influence between the effective tax rate and economic growth, they found that capital taxes had a certain negative effect on economic growth, taxes on labor largely reduced economic growth, and taxes on consumption did not hinder or slightly push economic growth.

1.2.4 Tax-Sharing System Under the Rule of Law In the article “Reflections on Intergovernmental Fiscal Relations in China”, Jiwei Lou (2013) conducted an in-depth discussion of China’s financial reforms on the basis of the national conditions and put forward a series of views that had implications for future financial reforms. Reviewing the reform of the fiscal management of the tax-sharing system in 1994, he believed that this reform had laid the foundation for China’s economic and social development over the past 20 years and pushed for the establishment of the basic framework of intergovernmental fiscal relations. In the past two decades, China’s fiscal capacity has been steadily enhanced, and fiscal revenue has also been substantially increased. The GDP ratio has been increased from 10 to 20%, laying a solid financial foundation for the government’s regulating ability. Central financial resources have also been strengthened over the past two decades, having changed the financial ratio of the central and local governments in the past and safeguarded the central government’s macro-control. However, this system also had defects and led to land finance to a certain extent. Jiwei Lou believed that the “principle of matching financial power with administrative authority” established in 1994 became “a principle of matching financial resources with administrative authority” in 2007, which helped to solve the problem of local financial difficulties but did not have the incentive effect of financial power because financial power could better mobilize the “enthusiasm of the central and local governments”. Therefore, it was better to “match financial power and financial resources with administrative authority”. In addition, according to the data of recent years, the central allocation accounts for a relatively large proportion of the local annual expenditures, which require huge tax rebates and transfer payments. The transfer of funds would lead to inefficiency and increase the demand for money by local governments, and it was not easy to form a constraint on local governments to save funds. To solve the problem of large-scale transfer payments, Lou put forward two ideas: expand the central administrative authority, decentralize financial power and financial resources and expand local financial power. Therefore, the problem of decentralization between the central and local governments must be solved through tax reform. Intergovernmental financial relations could be adjusted by restructuring the tax system. For example, local governments could levy taxes that fit locally after following necessary procedures,

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and they could be given certain powers to adjust tax rates for local taxes related to local public services.25 The research group of the Institute of Financial Science of the Ministry of Finance (2010) proposed the general idea about the reform of China’s financial systems: deepen the reform of the financial systems, the financial budget management and the financial management; promote the reform of the tax-sharing system below the provincial level through the reduction of financial hierarchical administrations; firmly adhere to the idea of sound development in the course of development to encourage transformation of growth mode. In accordance with the principles of a simple tax system, a broad tax base, a low tax rate and strict collection and management, a compound tax system could be made with turnover taxes and income tax as the main types supplemented by property tax, resource tax and other special purpose taxes. In addition, the efficiency of allocation and use of financial funds should be improved through the reform of financial management. The specific suggestions were as follows: (1) It was necessary to establish a fiscal system that matched financial resources and administrative authority and actively promoted fiscal flattening. China should reduce the fiscal hierarchy below the provincial level to promote the reduction of government levels and divide administrative powers at all levels of government, especially in some overlapping public domains. Administrative power and expenditure needed to be reduced at the level of counties and townships. A basic three-level structure needed to be followed to perfect the tax-sharing and grading financial systems. (2) It was important to optimize the division of fiscal revenues between governments and further improve the local tax system. Additions to the local tax category would increase local tax revenue to guarantee the local capacity for public services. Measures would have to be taken to steadily promote property tax, urban construction tax and resource tax reform to narrow the income gap. (3) China needed to improve financial policies and measures to promote the transformation of the economic growth mode to achieve sound economic development. In the process of reform, China should follow the principles of a simple tax system, a broad tax base, a low tax rate and strict collection and management, optimize the tax structure and improve the compound tax system where turnover taxes and income taxes were the main types supplemented by property taxes, resource taxes and other specific purpose taxes. China should standardize and improve the financial system, give full play to the role of taxation in raising national financial revenue, regulating the economy and income distribution, and promoting the transformation of the economic growth mode to build a harmonious society. (4) Financial management needs to be further reformed. China established modern budget management and improved the framework of the public finance system on a preliminary basis through reform, but financial fund allocation did not work well. The allocation and use of government funds did not fully meet the requirements for compliance with laws, security and effectiveness. To give full play to the financial role, China should further reform the treasury management, government procurement and financial budget allocation and 25

Lou, Jiwei. Reflections on Intergovernmental Fiscal Relations in China. Beijing: China Financial and Economic Publishing House, 2013. pp. 20–31.

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establish a system for the allocation, use and management of financial funds to guarantee the compliance, security and effectiveness of financial funds. In addition, it was necessary to reform and innovate all aspects of government budget management to achieve the same purpose.26 Based on the latest situation, Chinese scholars analyzed the problems in the current financial systems and put forward suggestions or system designs. Qiyun Li (2013) redefined the specific meaning of administrative power and financial power in the new situation. He believed that administrative power was how to define and divide public responsibilities. In accordance with this definition, he believed that a fiscal system presupposed a rational division of governments’ powers and, in doing so, it was especially important to match administrative power with financial resources. This also required the allocation of taxing power. To achieve the goal of balanced regional development, it was advisable to choose the tax sharing mode according to tax types. The provincial government should be given conditional creditor power, and subprovincial governments should adopt the command mode. China should focus on improving the financial transfer payment below the provincial government and pilot the horizontal transfer payment system to ensure the balance of financial resources between regions and to match the government’s administrative power with its financial resources.27 Kang Jia (2013) designed a three-level model for tax-sharing system reform and discussed the reform objectives and essentials for improvement. The model presupposed a rational definition of government roles at all levels and consisted of a budget system, horizontal payment between regions supported by central transfer payment, a financial system, and others. These factors cooperated and interfaced with each other and gave feedback to establish a normative, systematic and transparent budget system, a financial system that ran through three levels of taxation, and a horizontal payment between regions supported by central and local transfer payments and ecological compensation based on factor analysis. Governments at all levels needed to be built with corresponding administrative power and financial power with a sound share of the tax base. Jia also proposed that the innovation of various systems, such as financial systems, should be vigorously studied to design a reasonable incentive and restraint mechanism.28 Wanli Ma (2013) analyzed current theories of financial systems and further studied the financial system of matching financial resources and administrative power in China. He believed that there were three problems in the current system: The downward shift of fiscal expenditure aggravated the imbalance of local fiscal revenue and expenditure; Local government debt expansion had dragged down economic growth; The relevant legal system was not perfect; Reduced local taxes led to reduced fiscal autonomy. Therefore, the author put forward some

26

Ministry of Finance Institute of Fiscal Science. The Strategic Orientation of China’s Financial System Reform: 2010 ~ 2020. Reform, No. 1, 2010. 27 Li, Qiyun. Establishing a Financial System Matched with Administrative Power. Beijing: China Financial and Economic Publishing House, 2013. 28 Jia, Kang. Deepening the Reform of the Financial System and Establishing a Modern Financial System. Shenzhen Special Zone Daily, December 3, 2013.

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pertinent policy suggestions on how to divide government powers, improve the local tax system and optimize the transfer payment structure. For a long time, scholars studied government economics, including the tax-sharing system, by using mainstream economic paradigms such as rational man and model equilibrium and strictly following a series of hypotheses. An increasing number of scholars have chosen to adopt new analytical tools, such as experimental economics, game theory, behavioral economics and other analytical tools, so that more innovations have appeared in this field. Based on the quantitative control model and the relationships among fiscal revenue, fiscal expenditure and gross domestic product, Jianli Tan (2010) conducted an empirical analysis of the impact of the division of revenue and expenditure between the central government and local governments on social equity. The author revealed some problems in the division of the financial and administrative powers and proposed some solutions and suggestions. His study found that when the annual economic growth rate was 1%, the urban Gini coefficient would decrease by 0.16%. This showed that the income gap narrowed with economic development. However, an analysis of the one-year lag variable showed that economic development had a positive impact on the Gini coefficient. When the economy grew 1%, the urban Gini coefficient increased by 0.14%. This showed that economic growth would narrow the income gap to a certain extent in the short run, but in the long run, it would widen the income gap. That is, urban income could not be improved through existing transfer payments. In addition, the data analysis found that for every 1% increase in net transfer payments, the urban Gini coefficient increased by 0.0015% in the short run, and the lag period increased by 0.0027%. In other words, the current transfer payments could not improve urban income. The tax and fee reform in 1994 did not bring policy benefits to the developed areas because the central and local transfer payments were committed to narrowing the regional economic gap. The developed areas had a large income gap, but they had a high per capita income. The empirical results showed that economic growth not only failed to narrow the rural income gap but also aggravated it. Statistics showed that when the economic growth rate was 1%, the Gini coefficient in rural areas was reduced by 0.089% in the short run, and the lag period increased by 0.068%. The reasons for this phenomenon were similar to those for urban problems, but the difference was that agriculture developed more slowly than industry and commerce, resulting in the fact that the rural income gap had not been significantly narrowed because of economic development. Therefore, according to the above analysis, the author proposed that the total amount of the central government’s vertical transfer payments to the local governments should be controlled, and its proportion in the total national financial expenditure should be stabilized at approximately 32.9%, while the total percentage of the central transfer payments to various regions should also be controlled.29 Ke Yu (2008) studied the relationship between local fiscal expenditure and economic growth under a tax-sharing system. He expanded the analytical framework of the economic models of Devarajan, Steroppe and Zou (Swaroop& Zou 1996), added 29

Tan, Jianli. Research on the Relation between Central and Local Financial Powers and Administrative Powers. Beijing: China Financial and Economic Publishing House, 2010.

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the variable of central and local fiscal expenditures to the macro-production function, and established the econometric model of local fiscal expenditure structure and regional economic growth under the tax-sharing system. By using the methods of structural mutation testing and cointegration testing, he conducted econometric analyses and spatial econometric analyses of the data of various regions of mainland China and concluded that only when the structure of local and central fiscal expenditures complemented each other could local fiscal productive expenditures promote regional economic growth. Otherwise, the correlation between local fiscal productive expenditure and regional economic growth was not significant or even had a negative effect. Some scholars have attempted to study developed countries with mature taxsharing systems and use their advanced experience to inspire the development and reform of tax-sharing systems in China. Hai Li and Dafen Zhang (2014) analyzed taxsharing systems in Britain, France, Germany and America, summed up their common characteristics, and made relevant suggestions in light of the problems in China’s current tax-sharing system: China should improve the legal system for the division of administrative powers and expenditures between central government and local governments, reasonably divide the financial and administrative powers between central government and local governments, set up property tax and other taxes as the main local taxes, and narrow the income gap between regions through normative and transparent transfer payment systems. Many scholars have put forward suggestions for increasing the proportion of local taxes or strengthening the local tax system to solve the vertical fiscal imbalance in China.30 Qing Zhu (2010) disagreed with this view. Through international comparison, he found that the gap between local governments’ financial resources and expenditures was also common in foreign countries, including some developed countries. Moreover, his experience showed that expanded local governments’ financial power and tax resources might increase regional financial differences. Therefore, he believed that China should not only reduce the shared taxes but also continue to improve its relevant system. He also made useful policy recommendations concerning how to improve the transfer payment system and taxsharing methods and how to clarify the central government’s responsibilities in the field of public services.31

1.2.5 Research on Local Tax Under the Rule of Law China has a vast territory, a large population, and uneven regional development. At present, China is in a critical period of transformation, upgrading, and restructuring. 30

Li, Hai, Zhang Dafen. Comment on International Experience of Tax-sharing Systems: A Case Study of Tax-sharing System in Britain, France, Germany and the United States. Taxation Research, No. 11, 2014. 31 Zhu, Qing, The Reform of Tax-sharing System in China from the Perspective of International Comparison. Finance and Trade Economics, No. 3, 2010.

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Local governments bear heavy political and economic burdens. Therefore, a sound and proper local tax system in line with China’s national conditions to match administrative power and financial resources directly determines the governance capacity and public service of local governments. This is also an important part of deeper reform of the financial or even comprehensive reform in China. The Third Plenary Session of the 18th CPCCC clearly stated the necessity for “deepening the reform of the tax system and improving the local tax system”. Theoretical discussions and practical exploration have continued since the 1994 reform of the tax-sharing fiscal system. However, there are many unreasonable parts in the overall structure of the current local tax system in China, and some problems demand immediate solutions. As early as the 1980s, academia in China studied and discussed the issue of local taxes, significantly contributing to the local financial phenomenon of “eating separately”. Since the reform of the tax-sharing fiscal system in 1994, the local tax system has come to be an important topic in China’s academic circles. As problems continue to emerge, more scholars have been doing research into the local financial system in recent years and considering how to reform and improve the local tax system from different perspectives. W. Oates (1999) proposed that the main local tax might be property tax, the main source of local government revenue, to help local governments better provide major public goods. However, the tax type needs to be set up after a sound division of functions between the central and local governments to better fulfill government functions.32 Robin Boadway, a world-renowned banking expert, put forward the division of tax types on the basis of Musgrave’s research and focused his attention on the basic theories and principles of the main local taxes.33 Owens & Norregaard (2001) described the characteristics of the main taxes of local taxation through his research. He contended that the revenue sources of local taxation should be benefit-based and stable and could not be transferred freely between the central and local governments. Different revenue sources varied remarkably from one region to another, which led to different efficiencies of different governments in tax collection and management. Correspondingly, David (1992), a British scholar, studied several situations that local governments should avoid when levying taxes. He proposed that local governments should not impose highly progressive taxes and that it was not advisable to collect taxes with high mobility, taxes that were easy to pass on to nonlocal residents, and taxes that local residents might not be immediately aware of. Wilson J. D. T. (1999) made a further study of the U.S. financial system and designed the specific implementation plan of the U.S. tax-sharing system. He believed that the three-level governments should use income tax, property tax and sales tax as the main tax types for their respective governments.34

32

Oates, W, An Essay on Fiscal Federalism. Journal of Economic Literature, No. 5, 1999. Roadway, Robin. Inter-Government Fiscal Relations: the Facilitator of Fiscal Decentralization. Constitutional Political Economy, No. 12, 2001. 34 Wilson, J. D. T. Perfection and Development of Enterprise Income Tax Law. Social Sciences, No. 11, 1999. 33

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Domestic scholars’ research on local taxation can be divided into the following categories. One type of research was the application of financial policies to specific issues and industries. Guiting Xu (2015) studied the allocation of vocational education resources from the perspective of government economics. He believed that the only way for the long-term development and prosperity of vocational education was that the government needed to take measures to balance market regulation and government regulation, delegating the decision-making power of public goods such as vocational education to the lowest decision-making administrations and implementing decentralization. In addition, the government needed to guide and give full play to local initiatives through local tax and financial subsidies, introducing market competition according to local conditions, providing consumers with more choices, with the invisible hand playing its role properly under the visible hand.35 Some scholars conducted empirical analyses of local tax data. Fei Yuan & Ran Tao (2008) considered that the imbalance between revenues and expenditures in China’s financial system worsened in recent years with centralized revenues and decentralized expenditures. This led to the increasing proportion of central transfer payments and the increasing dependence of local finance on transfer payments from higher levels. Due to financial pressure, local governments continued to increase local taxes and fees to meet growing expenditures. In some western regions, central subsidies accounted for more than 50% of the disposable financial resources of local governments. Scholars have used county-level panel data and instrumental variables to study the relationship between the scale of transfer payments and the increase in the financially supported population. They found that with the increase in financial resources, transfer payments to poor areas increased substantially. However, there was no mechanism to ensure the rational and efficient use of financial resources at higher levels, which led to an increase in employees in local governments as well as an increase in the proportion of the population supported by public finance. Therefore, they believed that a dilemma would occur regardless of the transfer payment. The deep-seated reason was that China did not have a more financially decentralized management system that deeply involved grassroots governments.36 Many scholars have also analyzed the status quo of local taxes and made policy suggestions to improve the local tax system. Sheng Li (2012) first analyzed the status quo of each component of the local tax system. He found that the local taxing power had limits and worked only within the scope of designated tax rates. Governments at the provincial level and below could not make decisions that had a substantial impact on the tax burden of the economic entities, resulting in a mismatch with financial resources. No ideas or framework had been legally proposed for the overall arrangement of local taxing power allocation. In addition, the provincial and subprovincial 35

Xu, Guiting. Evolution and Consideration of Resource Allocation in Vocational Education from the Perspective of Government Economics. Chinese Vocational and Technical Education, No. 27, 2015. 36 Yuan, Fei, Tao Ran, Xu Zhigang, & Liu Mingxing. Transfer Payment and Population Expansion supported by Public Finance in Fiscal Centralization. Economic Research Journal, No. 5, 2008.

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governments did not have main types of taxes and had to rely heavily on shared taxes. The vertical financial allocation increasingly highlighted the problem of mismatch between local financial resources and their administrative powers. He suggested that provincial governments should be given proper tax administration power, such as levying local property taxes and environmental taxes with obvious regional characteristics. The financial resources of governments at all levels should be rationally defined, and the division of tax revenues between the central and local governments should be adjusted and optimized. For example, the VAT scope needed to be expanded. It was advisable to deepen the reform of the tax-sharing system and match financial resources with administrative power to determine the main tax types at all levels of public finance. To improve the local tax system, it was necessary to scientifically and rationally redesign local taxes such as the promotion of resource taxes and real estate taxes and the restructuring of individual income taxes.37 Bin Yang (2006) analyzed the theories of several local tax systems in academia and concluded that these theories could not elucidate the necessity of local taxes in China. For example, at a time of uneven economic development, “welfare economics” failed to work out a balance between public goods provision and cost sharing, which was determined by the “foot voting” mechanism. International experience also failed here because there was no single model due to different political and economic systems, economic development, historical and cultural backgrounds unique to a country. With the view that “certain administrative power corresponds to certain fiscal power and taxing power”, many scholars believe that the Western tax-sharing system is absolutely symmetrical in revenue and expenditure, that is, a pure tax-sharing system. This was a misunderstanding because each country had a vertical or horizontal fiscal balance, centralized taxing power, and decentralized administrative power. Some people thought that the local abuse of the power to collect fees led to excessive fees because they did not have levying power. Actually, local governments had almost unlimited taxing power because the fees and taxes imposed by any governments were the same to the people. Yang also designed an asymmetric tax-sharing system in line with China’s national conditions, where the central taxes accounted for the majority of the total tax revenue and the local expenditure accounted for the majority of the total fiscal expenditure. He believed that this model could not only facilitate central macro-control but also mobilize local enthusiasm.38 Kang Jia & Ji Liang (2014) believed that the lack of main local taxes in China led to a number of problems. For example, the significant decline in local governments’ tax revenue after changing BT to VAT made it impossible to meet the demand for financial support, and the division of shared taxes was not well grounded. They proposed some solutions to these problems. First, the local tax base should be mainly composed of a consumption tax and income tax in the near and mid-term and a property tax and consumption tax in the long run. Second, the incentive mechanism of local governments should be strengthened by 37

Li, Sheng. Theoretical Basis, Current Situation, Analysis and Improvement of Local Tax System. Finance and Trade Economics, No. 6, 2012. 38 Yang, Bin. Improving China’s Tax-sharing System and Rationally Dividing Tax Management Authority. Review of Economic Research, No. 7, 2006.

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decentralizing taxing power. Third, the main taxes that could be incorporated into the local tax system should be restructured through means such as replacing BT with VAT, speeding up the resource tax reform, perfecting the transaction and lease tax of preowned houses, classifying the vehicle purchase tax into the consumption tax, replacing environmental fees with taxes, and pushing forward a new round of individual income tax reforms in a timely manner. Finally, a tax-related information sharing mechanism should be constructed.39 Qingwang Guo & Bingyang Lu (2013) believed that local taxes played an important role in promoting China’s economic growth after the tax-sharing system reform. However, these local taxes also had some negative impacts, such as restraining economic development. First, because some important local taxes were levied on production, local governments would blindly expand production capacity, resulting in overproduction and environmental damage. Second, half of the BT revenue came from construction and real estate. Therefore, it was easy for local governments to have the incentive to promote real estate investment and a rise in housing prices. Third, since enterprises rather than individuals were the main taxpayers of local taxes, local governments were more inclined to provide support and protection to enterprises, which was not conducive to the transformation of government functions. To solve these problems, the author contended it to be necessary to straighten out the relationships between administrative powers, between the government and the market, and between taxes and nontaxes. On this basis, the author proposed two schemes for the local tax system. The key points of the new schemes were to levy retail taxes, incorporate individual income taxes into local taxes and change the rules of VAT division.40 Shengling Rong (2005) formulated a framework of local tax theory in several dimensions in his book Comparisons of Local Taxes between China and Foreign Countries. His series of studies on local tax systems, behavior backgrounds and reform changes at home and abroad came to several conclusions and policy suggestions to improve the current situation of the local tax system in China.41 The book “Local Tax Reform and Tax Policy Research” published by the Ministry of Finance (2007) sorted out the theoretical context of the local tax system and its connotation. Ziji Deng (2007) compiled local tax system research, which sorted out the literature relevant to local tax research and further elaborated on the technical improvements and institutional changes in the shaping process of the local tax system based on the research of other related scholars.42 Shangxi Liu (2013) believed that the basic blueprint for the local tax system required a basic understanding of the true connotation of local tax and its systematic analyses and definition. Zuo Liu (2011) further explored the local tax system in the new period on the basis of previous studies of local 39

Jia, Kang and Liang Ji. Realistic Choice of China’s Local Tax System: an Overall Framework. Reform, No. 7, 2014. 40 Guo, Qingwang and Lu Bingyang. An Outline of the Local Tax System and Collection of Retail Tax. Taxation Research, No. 11, 2013. 41 Rong, Shengling. A Comparison of Local Taxation between China and Foreign Countries. Beijing: China Economic Publishing House, 2005. 42 Deng, Ziji. Study on the Local Tax System. Beijing: Economic Science Press, 2007.

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tax reform. His focus was on the property tax, which was closely related to people’s livelihoods.43 Kang Jia (2005) pointed out that the local financial system was both an important part of the state’s fiscal system and the implementation and extension of the central government at the local level. It is obviously urgent to improve local fiscal revenue and alleviate financial difficulties at the grassroots level.44 Academics have also discussed the division of local taxing power. Regarding the legislative power of property taxes, Cheng Gu (2006) believed that the legislative power of property taxes should be further decentralized under the current economic situation. The relevant laws of property tax should be formulated by China’s supreme legislature, and the power of supervision and the formulation of implementing rules should be entrusted to the Standing Committee of the Provincial People’s Congress. The supreme legislature should grant provincial governments certain tax rates, preferential tax policies, and the power to formulate and recommend tax items.45 Gongliang Tang (2008) believed that the rational distribution of taxing power between the central and local governments was conducive to further tax division between them, helped different regions adopt different economic development strategies and ensured the unity of the tax system. In general, the distribution of tax revenue jurisdiction should be clearly stipulated in the Constitution.46 Qiuxiang Zhu (2008) believed that the central government had played a leading role in the distribution of taxing power since the reform of the tax-sharing system in 1994. When the central government distributed taxing power, it neglected the local governments’ interests without any legal or factual basis. Consequently, the central government competed with the local governments for tax benefits and hurt the latter’s interests to a certain extent.47 Gongliang Tang, Yang He & Junying Li (2012) studied the experiences of member countries of the Organization for Economic Cooperation and Development (OECD). With the central government dominating the taxing power, the delegation of certain taxing power to local governments had certain significance for the improvement of China’s local tax system. Gongliang Tang and others (2012) pointed out that the Standing Committee of the National People’s Congress should gradually take back the legislative power of tax collection and maintain the authority of tax law-making. Authorized governments at lower levels should formulate administrative regulations and other regulations and further strengthen legislative supervision.48 Xiaoping Kuang & Ying Liu (2013) conducted research on tax reform, system changes, and the 43

Liu, Zuo. Macro Tax Burden Adjustment. Tax and Economic Research, No. 1, 2011. Jia, Kang, Bai Jingming. Basic Thoughts on China’s Tax-sharing and Hierarchical Fiscal System. Economic Trends, No. 2, 2005. 45 Gu, Cheng. China’s Property Tax Reform under Fiscal Decentralization. Economic Theory and Business Management, No. 8, 2006. 46 Tang, Gongliang. Suggestions on Improving the Local Tax Law System in China. International Taxation in China, No. 5, 2008. 47 Zhu, Qiuxiang. The Transitional Characteristics of the Decentralization of Central and Local Administrations and the Trend of the Rule of Law. Political Science and Law, No. 11, 2009. 48 Tang, Gongliang. He Yang, Li Junying. Drawing on the Experience of OECD Member States to Improve the Division of Local Taxing Power in China. International Taxation in China, No. 1, 2012. 44

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path dependence of taxing power division. Then, they proposed that future reform of the local tax system should break through the inefficient lock-in caused by path dependence. It was important to adopt moderate decentralization and properly handle the division and allocation of taxing power between the central government and local governments. The main tax types of local taxes, such as income taxes and property taxes, should be developed to enhance the financial self-sufficiency of local governments. The central government was not supposed to monopolize taxing power division, legislation, law enforcement and income distribution. Instead, it was to work together with local government in the process. The specific criteria for division were as follows: The central government was to make laws for such tax types as enterprise income tax and VAT which, collected throughout the country, had a great impact on macroeconomic development and social stability; The central government was to make basic laws and regulations for such taxes as property tax, urban land use tax and urban construction tax which, collected throughout the country, had an impact on regional economic development, and the local authorities should formulate detailed rules on tax collection and administration, law enforcement, implementation, adjustment and interpretation; Regional and income-constrained taxes can be formulated and implemented by provincial people’s governments through provincial people’s congresses.49 The research on the choice of taxes as the main local taxes could be divided into several groups. Some scholars supported property tax as the main local tax. Bo Li (2006) argued that property taxes had distinctive characteristics compared to other taxes. First, it could raise stable and reliable income for governments. Compared with indirect taxes such as VAT, property tax had its unique advantages: transparency, so it could promote the efficient and transparent use of financial funds and budget expenditure and confine expenditures within an effective range. Second, to collect the property tax, the property value needed to be effectively determined and monitored by the special technical department, which might effectively avoid risks. Rong Liu (2005) also agreed to set up property tax as the main local tax, and she designed the specific structure of property tax reform. She believed that the nature of property taxes, their balanced and stable fiscal revenue, and the improved efficiency of collection and management determined that property taxes should be suitable to serve as the main local tax in China.50 Rong Qin (2005) believed that, under the current economic situation in China, property tax should become one of the main local taxes, and local governments needed to base its choice of the main local tax on economic development, economic benefits, and per capita quota.51 Shaoqun Ye (2005) proposed that property taxes and land taxes were supposed to be the two pillars of the local government because they had the characteristics of a broad tax

49

Kuang, Xiaoping, Liu Ying. Institutional Change, Taxing Power Allocation and Local Tax System Reform. Research on Financial and Economic Problems, No. 3, 2013. 50 Liu, Rong. Shaping Conditions, Framework and Planning of China’s Intergovernmental Tax Competition. Taxation Research, No. 5, 2005. 51 Qin, Rong. On the Building of Local Tax System. Journal of West Anhui University, No. 2, 2005.

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base, a large income scale, moderate flexibility, a stable tax base and agreement with interest.52 Qingwang Guo & Bingyang Lu (2013) argued that when the government was “changing BT to VAT”, the local tax system encountered two major problems to be urgently addressed: intergovernmental financial relations and reshaping of the local tax system. To perfect the local tax system, it would be necessary to clarify the relationships between the government and the market, between different government sectors, and between tax revenue and nontax revenue. Two schemes were proposed for the main local tax: (1) retail tax + individual income tax + property tax; (2) VAT + individual income tax + property tax. To restructure the local tax system, the key part was to change the rules of VAT division or to levy retail taxes. As BT was becoming history, the ownership of property tax and individual income tax was changing.53 As China moved on with national governance and system building, Jidong Jin (2015) studied the local tax system in modern national governance and concluded that the current local tax system was complex and involved a wide range of aspects. To build a local tax system, China needed to take a holistic, integrative and systematic approach to policy making, focusing the main local tax while guarding against financial risks that may be caused by local fiscal capacity and stabilizing local tax revenue while reducing local nontax revenue.

1.2.6 Research on Tax Collection and Management Amid Rule of Law Jingjin Song (2014) analyzed the efficient market theory of tax collection and management from the perspective of economics and believed that principal-agent theory, taxpayer rights protection and relational contract theory should be regarded as the three foundations of contract, value and subject for the law of tax collection and administration. China needed to modernize its traditional tax collection and administration. The revision of the tax collection and administration law could promote the perfection of relevant laws and regulations and strengthen the enforcement of laws in tax collection and management. Improvement of the current tax collection and administration law in China played a significant role in regulating the payment and collection of tax revenue, guaranteeing tax revenue, safeguarding legitimate rights and interests of taxpayers, and effectively promoting social and economic development.54 Xiong Lin & Chen Mengyuan (2010) studied tax collection and management in practice and proposed solutions to five major problems he had found out in due course: (1) Taxation authorities should be granted the power to freeze the bank 52

Ye, Shaoqun. On the Main Local Tax. Journal of Minjiang University, No. 2, 2005. Ye, Shaoqun.On the Main Tax of Local Taxes. Journal of Minjiang University, No. 2, 2005. 54 Song, Jingjin. Economic Analysis of the Revision of Tax collection and Administration Laws. Taxation Research, No. 2, 2014. 53

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deposits of taxpayers in the implementation of tax collection and administration; (2) Taxation authorities should be empowered to enforce taxation on non-productive and operational taxpayers; (3) Taxation authorities should be given the power to specify the standard of the rejected legal documents; (4) Laws needed to be made to limit room for abuse of power in tax collection and management; (5) There should be specific provisions to protect taxpayers’ right to know the truth.55 In view of the problems in the current tax collection and administration law, Yong Fan and Xianyun Lai (2008) proposed the following suggestions for its revision: It was necessary to improve the relationship between tax collectors and taxpayers, protect taxpayers’ legitimate rights and interests, and define their rights and obligations to ensure the integrity of tax regulations; There was no uniform penalty for specific tax evasions in the laws and the discretion is too broad with exorbitantly high ceilings; Rules of the tax collection and administration law needed to be clarified to close up the loopholes against tax violations; It was also necessary to improve the tax law system related to tax collection, tax enforcement and protection.56 Bao Xue (2014) argued that the development of e-commerce brought new bottlenecks to tax collection and management by raising new challenges and requirements. Therefore, taxation on the part of e-commerce was a beneficial contribution to the existing law of tax collection and management, and e-commerce’s healthy development could mean fair and rational taxation.57 Guoying Chen (2015) proposed that modern tax collection and management were an important part of current taxation in China. Rigorous, scientific and effective tax collection and management could promote the transformation of the old pattern and provide effective and practical solutions to problems that occur in actual taxation.58 Long Chen (2015) believed that the “old normal” of tax collection and management had problems such as structural imbalance, incapacity, low efficiency and an inflexible mode.59 Bing Chen & Qian Cheng (2015) believed that it would be particularly important to informationize tax collection and management in the future and build tax control by tickets. It was necessary to establish and improve electronic transaction documents, supervise and effectively collect tax-related information to achieve modernization, informatization and law-based taxation.60 Wenxiu

55

Lin, Xiong, Chen Mengyuan. Several Problems in Tax Enforcement Measures Urgently Needed to be Solved in the Tax Administration Law. International Taxation in China, No. 11, 2010. 56 Fan, Yong, Lai Xianyun. Some Issues to be Revised in the Current Tax Administration Law. Tax Research, Issue 10, 2008. 57 Bao, Xue. Research on the Improvement of Tax Collection and Management System under ECommerce Environment. Wuhan: Central China Normal University, 2014. 58 Chen, Guoying. Creating a New Pattern and Promoting a Modern Tax Collection and Management System. China Taxation, No. 2, 2015. 59 Chen, Long. New Normal of Tax Collection and Management under State Governance System and Modern Governance Capacity. Tax Economics Review, No. 2, 2015. 60 Chen, Bing, Cheng Qiang. Interpretation of Tax Collection and Management of Online Transactions under the Revised Tax Administration Law: Third Party Platform Management and Control. Journal of Shanghai University of Finance and Economics, No. 4, 2015.

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Cui (2013) believed that to improve the performance management of tax administrations, it was important to combine horizontal management with vertical management and establish high-performance tax administrations.61

1.2.7 Conclusion of Literature Review This book will mainly make three improvements to the previous studies given above on the tax system under the rule of law.

1.2.7.1

Setting the Goal to Be Higher

With increasing studies on national governance capacity, an in-depth discussion has been made of how to strengthen the rule of law to build a modern national governance system. More research needs to be done on how to define taxation as an important means of national governance and realize rule-of-law taxation in China.

1.2.7.2

Improving the Tax-Sharing Administration to Soundly Regulate Governmental Power Responsibility

As a significant part of China’s modern tax system, a sound tax-sharing administration helps to regulate the power-responsibility relationship between governments at all levels. The current theoretical and practical research has covered the taxsharing administration in every possible aspect and played a strong guiding role in its progress. However, most of the literature took a sociological or economic approach instead of an interdisciplinary and synthetic approach to the object of study.

1.2.7.3

A Rule-Of-Law Government Making Stricter Requirements for Tax Collection and Administration

For a long time, China’s tax collection and administration essentially adopted a mixed mode of “tax planning contract + fixed wage contract + sharing contract”. Mainly based on the transactional cost theory from the new institutional economics, most of the current literature analyzed the government’s choices of tax contracts, but they were merely analyses and interpretations of tax farming. Therefore, more research needs to be done on how to further promote law-based tax administration, how to analyze the pros and cons of tax planning contracts under a unified framework, and how to evaluate the performance of tax administrations. 61

Cui, Wenxiu, How to Improve Performance of Tax Administrations. Taxation Research, No. 8, 2013.

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1.3 Research Design and Research Methods 1.3.1 Research Design The study of the tax system is very significant in the context of a new normal economy. This book’s design is based on the collection and understanding of previous studies at home and abroad on China’s tax system in terms of basic theories, academic history, reform, theoretical frontiers, and positive research. Aiming to build a tax system under the rule of law, this book will explore the characteristics, multicoordination framework, systems and advantages of modern national governance and analyze the definition of a rule-of-law China and its requirements for the tax system. Based on the rule of law, this paper will examine the current situation and problems of China’s current tax system and propose policy suggestions on how to optimize the tax structure and reform the tax-sharing system, the local taxes, and tax collection and management.

1.3.2 Research Methods 1.3.2.1

Literature Analysis, Induction and Deduction

This book examined the existing classic literature on the tax system and sorted out the views of different scholars and disciplines on the connotation, functional orientation, objectives, and institutional framework of the modern tax system. On this basis and with China’s national conditions in mind, this work will draw on the research results and methods of economics, finance, politics, sociology, public management, law and other disciplines for a systematic study of the improvement and building of China’s modern tax system to serve the goal of a national governance system and governance capacity. The theoretical basis for this work came out of a survey of previous related research, an understanding of academic frontiers in local tax studies, systematic knowledge and a good command of current research in local tax reform.

1.3.2.2

Comparison of Empirical Questions

A comparative study will be made in two aspects. First, a comparison will be made between China and foreign countries on the same issue in their practice to summarize the experience when foreign examples are surveyed. Second, the experiences from China and foreign countries will be refined to help build a modern tax system that agrees more with China’s national conditions.

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1.3.2.3

1 An Overview of China’s Tax System

Qualitative Method

Qualitative analysis was used throughout the entire study. It will be used on the collected primary data to draw good lessons from the tax systems at home and abroad. In addition, it will also be used to find the advantages and disadvantages of the relevant practices when China and foreign countries are compared.

1.3.2.4

Model Analysis and Empirical Research

In this research, statistical yearbooks and survey data are used to show the costs and benefits of tax reform. Empirical analyses such as numerical simulation with MATLAB are used to improve the effectiveness of policy decision-making and to consequentially help improve the tax system.

1.3.3 Research Difficulties 1.3.3.1

Dialectically Handling Logical Relationships Between Different Concepts

This work adopts a multidisciplinary and dialectical approach and focuses on several issues, such as connotation, extension, nature, and features of a law-based tax system in the modern governance system; the logical relationship between the optimization of the tax system structure, modern governance and law-based tax administration; the logical relationship between the tax-sharing system and law-based tax administration; and the logical relationship between the rule-of-law taxation, tax collection and administration and the modern national governance system.

1.3.3.2

Multiple Relationships to Be Resolved in Rebuilding the Tax System

It is undoubtedly very difficult to theoretically and philosophically settle the relations between centralization and decentralization, between a unitary tax system and local taxing power, between tax burden stability and structural tax reduction, and between administrative power and financial power.

1.3.3.3

Restructuring the Tax System Involving a Wide Range of Issues

Restructuring the tax system would lead to improvement of the existing system and establishment of a new system, adjust rights and interests of different departments and

1.3 Research Design and Research Methods

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groups, and involve multiple issues such as institutions, technology and management, which undoubtedly makes this research more difficult.

1.3.3.4

Combining International Experiences with China’s National Conditions

One of the difficulties in this work is how to adapt lessons from foreign countries to China’s national conditions to establish a tax system optimization theory in line with China’s national and political conditions.

1.4 Research Structure and System 1.4.1 Technical Roadmap With China moving toward the rule of law, this book suggests that tax laws and stratified governance should be reformed with the view that tax neutrality, law-based taxation, tax equality and tax burden stability would be achieved. The research tries to identify the logical relationships between the connotation of a rule-of-law China and the tax system, to optimize the current tax system structure, to propose a normative tax-sharing system, to define administrative and fiscal power and expenditure of both the central and local governments, and to reconstruct a better local tax system toward sound and law-based tax collection and management (see Fig. 1.1).

1.4.2 Research Framework This book is divided into five parts, and the overall structure is arranged as follows. Part one: the connotation of a rule-of-law China and its requirements for a tax system. Based on governance theory, this section will conduct a comparative analysis of histories and institutions to theoretically define the rule of law as the basic requirement of a modern national governance system and recognize the important role of a tax system in building a “rule-of-law China”. Specifically, this section will discuss the connotation and elements of a modern national governance system, the characteristics and significance of a modern tax system, the relationship between a modern tax system and a national governance system, the relationship between national governance capacity and a rule-of-law China, and law-based taxation that should be followed in rebuilding China’s tax system. On this basis, it will be argued that law-based taxation needs to start with improvement of the tax system structure, the tax-sharing system, the local tax system, and tax collection and management.

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Fig. 1.1 Technical roadmap

Part two: tax system structure optimization under rule of law. First, a comparison of international examples will be made to generalize the laws of tax structure development. Second, a survey will be conducted on the development of China’s tax structure and will identify its weaknesses. Finally, based on the requirements of a rule-of-law China, this section will define the objective and direction of China’s tax structure optimization. Part three: Improving the tax-sharing system amid a rule-of-law China. First, this part will define the principles regulating central and local governments’ financial powers, administrative powers and expenditure responsibilities. Second, a sound division will be made of those powers and expenditure responsibilities between governments at different levels. Third, different modes will be defined of tax legislative power, law enforcement and judicial power. Finally, drawing on lessons from international management of tax-sharing practices, proposals will be made to improve China’s tax management of tax-sharing practices that match administrative power and financial power at different levels. Part four: local taxes amid rule of law. A normative local tax is an important part of law-based taxation. With increasing replacement of BT with VAT, it is very important to reconstruct the local tax system that matches financial power and administrative power with expenditures at all levels of government. For this purpose, this part will first define a principle on how to make a

1.4 Research Structure and System

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normative local tax system. Second, a discussion will be made of the central and local governments and the main taxes for local governments at all levels. Following the three-level public finance system from the central to provincial and county governments, China needs to define the main taxes first for the provincial governments and then for the county governments. On this basis, China needs to move forward with the reform of resource taxes and environmental protection taxes. Part five: tax collection and administration amid rule of law. The increasing economic globalization has brought challenges to the current tax collection and management, which, far from being under the rule of law, needs to move forward with law-based tax administration and tax payments, protection of taxpayers’ rights and interests, and a rule-of-law environment for taxation. Therefore, rule-of-law tax collection and management requires a multipronged approach. On the basis of foreign experiences, China needs to promote the idea of law-based taxation, improve the tax law system, raise citizens’ awareness of taxpaying, improve the tax relief system, develop tax collection and management, and create a rule-of-law environment for taxation to meet the needs of a rule-of-law China.

1.5 Innovations and Deficiencies 1.5.1 Innovations 1.5.1.1

Problem Selection

It was made clear in the Decision by the CPCCC Fourth Plenary Session that the “rule of law should be promoted in an all-round way”. This work will take a jurisprudential approach to the political, economic, cultural, and social systems, ecological conservation and CPC building, which are all component parts of a modern national governance system. This research will also explore the governing bodies, concept, content and mode of modern governance capacity. For taxation to serve modern national governance capacity, this work will start with restructuring the tax system to push the system toward the rule of law so that law-based taxation can be realized. This starting point is the focus of attention today. Compared with previous related studies, this research is innovative enough to come right to the weak point of the problem.

1.5.1.2

Ideas

Taking an interdisciplinary approach, this work proposes a new mode of tax systems that matches the increasing national governance capacity and introduces a new idea of tax systems based on the principle of law-based taxation.

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1.5.1.3

1 An Overview of China’s Tax System

Research Methods

The interdisciplinary approach in this research will involve economics, finance, politics, sociology, law, public management, history, econometrics and other disciplines. Theoretical, comparative, and empirical analyses and econometric models will be adopted to make the research more scientific, systematic and comprehensive.

1.5.2 Inadequacies There is still room in this research for improvement due to the authors’ modest research capacity and other objective factors.

1.5.2.1

Data Collection Needed to Be More Comprehensive

This work will focus on theoretical and policy analyses. The empirical analysis of data concentrated on tax system structure optimization will be deficient in studies on tax-sharing systems, local tax systems and tax collection and administration. The collection of more data will help to check the policy impacts and make the research more meaningful.

1.5.2.2

Content Needed to Go Deeper

To realize law-based taxation, this book adopts an interdisciplinary approach with induction, deduction, comparison, and qualitative and quantitative analyses to explore the problems in China’s tax system, focusing specifically on the problems in the tax system structure, the tax-sharing system, the local tax system, and tax collection and management. However, the research scope is too wide for a modest book, and the relationship needs more definition between “law-based taxation”, a “rule-of-law China” and “national governance”.

1.5.2.3

Policy Recommendations Needed to Be Reconsidered

This book will propose some suggestions to push China’s tax system toward the rule of law. However, their feasibility, operability and pertinence require more demonstrations, which might be done in future research.

Chapter 2

Rule-of-Law China and Its Requirements for the Tax System

2.1 Building a Rule-of-Law China: The Only Way to Modernize the National Governance System 2.1.1 National Governance and the Modern National Governance System 2.1.1.1

Governance and National Governance

(i)

Governance and Good Governance

(1)

Governance

The concept of “governance” originates from classical Latin and Greek. Its original meaning is to control, steer, and manipulate. “Governance”, traditionally a synonym for domination, has long been used interchangeably with the term “government” and primarily refers to management and political activities related to the public affairs of the country.1 The term “governance crisis”, first used by the World Bank in 1989, describes the political, economic, and social situation in Africa at the time. Since then, the term “governance” has been widely used in political science, economics, sociology, and other fields. Qualifiers can be added before the word “governance”, generating a large number of technical phrases such as “global governance”, “public governance”, “social governance”, “local governance”, “community governance”, “crisis governance”, “multilevel governance”, “multicenter governance”, “network governance”, and “governance without government”. The theory and practice of governance have affected all aspects of social, economic, and political life.

1

Yu, Keping. Governance and Good Governance. Beijing: Social Sciences Academic Press, 2000, p. 2. © People’s Publishing House 2022 Q. Wang and W. Xi, Improving the Tax System amid the Rule-of-Law China, https://doi.org/10.1007/978-981-16-7033-6_2

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2 Rule-of-Law China and Its Requirements for the Tax System

In general, we can understand “governance” as the control and management of people, events, and things for a certain goal or value. It indicates but cannot be equated with “domination” and “management”. James N. Rosenau, one of the first pioneers working on governance theory, defined governance as activities backed by shared goals in governance without government. The governing body of these management activities is not necessarily the government, nor does it need to rely on the coercive force of the country to be achieved.2 Gerry Stoker pointed out, “the essence of governance is its focus on governing mechanism which do not rest on recourse to the authority and sanctions of the government. The governance concept points to the creation of a structure or an order which cannot be externally imposed but is the result of the interaction of a multiplicity of governing and each other influencing actors.”3 In the governance system, the government mainly performs the following functions. First, the government provides different institutions that determine whether and how social forces can enter the field of public governance and censor and regulate other governance subjects if necessary. Second, government offers policy incentives. For certain public affairs, even if government yields the power of governance, social forces may not always actively engage themselves in, especially in the production of public goods, which requires the government to institute corresponding incentive policies and measures. Third, government enforces external constraints. Coping with public affairs also needs “referees”. The government should follow laws and regulations to supervise, arbitrate, and even punish the behavior of other governance subjects.4 (2)

Good governance

The formal definition of the term “good governance” comes from the United Nations, the World Bank, the International Monetary Fund, the Organization for Economic Cooperation and Development (OECD), and other bodies. For example, the United Nations Development Program believes that good governance comprises the interaction of government, citizens, social organizations, and private sectors in the formation of public affairs, as well as the existence of various institutions and processes through which citizens articulate their interests, mediate their differences and exercise their political, economic, and social rights. Good governance represents the social administration process that maximizes public interests. This concept renders governance theory more value-laden, by which governance becomes not only about the instrumental rationality of who governs and how to govern but also a set of value evaluation objectives so that it unifies instrumentality and values. The very essence of good governance lies in its cooperative management 2

Rosenau, James N. Governance without Government. Nanchang: Jiangxi People’s Publishing House, 2001, p. 45. 3 Stoker, Gerry. Governance as a Theory: Five Propositions, International Journal of Social Sciences (Chinese Edition), No. 1, 1999. 4 Chen, Guangsheng. Towards Good Governance. Hangzhou: Zhejiang University Press, 2007, pp. 124–125.

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of public life between the government and the people, novel relationship between the political state and society, and the optimum of both.5 The values contained in good governance, such as democracy, freedom, rule of law, accountability, transparency and equality, conform to the common pursuit of all human society. Whether national governance is good depends on its purpose, mechanism, mode and method. Western-based governance emphasizes the role of society and decentralization from and empowerment by government to achieve a state of multibody and multicenter administration. It champions the idea of autonomous self-governing and equal governance by both social organizations and government. In the Chinese context, the meaning of good governance far exceeds what is defined by Western scholars. Its essential features are as follows: first, it is a people-oriented approach; second, it is governance of the country according to the rule of law; and third, it is public governance. (ii)

National Governance

National governance is an open and systematic concept. Horizontally, national governance can be divided into economic governance, political governance, social governance, cultural governance, and ecological governance. Vertically, it can be divided into grassroots social governance, local governance, and national governance. Government bodies consist of multiple entities, among which the ruling party and its state organs, the broad masses of the people are the primary entities, and other economic and social organizations act as participating entities. National governance involves three basic issues: who governs? How to govern? How effective is governance? (1)

Who governs: the governing body

A national governance system is an organic whole composed of a political power system, social organization system, market economy system, constitutional law system, and ideological and cultural system. Governance, characterized by the diversity of its governing entities, emphasizes cooperation and participation. National governance in China is mainly performed by all levels of organizations of the CPC, people’s governments at all levels, various social groups, and the general public. The first are the organizations at all levels of the CPC as the ruling party. In the great journey of realizing the great rejuvenation of the Chinese nation, the leadership of the Communist Party of China has always been at the political core of the whole governing system, and its organizations at all levels are the most important governing entities of national governance. The second is the people’s governments at all levels. The modernization of the national governance system and governance capacity needs to be advanced from the central to the local governments at all levels. Governments at all levels shoulder the most responsibilities in the national governance system in fields such as economic, political, cultural, social, and ecological civilization development. 5

Yu, Keping. Governance and Good Governance. Beijing: Social Sciences Academic Press, 2000, pp. 8–9.

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2 Rule-of-Law China and Its Requirements for the Tax System

The third are various social organizations. Social organizations play a vital and synergistic role in social governance. In the process of promoting the modernization of the national governance system, more efforts should be put to fostering social groups and building a solid partnership with government. More social services should be entrusted to these groups, as should public resources and fields accessible to them. This is an inevitable choice for the transformation from the government’s unitary management to multientity participation in governance and for the construction of a benign interaction between the government, society, and the market. The fourth is the broad masses of people. The return of power of the state to citizens, the involvement of public participation in social governance, and the realization of good social governance are common practices in foreign countries and inevitable requirements for the development of human society. (2)

How to govern—the mechanism of governance

Compared with traditional rule, governance aims for good governance characterized by modern democratic politics and participation; compared with general management, governance strives for good public order with human concern based on interaction. Therefore, the governance mechanism is first embodied in a certain value and subsumes a series of methods. It covers two dimensions, value and method (Zhang Xiaojin, Yu Xiaohong 2014).6 The first is the value dimension of governance. According to the governance experiences of countries around the world, governance needs to include the following values (Yu Keping 2012): the first is legitimacy wherein social order and public authority are recognized and obeyed consciously; the second is the rule of law wherein law is the highest criterion of public political management, and everyone is equal before the law; the third is transparency, i.e. the openness of political information; the fourth is responsibility wherein managers should be responsible for their own actions; the fifth is responsiveness, wherein public managers and management agencies should respond to citizens’ demands promptly and responsibly; the sixth is effectiveness where administrators should have high efficiency; the seventh is participation referring to citizens’ extensive participation in political and social life; the eighth is stability, to safeguard domestic peace, orderly life, the safety of residents, unity of citizens, coherence of public policies, etc.; the ninth is a clean government, which means government officials abide by the law; and the tenth is justice, which means ensuring the equality of political and economic rights among citizens of different genders, classes, races, educational levels, religions, and political beliefs. China’s national governance also embodies the above values.7 The second is the methodological dimension of governance. The methodological system of governance mainly consists of law, administration, morality, education, consultation, and other means, involving those technologies and methods that 6

Zhang, Xiaojin, Yu Xiaohong. Six Lectures on Promoting the Modernization of National Governance System and Capacity. Beijing: People’s Publishing House, 2014, p. 57. 7 Yu, Keping. Respect for Public Opinions—China’s Democratic Governance and Political Reform. Beijing: Central Compilation and Translation Press, 2012, p. 128.

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connect government and society and officials and the public. For example, governance requires improving collaboration mechanisms and strengthening communication, cooperation, and collaboration among entities. It includes networked trust and reciprocity mechanisms. It needs to improve the responsibility mechanism and clarify the allocation of powers and responsibilities of the governing body, to refine the supervision mechanism and form a scientific and effective restriction mechanism, to improve the information exchange mechanism and build a transparent and operational model of national governance. (3)

Governance effect—evaluation of governance

A scientific and effective governance evaluation mechanism with the purpose of enhancing governance, promoting democratic governance, and guiding governance reform is indispensable to the measurement of the effectiveness of national governance. The evaluation system of China’s national governance should not only draw lessons from international experience but also embody Chinese characteristics and reflect the conditions and realities of the country. It must focus on strategic thinking and initiatives such as the scientific outlook of development, harmonious socialist society, socialist political civilization with Chinese characteristics, the building of a well-off society in an all-round way, the building of an innovative country, and the building of an ecological civilization. Democracy, rule of law, fairness, efficiency, responsibility, and transparency should be taken as evaluation indicators. Some scholars believe that China’s governance evaluation framework should contain 12 basic elements. That is, citizen participation, human rights and civil rights, intraParty democracy, rule of law, legitimacy, social justice, social stability, openness of government affairs, administrative efficiency, government responsibility, public service, and integrity.8

2.1.1.2

Modernization of the National Governance System and Governance Capability

National governance encompasses two dimensions: the governance system and the governance capacity, with economic, political, cultural, social, ecological civilization, and other fields of concern. The following criteria can be adopted to measure the modernization of the governance system and capacity (Yu Keping 2013): (1) Institutionalization and standardization of the exercise of public power. Promoting the modernization of the governance system and capability requires a sound institutional arrangement and a standardized public order for government governance, market governance, and social governance. (2) Democratization. Promoting the modernization of the governance system and capability requires that public governance and institutional arrangements can guarantee that sovereignty is in the hands of the people or that the people are the masters of the country, and all public policies must 8

Yu, Keping. National Governance Assessment—China and the World. Beijing: Central Compilation and Translation Press, 2009, p. 122.

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2 Rule-of-Law China and Its Requirements for the Tax System

fundamentally reflect the will of the people and the ruling status of the people. (3) The rule of law. To modernize the governance system and capacity, China must make the Constitution and the law the supreme authority of public governance and make everyone equal before the law. (4) Efficiency. Promoting the modernization of the governance system and governance capacity requires maintaining social order and stability and improving administrative efficiency and economic benefits. (5) Coordination. The modern national governance system is an organic system. From central to local levels, from government governance to social governance, all kinds of institutional arrangements are coordinated and inseparable as a unified whole.9

2.1.2 The Modernization of the National Governance System and the Construction of the Rule of Law in China Since the reform and opening up, the construction of the rule of law in China has been deepening, and the process of the rule of law advancing. The 15th National Congress of the CPC put forward the idea of “governing the country by law” and then put forward the idea of “administering the country by law” to build a “law-based government”. The report of the 18th National Congress stressed that governing the country in accordance with law was the basic strategy for the Party to lead the people. The rule of law is the basic way to govern a country. China should give greater emphasis to the important role of the rule of law in national governance and social management, fully implement the basic strategy of law-based governance, and accelerate the construction of a law-based socialist country. In February 2013, General Secretary Xi Jinping highlighted in the fourth collective study of the Political Bureau of the Central Committee that “ensure sound lawmaking, strict law enforcement, impartial administration of justice, and the observance of the law by everyone, pursue coordinated progress in law-based governance, law-based exercise of State power, and law-based government administration, promote the integrated development of rule of law for the country, the government and the society, and constantly create a new situation of ruling the country by law.”10 After the 18th National Congress of the CPC, General Secretary Xi Jinping proposed the concept of “the rule-of-law China” to deliver a solid political and legal performance under the new situation. The Third Plenary Session of the Eighteenth Central Committee of the CPC set the general goal of deepening reform as the improvement and development of the socialist system with Chinese characteristics and the promotion of the modernization of the national governance system and governance capacity and clearly put forward the promotion of the construction of the rule-of-law in China.

9

Yu, Keping. Promoting the Modernization of National Governance System along the Road of Democracy and Rule of Law, Phoenix network, Nov. 30, 2013. 10 Xi, Jinping. General Secretary Xi Jinping’s Series of Important Speeches. Beijing: People’s Publishing House, 2014, p. 81.

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By “rule-of-law China”, it means that the rule-of-law governing body, guided by the belief in and spirit of the rule of law, confine the object of the rule of law by adopting a mindset consistent with the rule of law and taking a law-based approach, and safeguard all the people’s right to participate and to develop as equals, hence to further attain the fundamental value of national development by enhancing China’s global competitiveness of law-based governance. The development of the rule of law in China is closely related to the modernization of the national governance system and capacity. Without the rule of law, there would be no full-blown, typecast system. Nor would it be impossible to maintain confidence in the Chinese socialist path, theory and system put forward by the Eighteenth National Congress of the CPC. The history of modernization around the world has also proven that modern countries are all ruled by laws, all taking law as the foundation, and all state affairs and government services are based on laws. It can be said that offline with the rule of law, there would be neither modern politics nor modern states. Therefore, the concept of “rule-of-law China”, while drawing on the common cultural heritage of the rule of law, reflects the development trend of rule-of-law China and conforms to the universal principle of the rule of law. The meaning of rule-of-law China can be interpreted from different dimensions: (1) Vertically, it includes rules of law at the national, local and industry levels. (2) The relationship between government and society involves the rule of law for the country, the political party, the government and society. Specifically, it covers five spheres: economic, political, cultural, social and eco-environmental rules of law. (3) Governance requires taking into consideration the entity, purpose, and principle of governance to attain a full understanding. In terms of governing bodies, to build rule-of-law China, it is necessary to clarify that political parties, the government, and the people are all governance subjects and to highlight the two-way interaction between different governing actors. Governance purposes refer to ensuring the principal position of the people and placing people at the center. With reference to the governance principle, it underscores and fully embodies genuine equality and justice. Concerning the basis of governance, it calls for good governance and kind governance, to pursue substantive rule by law and to seek “kind governance” through “good laws”. The base of governance rests on the combination of rule of law with by rule of virtue. The Constitution, above everything else, is the ultimate authoritative code of governance. However, “law” has limitations and weaknesses, where “virtue” finds a way to fit in. Therefore, the combination of rule of law and rule of virtue should be promoted, with the latter as the base. Specifically, building the rule of law in China contains the following founding principles. (1) Upholding the authority of the Constitution is at the core of building a country ruled by law. Serving as the foundation of the basic legal order and the basic behavior norms of people’s lives, the core spirit of the Constitution is to regulate how state power operates and ensure that people enjoy their basic rights. So does it, as the cornerstone of the entire legal system, pave the way for gluing social consensus, maintaining law and order, and protecting national interests. (2) Stepping up efforts to build a law-based government is the key to building rule of law in China. A law-based government is bound to be a responsible government. It must adhere to the principle

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that “law without authorization is inadmissible, law without prohibition is freedom”, which, as the paramount principle for determining public and private power, serves as the basis for delineating the limits of government power. (3) Promoting rule of law for society lays the solid foundation for building a law-based China. The fact that “each individual abides by the law” makes the observance of the law by the whole society. The spirit of law must be uphold to create a rule-of-law culture and to form a social atmosphere wherein it is honorable to abide by the law and shameful to break it. (4) Adhering to the leadership of the Party is the fundamental guarantee for building rule-of-law China. It is the basic experience of the socialist rule of law construction to ensure Party leadership over advancing and speeding up the construction of a law-based country.

2.1.3 National Governance Under the Law: The Only Way to Modernize the National Governance System To achieve the modernization of the system and capabilities for governance, it is necessary to subject national governance to legislation, which is integral to the modernization of a country’s governance system. Since the reform and openingup, various institutional innovations and buildings in social governance in China have always been synchronized with the development of the legal system and rule of law. The socialist market economy is an economy governed by law, as are socialist democratic politics. The rule of law has become China’s governing strategy and the basic method of CPC governance. The 18th National Congress of the CPC pointed out that we must adopt a mindset consistent with the rule of law and take a lawbased approach to govern the country. These scientific judgments and complex practices fully demonstrate that the process of modernizing the national governance system is that of legalizing national governance. Legalization is the only path to the modernization of the national governance system and capacity.

2.1.3.1

National Governance System Under the Law

The national governance system is essentially a national institutional system. The system of socialist rule of law with Chinese characteristics is composed of a set of systems, including the system of inner-party laws and regulations under the leadership of the Party Constitution, the policy system of the Party and the country under the leadership of the Party’s basic line, the legal system with the Constitution at the heart, and the legal system based on the system of laws. In terms of governance affairs, this system involves governance systems such as reform, development, stability, internal affairs, foreign affairs, national defense, and party, state, and army administration, while in terms of governance activities,

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it includes a governing entity system, governance power system, governance procedure system, and governance evaluation system. Only when the national governance system is upgraded to the constitutional and legal level and rule of law is realized can it be typecast and refined, and should its executional and operational efficiency also be enhanced accordantly. As to the path of the law-based governance institutions, the Party and the government must first identify their political ideas, experiences, strategies, and principles in the form of inner-party regulations and policies, tested and matured through the governing practice, which will finally be enacted as laws through legislative procedures and typecast by the Constitution and the legal system. National governance institutions require legalized and categorized policies, which are characterized by broader universality, long-term effectiveness, and a litigable nature.

2.1.3.2

National Governance Capability Under the Law

The twenty-first century has witnessed great changes taking place in the social and historical totality of national governance as well as in domestic and international environments. The patterns of social interests have undergone a profound shuffle. Different interest classes and interest groups have further taken shape and divided. Correspondingly, the unified moral values and norms universally recognized by society as a whole lost solid economic or social support. At the same time, people’s conception of the rule of law, awareness of rights, and motivation to safeguard such rights have been generally enhanced. As the largest common denominator of social consensus, the law naturally plays a leading role in national governance. Implementing the rule of law has become the first choice of governance and the contemporary current of the development of political civilization. This requires national governance to follow the laws and principles of the rule of law, constantly improve the capacity for governance in line with the thinking and methods of rule of law and abandon the thinking of the rule of man. To make good use of the tenets and methods of the rule of law, China must run the idea, spirit, principle, and method of the rule of law through the whole process of the practice of national governance, which includes political governance, economic governance, social governance, cultural governance, ecological governance, party governance, and military governance, and gradually guide all citizens to adopt the concept of “acting by law, resorting to law when problems occur, solving problems and resolving contradictions by law” and to form a hospitable and law-based social atmosphere. This is an inevitable choice for the modernization of the governance system and capacity of the country as well as a realistic requirement for the construction of the rule-of-law China.

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2.2 Rule-of-Law Taxation: A Requisite to Build a Rule-of-Law China 2.2.1 Connotations and Essence of Rule-of-Law Taxation 2.2.1.1

Connotations

If the core premise of the rule of law builds on the restriction of state power and protection of civil rights, then the concept of law-based tax perfectly represents rule of law in the field of taxation. Taxation boils down to a form of distribution relationship. It is an indispensable “encroachment” of citizens’ property rights by the state’s compulsory power to ensure government playing its functions of providing public goods and services for which citizens pay as “consideration”. However, the scope and boundary of the state’s compulsory power (the state’s power to collect taxes) should be designated to avoid conflict arising between the tax collection power of the state and the private property rights of citizens. The rule of law for tax stands as the principle for modern legal countries to effectively avert and approach such contradictions and conflicts, which requires administrating tax under law to serve as the basic framework. Rule-of-law taxation makes a major part of rule-of-law China and a break-through step to achieve the rule of law in China. Specifically, it conveys the following implications. First, rule-of-law taxation is an important form of the rule of law. Traditionally, taxation has been interpreted as “a collection of people’s property by the state” or “a specific distribution relationship formed by the state levying physical or monetary goods unrequited by virtue of its political power” (“the theory of state distribution”). The emergence and existence of taxes based on the theory of “state distribution” mainly arises from the assumption of the state as a “tool of violence” or the need for the state to organize its fiscal revenue. Nothing wrong is due for this interpretation, but tax conceptualized as this is not enough to meet the requirement of the rule of law. More importantly, “administrating tax under law” based on this tax concept differs significantly from the law-based taxation built on the concept of the rule of law because “administrating tax under law” is only a means of “the rule-of-law taxation”. The context of rule of law calls for a redefinition of taxation, which should be expounded from the perspective of “the consideration paid by the nationals for the acquisition of public goods and services”. Only taking the lens of the rule of law in modern national governance can its rich connotation be accurately captured. Second, the rule-of-law taxation is a concept, value, and principle of tax laws, which cannot be equated with the legal system of taxation (tax laws) in the general sense. It needs to be implemented through the legal system of taxation, which in turn becomes a means to achieve the rule of law for tax. As a concept and value, it channels the overall direction for tax legislation, law enforcement, and judicature, thus the soul of the legal system of taxation. Tax by law depends on the “good law” of taxation, which would only be realized through a real law-based tax system. The

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rule-of-law taxation, in essence the rule of “good law”, differs significantly from “administrating tax under law”. The key to distinguishing the two lies not in whether there is a law or how the law is implemented. The rule-of-law taxation contains both the judgment of what a “good law” is and the requirements of how to formulate and enforce the principles and procedures of the said “good law”. Third, the basic requirements of rule-of-law taxation are “restricting power” and “safeguarding rights”. While highlighting the supremacy, continuity, and stability of tax law, law-based taxation excludes any individual or unit from arbitrary taxation or exemption. Meanwhile, in formulating and implementing the law, power and rights are placed at the core, and so is the tax law. In step with rule-of-law taxation, the authority of tax law in taxation must be established, and the state’s tax power must be brought under restriction. Yet, taxpayers’ rights should be fully guaranteed. Constraints and guarantees must complement each other because without restriction, rights will turn into an illusion. The rule of tax law aims to check a variety of tax-related powers to the maximum extent from the political and legal systems.

2.2.1.2

Essence

In summation, the foregoing discussion argues that rule-of-law taxation refers to a state of legislation wherein taxation power is fully checked, the authority of taxation law is put in place, and the power of taxation authorities and the rights of taxpayers are recognized and effectively protected under the premise of the “good law” of taxation. This has several important implications as follows. First, the good law of taxation has been established. The said “good law” of taxation refers to tax laws formulated when democratic rights are fully exercised and the common will of taxpayers is broadly represented. In this sense, when people abide by tax laws, they follow their own will. Second, the legislative power of taxation is checked. Within the framework of the Constitution, the legislative power of taxation is clearly stipulated, and the improved judicial review system of taxation has become the main measure to restrain the legislative power of taxation. Third, the power of tax enforcement is restricted. It shows that tax collection and administration organs strictly administer taxes according to law, fully abide by the concept of rule-of-law taxation, provide sufficient and efficient services for taxpayers, and fully protect the basic rights and interests of taxpayers.

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2.2.2 Rule-of-Law Taxation: An Inevitable Requirement of a Rule-of-Law China 2.2.2.1

Tax Law as a Powerful Tool to Regulate Taxation

Rule-of-law taxation constitutes an important part of the modernization of national governance because in the power system of the state (government), the dominant power of having financial resources at disposal is the most core and substantial power. Taxation, as a link posited between the state and its citizens, derives from the income and property of citizens and their families, ranking behind private property rights. Only the legal system can constrain the fiscal and taxation behavior of the state (government). Only by restraining this power (tax power) can other powers of the state (government) be effectively restrained. Throughout the development of the tax system, whether in ancient or modern society, taxation has had constitutional and legal significance because the state and government do not create wealth themselves. The legitimacy of tax, i.e. The redistribution, possession, and use of national wealth can only be regulated and bound by the constitution and law. The Constitution and law must stipulate regulations concerning the deriving, deployment, and control of national wealth and who uses national wealth, as well as its procedures and legitimacy. In short, the establishment of a modern tax system must be guided by the spirit of the rule of law, and the reform of the tax system must also be carried out under strict legal procedures.

2.2.2.2

Law-Based Taxation as a Powerful Manifestation of the Concept of the Rule of Law

The principle of taxation according to law comes into being with the modern state and is rooted in the soil of a market economy and a society ruled by law. Throughout the history of human society, and specifically in feudal society, taxation, solely the private property of emperors and monarches, underpins feudal rule. In planned economy countries, tax revenue is a national property collected, distributed, and deployed at the state’s willful disposal, which hardly reflects the cardinal meaning of lawbased taxation. It is only in market economy countries that taxation acquires a “civilized consideration” status, taxpayers’ rights can be highlighted, and the principle of law-based taxation has gained a broad theoretical basis. Against the background of modernizing the national governance system, implementing the principle of lawbased taxation represents the incessant process of embodying and applying the ideas, principles and methods of law in the field of taxation. Given that the concept of the rule of tax law has revived and the system is undergoing transformation, the utter vitality of the legal system of taxation can be brought into full play as public property law, taxpayer rights protection law, and income distribution justice law, which

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then lays a solid fiscal foundation for the sustainable and healthy development of the economy, social equity, justice, and the long-term stability of the country. For a long time, especially in the historical period of the planned economy, the notion of taxation according to law has not received due respect and recognition in China and the government, and academia and the public hold biased opinions toward it. In the process of advancing rule-of-law China, great importance must be attached to adopting a mindset consistent with the rule of law and taking a law-based approach to deal with the complex relations between the government and taxpayers, legislation and administration, and central and local governments. Therefore, only by building up a scientific and efficient tax system can China effectively optimize the allocation of resources, maintain the unity of the market, ensure social fairness and justice, and provide institutional guarantees for the sustainable and healthy development of the economy and the long-term stability of the country. The essence of a scientific taxation system is the rule of law for finance and taxation to achieve a balance of the interests of the state, society, market, and the public to the greatest extent through the scientific and legalized governance of public property.

2.2.2.3

Law-Based Taxation as an Inevitable Requirement of Rule-of-Law China

Amid the development of modern rule of law, the improvement of rule of law, and the changes of tax law, the rule of law in the field of taxation in a country often profoundly affects the level of rule of law in the whole of society and leads the progress of the rule of law in other social sectors. In this process, the legal concept of tax law enforcement and taxpayers’ conceptualization of the rule of law and awareness of power have a direct effect on the improvement of the legal level of taxation. (i)

Internal Consistency between Rule-of-law Taxation and the Building of Rule-of-Law China

The inherent compatibility between taxation and the rule of law has been formed since the establishment of the principle of the rule of law. In the course of the birth and growth of modern democracy and the rule of law, taxation scored first to promote democracy and the rule of law in the international governance system. The fact that the rule of law for taxation is intrinsically compatible with the construction of the rule-of-law China indicates the latter’s rudimentary nature in the construction of law-based taxation. Apparently, governments at all levels, as well as tax collection and management institutions, function as the main subjects in constructing the rule of law in taxation, but at the same time, taxpayers are also subjects. Only by virtuous interaction between the two main taxes and establishing a harmonious relationship between tax collection and payment can the rule of law of taxation be smoothly promoted.

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Law-based Taxation Exerting a Profound Impact on Social Rule of Law

The concept of law-based taxation has played a pivotal and pioneering role in the gradual formation and firm establishment of rule of law in modern times. The constitutions or constitutional documents promulgated by different countries usher in the ultimate establishment of the modern rule of law, which places emphasis on the importance of the rule of law for taxes. The English Bill of Rights stipulates, “Levying taxes without grant of Parliament is illegal.” Article 1 of The U.S. Constitution stipulates that “All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.” Article 34 of The French Constitution stipulates, “Taxation must be regulated by law”. Article 84 of The Japan Constitution stipulates, “No new taxes shall be imposed or existing taxes modified except by law or under such conditions as law may prescribe.” Article 23 of The Italian Constitution stipulates, “No obligation of a personal or financial nature may be imposed on any person except by law.” The provisions of the constitutions or constitutional documents on taxation can be abstracted as “tax governed by law”. The constitutional principle of tax by rule of law scientifically defines the legal relationships between taxpayers, the state, and tax authorities. In the face of the law, taxpayers pay taxes according to it. Taxation authorities levy taxes according to law, the state obtains financial revenue according to law, and the establishment of the law is based on the consent of taxpayers. In this way, the core requirement of “governance according to law” is gradually established in the field of taxation and extended to other fields. (iii)

Administrating tax under Law as a Realistic Requirement of Governing the Country by Law

Whether the tax law system is sound, whether tax law can be effectively implemented, and whether the tax law relationship is harmonious directly reflect the level of tax administration according to law and directly affects the level of modernization of national governance. The Third Plenary Session of the 18th CPC Central Committee deployed the reform on the tax system in modernizing China’s national system and capacity for governance. It should be pointed out that the influences of taxation have stretched far beyond the economic sphere and extended to promoting economic, political, cultural, social, and ecological advancement. Therefore, in the Five-sphere Integrated Plan,11 tax governance, as the pillar and fulcrum of the national governance system, will be more fully and deeply integrated into all aspects of state governance. (iv)

Law-based Taxation as an Important Basis for Administrating Tax under Law

The Third Plenary Session of the 18th CPC Central Committee pointed out in the Decision that “finance is the foundation and an important pillar of national governance”. The historical origin of rule of law in the world is closely linked to the 11

The Five-sphere Integrated Plan refers to coordinated progress in the economic, political, cultural, social and eco-environmental fields. (note by translators).

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power to collect taxes because the birth of the constitution goes hand in hand with this power. That is, the constitution should stipulate who should levy taxes and who should determine how taxes are levied, which lays the groundwork for the rule of law in all countries around the world. The old links show that constitution-based governance and law-based governance we want to continue to advance today actually dates back to the establishment of the principle of law-based taxation. Taxation according to rule of law virtually checks public power and curbs the willful expansion of tax collection and management power. On the other hand, it protects private ownership, preventing the property rights and the interests of individuals, enterprises, and other market entities from being illegally infringed. Taxation by law underpins a reasonable market economic order and facilitates the sustainable development of the economy. If the notion of tax by law cannot be carried to the letter, tax collection will not be ensured, and the economic entity will not be able to make reasonable anticipation, which will further induce instability in investment prospects and economic development.

2.3 Relations to be Handled to Promote Law-Based Taxation The development of the rule-of-law China requires tax by law to be advanced at a deeper and higher level. To realize the rule of law in the field of tax, we must first bring the idea of law-based taxation into practice, speed up the reform of the taxation system and the improvement of the taxation legal system, raise the level of tax law and enhance its efficacy, and step up efforts to build a well-weighed legal system of tax revenue that matches the modernization of the national governance system and capacity. A sound tax law system can rationally define the tax interests between the government (the country) and the market, between the central and local governments, between different levels of government, and between tax collection and payment. Specifically, the following issues need to be addressed with great care.

2.3.1 Optimizing the Tax Structure The tax structure reflects the tax burden and distribution relationship between different groups and classes of society, manifesting the status quo of tax fairness and impartiality as well as the progress of national taxation development. The history of tax structure change in developed countries demonstrates an inevitable trend of transition from a tax system dominated by indirect taxes to a tax system dominated by direct taxes. Direct and indirect taxes constitute the most important structural duo in the tax system. However, direct and indirect taxes in China are disproportionate. Specifically, the goods and services tax (turnover tax) takes too much account, while

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the income tax takes too little. This fact not only limits the regulatory function of the tax system but also fails to fully embody the principle of the fairness of tax revenue, which does not match the current economic and tax development of China. The Third Plenary Session of the 18th CPC Central Committee proposed establishing a modern taxation system that is consistent with the “modernization of China’s system and capacity for governance”. Therefore, it is necessary to improve legislation. By establishing a comprehensive and classified individual income tax system, improving the real estate tax system, levying inheritance and gift taxes, and gradually increasing the proportion of direct taxes, the gradual optimization of the tax structure can be thus fostered.

2.3.2 Improving the Tax-Sharing System Countries with a sound rule of law enact statutes to guarantee intergovernmental tax-sharing (decentralization) in their practices of tax-sharing systems. For example, there are provisions clearly stipulating the division of fiscal power and tax power among governments, generally embodied in the Constitution or the Basic Law. The fiscal transfer payment system is explicitly regulated through the Constitution and laws. By contrast, the centralized tax-sharing system implemented in China now has many drawbacks, such as the arbitrary adjustment of intergovernmental financial power relations, the lack of stability and certainty of government financial resources, the lack of legal channels to safeguard the interests of local governments, the lack of legality of the transfer payment system, and the separation of “financial power” adjustment from “administrative power” reform. The root of these drawbacks lies in the lack of legal system guarantees in the tax-sharing system. Therefore, it is necessary to upgrade the tax-sharing system through legislation. For example, the intergovernmental allocation of administrative and fiscal powers by law should be defined, that is, sorting out the fiscal distribution relations among governments at all levels based on a lucid delineation of powers and promoting the legalization of fiscal revenue and expenditure among governments. Moreover, tax law should be improved, and the central and local tax revenue rights should be clearly delineated; the legal system of financial transfer payments should be enhanced, the rights and obligations among the subjects of financial transfer payments should be clarified, and transfer payment behaviors should be standardized.

2.3.3 Perfecting the Local Tax System The local tax system, as the product of the tax-sharing system, reflects the income distribution relationships between the central government and the local governments as well as interlocal governments. At present, there are still acute problems in our local tax system, for example, the unreasonable design of local tax categories, the

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imperfect structure of the local tax system and the abuse of local tax power. To promote rule-of-law taxation, it is necessary to enhance legislation, deepen the reform of the taxation system, and constantly improve the local taxation system. For example, through the improvement of legislation, tax legislative power, tax law enforcement power (collection and administration power) and tax judicial power should be legally defined and formalized. The legislation of real estate tax should be sped up and its reform propelled in a timely manner, so real estate tax can be taken as a main tax in the future. Resource tax reform should be advanced, and in the field of environmental protection, fees can be changed into taxes. Local tax revenue should be increased, as should its proportion in total tax revenue.

2.3.4 Improving the Tax Collection and Administration System To put tax on the track of rule of law, efforts must be stepped up to modernize tax collection and administration. Therefore, it is necessary to promote the amendment to the Tax Collection and Administration Law, which can be improved in light of the following points: standardizing the basic procedures of tax collection and management, establishing a taxpayer identification system, clarifying the tax collection and management and service system of natural persons, building up the tax-related information sharing system, and perfecting the protection system of taxpayers’ rights and interests. Much more emphasis should be attached to safeguarding the legitimate rights and interests of taxpayers and adopting comprehensive measures in legislation, decision-making and relief. Specifically, in legislation, the rights and obligations of tax authorities and taxpayers should be balanced. In decision-making, a mechanism in which all decisions are made based on democracy should be bettered, and tax-related issues involving major public interests and taxpayers’ rights and interests should be subject to democratic decision-making. For relief, the law of administrative reconsideration and administrative litigation should be fully implemented, and tax administrative reconsideration and other tax dispute resolution systems and mechanisms should be improved.

Chapter 3

China’s Tax System Structure: Issues and Solutions

The tax structure is a fundamental problem in the design of a country’s tax system. Whether it is reasonable is not only related to whether the government’s function of taxation will be smoothly realized but also determines the scope and depth of the role of government taxation. Therefore, in the 12th Five-Year Plan, optimizing the tax structure became one of the major tasks of China’s fiscal and tax system reform. The plan mentions that “in accordance with the principles of optimizing the tax structure, evening the tax burden, regulating distribution relations, and rationalizing the allocation of taxing power, China should improve the tax system and build up a sound legal system for tax”. The 13th Five-Year Plan further states that “in accordance with the requirements of optimizing the tax structure, stabilizing macro-tax burden, and promoting tax administration under law, China should fully implement the principle of law-based taxation and establish a modern tax system featuring scientific tax categories, optimized structure, sound law, standardization and equity, and efficient tax collection and administration”. Therefore, under the background of the rule of law, it is of great theoretical and practical significance to further study the optimization of the tax structure comprehensively, systematically, and thoroughly.

3.1 Theoretical Analysis of the Tax Structure Optimization 3.1.1 Connotations and Classifications of the Tax Structure 3.1.1.1

Connotations

In recent years, there have been many research results on the tax structure. However, scholars have diverse or even substantially different understandings of the basic concept. At present, there are roughly three views on the connotation of the tax structure. The first viewpoint holds that the tax structure only includes a single level of various © People’s Publishing House 2022 Q. Wang and W. Xi, Improving the Tax System amid the Rule-of-Law China, https://doi.org/10.1007/978-981-16-7033-6_3

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types of taxes or tax categories or an allocation combination of the two levels. For example, Wanjun Jin and Jian Shi (2010) contended that the tax structure formed an orderly whole based on national conditions and through the combination and allocation of various types of taxes with different functions.1 Xueyu Che (2007) argued that the tax structure referred to the composition of the tax system, which was a form of mutual coupling and coordination among different types of taxes and tax categories.2 Shufang Ding (2004) also believed that the tax structure was the combination of various tax types, combinations of tax categories, and their relative positions in the combination.3 Yijian Hu and Shuna Xu (2014) pointed out that the tax structure was a tax distribution pattern formed on the basis of tax classification according to certain standards and their mutual relations.4 Guoqiang Mao (2004) claimed that the tax structure was the combination of various tax categories and their relative positions in the tax system.5 The second viewpoint holds that the tax structure should include the three levels of combination and allocation of various tax types, tax categories, and elements of the tax system. For example, Qiao Wang and Quanlin Zhou (1999) believed that the tax structure was the composition system and layout of the interaction, restriction, and coordination among various tax types, tax categories, and tax elements of a country’s tax system.6 Shumin, Yue etc. (2007) gave a clearer explanation of the connotation of the tax structure, which comprises three levels: the micro-level of the makeup of tax categories, the meso-level of the structure of tax categories, and the macro-level of the structure of the tax system.7 The third view holds that the tax structure should include not only the three levels of the combination and allocation of tax types, tax categories, and elements of the tax system but also tax collection and administration. For example, Chengyao Wang, etc. (1997) believed that the tax structure was an integral system consisting of the various tax types, tax categories, and elements of the tax system and levels of collection and administration. The whole system is structured into primary and secondary ranks of hierarchical connection, combination, confinement, and coordination.8 Ruyu Hao, etc. (2002) conceptualized the tax structure as a coherent and complementary system

1

Jin Wanjun, Shi Jian. Tax Theory and Practice. Beijing: Economic Science Press, 2010. Che, Cuiyu. Research on the Optimization of Tax structure in China, Master Dissertation, Shandong University, 2007. 3 Ding, Shufang. The Optimization and Improvement of China’s Tax Structure. Macroeconomics, No.4, 2004. 4 Hu, Yijian & Xu Shuna. Target Model and Realization Path of Tax structure Optimization in China. Taxation Research, No. 7, 2014. 5 Ma, Guoqiang. Economic Development Level, Tax Policy Target and Tax structure Model Taxation Research, No.5, 2016. 6 Wang, Qiao & Zhou Quanlin. Tax Theory and Practice. Nanchang: Jiangxi University Press, 1999. 7 Yue, Shumin, etc. Study on the Optimization of Tax structure, Beijing: Renmin University Press, 2007. 8 Wang, Chengyao, etc. National Taxation. Beijing: China Financial and Economic Publishing House, 1997. 2

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and layout built upon a country’s reasonable arrangement of the various tax types, tax categories, and elements of the tax system and tax collection administration.9 Evidently, most scholars share the same view that the tax structure includes tax types and tax categories. Then, does it hold water that the first view does not contain the elements of the tax system. This book argues that this view is unreasonable. The reason is that a well-conceived tax structure must take into account in advance whether the design of tax categories is reasonable; that is, the various factors of taxation must be more optimized. This is a fundamental issue of tax structure optimization. The third view packs the administration of tax collection into the tax structure, which will likely expand the scope of research. The third view is essentially tenable, but it is slightly lacking in expression, and the two parts reach a certain complementary effect. Therefore, we define the connotation of the tax structure as follows. The tax structure refers to the composition and layout of the cooperation and coordination among various tax types, tax categories, and tax elements in a country’s tax system, which correspondently includes three levels of structure. First, the structure of tax types belongs to the macrolevel tax structure, referring to the composition of different tax types within a country’s tax system. For example, according to the nature of the object of taxation, it can be divided into circulation tax, income tax, property tax, and so on. Second, the structure of tax categories is the mid-level tax structure, meaning the combinations of different tax types within each tax type. The main and auxiliary tax categories can be mixed into different patterns, which may present different characteristics of the tax types. Third, the structure of tax elements is ascribed to the microlevel tax structure, which refers to the combination of all tax elements in each tax category. Different combinations of tax elements may constitute different types of taxes, such as production-type VAT and consumption-type VAT. The abovementioned three levels of the tax structure merge into an integral whole, forming a complete tax system (as shown in Fig. 3.1).

3.1.1.2

Classifications

To study the tax system structure and optimization, we must first analyze its structure at the macrolevel, that is, to conduct an in-depth analysis of the structure of tax types. This involves how tax structures are classified or whether they have standards. At present, some scholars adopt confusing or even erroneous classification methods or standards of tax structures. For example, the structure of the tax system can be divided into a direct tax system and an indirect tax system according to the nature of the tax. It is then further divided into a goods and services tax system, property tax system, income tax system, and other tax systems (Research Team of the State

9

Hao, Ruyu, etc.. Theoretical Research on Taxation. Beijing: Economic Science Press, 2002.

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Fig. 3.1 Relationships among the three levels of the tax structure

Taxation Administration 2009).10 Therefore, a clear and unified taxation method or standard for classifying and standardizing the tax structure will be helpful to further study the tax structure and optimization problems. Based on the existing research results, we believe that there are three main classification methods or standards applicable to tax structures. Taxes can be divided into: (i)

Direct tax and indirect tax based on whether the tax revenue is transferred or not

For a long time, Western scholars have generally used the duo of direct tax and indirect tax to represent the tax structure. After the tax system reform in 1994, some scholars in China began to adopt this twofold classification. Generally, it rests on whether the tax burden of tax categories is transferable. If the taxpayer is the same as the tax bearer, then the burden cannot be transferred to someone else, so it is a direct tax. If the taxpayer and the tax bearer are not identical, then the burden can be transferred, so it is an indirect tax. Far back to the eighteenth century, Francois Quesnay, the founder of the French physiocratic school of thought, put forward the concepts of direct and indirect tax. John Stuart Mill, a British economist in the nineteenth century, proposed that the criterion of tax burden transfer should be whether or not the tax burden is expected to be passed on when the state makes tax legislation, rather than whether or not it is transferred in actuality. This view is now widely adopted in many countries around the world. The popular view maintained by Western scholars is that all types of taxes levied on revenue, income and property, including income tax, property 10

Research Team of the State Taxation Administration. Drawing on International Experience to Further Optimize China’s Medium-and-Long-Term Tax Structure. Public Finance Research, No. 5, 2009.

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Table 3.1 Advantages and disadvantages of direct tax and indirect tax13 Advantages

Direct tax

Indirect tax

(1) Based on the ability to pay principle, progressive tax rate

(1) Consumer goods has clear price and quantity, easy to collect

(2) Elasticity. When a country needs financial earnings, revenue can be increased as long as tax rates are raised

(2) Everyone has to buy and consume goods, so taxpayers may not feel burdened and pinched

(3) Promoting equality. It can restrain the high-income and the rich, protect the low-income and the poor, and contribute to balancing social wealth

(3) A broad scope of taxation; generating relatively large revenue; In economically underdeveloped countries, it is conducive to capital accumulation

(4) Save time and money. The (4) Raising tax on certain goods; levy collection and administration costs are to ban generally less Disadvantages

(1) Exposing taxpayers to direct burden; causing resistance among taxpayers

(1) Violating the principle of fairness; regressive in nature of

(2) Needing a sound supporting system such as property registration, tax source statistics, financial accounting, etc. It is hard to inspect taxation

(2) Inelastic. If the revenue needs to be increased through raising tax rates, consumption will shrink and tax revenue will decrease

(3) Encouraging bargaining, tax evasion, bribery, and other malpractice

tax, inheritance tax, and social insurance tax, are classified as nontransferable taxes, directly borne by taxpayers and subject to direct taxes. All types of taxes levied on commodities, businesses, or services, ranging from VAT, business tax, sales tax, consumption tax, to tariffs, are identified as transferable taxes and fall into indirect taxes. Nevertheless, a few scholars argue against this classification method. For example, Musgrave (1996), a renowned American scholar of finance, noted that the distinction between direct tax and indirect tax was not proper to articulate the tax structure.11 Messere (1997), formerly director of the Finance Department of the Organization for Economic Cooperation and Development (OECD), argued that the direct-versus-indirect criterion was contradictory, ambiguous, and not operable. As such, the organization does not intend to follow such tax classification.12 Moreover, the advantages and disadvantages of direct and indirect taxes are obvious, as shown in Table 3.1. Thus, generally speaking, a larger proportion of direct 11

Musgrave, Richard. Fiscal Systems. Shanghai: Sanlian Bookstore, 1996, p. 160. Messere, Frank. Tax Policies of OECD Members: Choices and Conflicts. Beijing: China Finance and Economics Publishing House, 1997, p. 62. 13 Wang, Chengyao et al. National Taxation. Beijing: China Financial and Economic Publishing House, 1997. 12

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taxes in a country indicates that the rich bear more taxes, while a larger proportion of indirect taxes suggests that the general population bear more taxes. At present, except for the United States, Japan, France, the United Kingdom, and other developed countries, the proportion of direct taxes and indirect taxes in other countries is almost the same, or, in some cases, the proportion of indirect taxes is larger. (ii)

Turnover tax, income tax, property tax and other taxes, taking the nature of taxable objects as the criterion

Since the mid-twentieth century, some Western scholars and international organizations have resorted to the nature of taxable objects to describe the tax structure. The tax reform in China took place in 1994 and served as a watershed for the definition of the tax structure. Prior to 1994, scholars modelled it in terms of turnover tax and income tax. Since then, this situation has undergone some adverse changes, and a few scholars have begun to capture the tax structure in terms of direct taxes and indirect taxes. By grounding the tax structure on the nature of taxable objects, we can clearly see the different effects of various tax types. The turnover tax is a kind of tax levied on the turnover of commodity production and noncommodity production. It is generally believed that the turnover tax has a weak positive effect in boosting economic growth, but it may result in a wider gap in the income distribution and has a certain degree of regressivity. This type of tax nonetheless is conducive to ensuring government revenue and assists with government intervention in the economy. It is in such form as business tax, VAT, consumption tax and tariffs, with which ordinary taxpayers are quite familiar. Income tax is a type of tax levied on the income obtained by enterprises and individuals in a certain period of time. It exerts a significantly negative effect on economic growth but can narrow down the income distribution gap. In particular, the progressive tax system is more conducive to achieving the goal of social equity and has a certain degree of progressivity. The income tax mainly includes corporate (enterprise) income tax and personal income tax. Property tax is a type of tax levied on the amount and value of the property owned or controlled by the taxpayer. It is generally believed that property taxes play a significant positive role in promoting economic growth and are conducive to reducing the gap in social wealth distribution, with a certain degree of progressivity. Property taxes mainly include house taxes, inheritance taxes, gift taxes and so on. Although scholars and international organizations both at home and abroad acknowledge using taxation objects to categorize different taxes, they differ in the classification of specific tax types, as shown in Table 3.2. According to the classification of the Organization for Economic Cooperation and Development (OECD), the taxes of each member country mainly fall into six categories: (1) income taxes, levied on income, profits, and capital gains; (2) payroll and workforce taxes, levied on wages, salaries, and labor; (3) social security contributions, charged on employees, employers, and private personnel; (4) property taxes, imposed on property, appreciation of property, inheritance, and gifts; (5) goods and services taxes, including various product taxes, sales taxes, value-added taxes, consumption taxes, and import and export tariffs on goods and services; and (6) other taxes. As seen from Table 3.2,

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Table 3.2 Classification of taxes by OECD, IMF, and Chinese scholars OECD classification

IMF classification

Chinese scholars’ classification

1. Taxes on income

1. Taxes on income

1. Income tax

2. Taxes on payroll and workforce

2. Taxes on payroll and workforce

3. Social security contributions

3. Social contributions

4. Taxes on property

4. Taxes on property

5. Taxes on goods and services 5. Taxes on goods and services

2. Property tax 3. Turnover tax

6. Taxes on international trade and transactions 6. Other taxes

7. Other taxes

4. Other taxes

Sources According to “Revenue Statistics (1965–2010)” by the OECD and “Government Finance Statistics Manual (2001)” by the IMF

the classification offered by the International Monetary Fund (IMF) is almost consistent with that of the OECD. The difference is that the IMF further subcategorizes goods and services tax into a domestic goods and services tax and an international trade tax (mainly including import and export tariffs). In China, there is no social security tax, and taxes are mainly grouped into four types: income tax including enterprise income tax and individual income tax; wealth tax including property tax, deed tax; turnover tax including value-added tax, consumption tax, and tariffs; and other taxes. (iii)

Central taxes, local taxes, and central-local shared taxes based on the ownership and administration authority of taxes

According to the ownership and administration authority of the tax, the tax structure can also be expressed in terms of the relationship between central taxes, local taxes, and central-local shared taxes. Such classification embodies the principle of consistency between fiscal power and administrative power. Therefore, under the fiscal decentralization system, a sound division of central tax and local tax becomes a key issue in the long-term disputes on the tax-sharing financial system. Usually, the central tax is legislated by the central government, in which the power to administer and spend taxes is fixedly vested. In general, those tax categories needed to safeguard the overall rights and interests of the country and facilitate the implementation of national regulation are listed as central taxes, such as tariffs and consumption taxes. Local taxes refer to taxes that are uniformly legislated by the central government or the local governments that are granted certain legislative powers. The revenues are allocated to and managed by local governments. Generally, closely linked to the local economy and regional regulation, taxes suitable for local taxation and management, such as real estate taxes, vehicle and vessel taxes, and land use taxes, fall into local taxes. In China, some scholars, by following many Western scholars, regard turnover taxes as commodity taxes. In addition, in line with

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the common practice of the OECD and the IMF, some scholars refer to turnover taxes as commodity and service taxes. Although different terms are used, their substance is the same. Tax categories wherein the legislative and administrative powers are both vested in the central government but the revenue is shared by both the central and local governments are called central-local shared taxes. Generally, those taxes directly pertinent to economic development, of relatively a large sum in incomes, and taking care of the economic interests of all aspects are listed as shared taxes, such as value-added tax, business income tax, and resource tax. Since the tax-sharing reform in 1994, the financial relationship between the central and local governments in China has shifted from the financial contracting system to a more standardized tax revenue sharing system. With socioeconomic development and the continuous reform of the tax system, the tax relationship between central and local governments has undergone many changes. The current tax structure in China is composed of central taxes, local taxes, and central-local shared taxes, as shown in Table 3.3. Table 3.3 Existing classification of central taxes, local taxes and central-local shared taxes in China Tax types

The ownership of legislative power

Main tax categories

Central taxes

Tax legislative power is vested in the central government for the protection of the state’s powers and interests and the implementation of macro-control

Consumption tax, tariff, vehicle purchase tax, value-added tax, and consumption tax collected by customs on behalf of the tax authorities

Local taxes

The legislative power for the unified implementation of local taxes nationwide is concentrated in the central government

Land appreciation tax, stamp tax, urban maintenance and construction tax, urban and township land use tax, real estate tax, deed tax, vehicle and vessel tax, etc.

Central-local shared taxes The legislative power is vested in Value-added tax, enterprise the central government for major income tax, individual income taxes directly pertinent to tax, stamp tax, resource tax, etc. economic development

3.1 Theoretical Analysis of the Tax Structure Optimization

59

3.1.2 Theoretical Basis and Assessment of Tax Structure Optimization 3.1.2.1

Connotations of the Tax Structure Optimization

Optimization is defined as “making changes or choices to become better”.14 Accordingly, the optimization of the tax structure means that the state makes adjustments and improvements on the unreasonable parts of the existing tax structure in response to the changes and needs of socioeconomic development. Specifically, it should include three tiers of optimization. The first comes the optimization of tax types. Optimization of the tax structure at the macro level refers to the optimal allocation of different tax types of a country’s tax system. Essentially, it is a matter of a country’s decision on its tax structure or tax system model. For example, the prevalent tax structure models include turnover tax as the main body, income tax as the main body, and turnover and income taxes as a dual-subject tax structure. The second is the optimization of the tax structure. This is the enhancement of the tax structure at the meso level, specifically referring to the best possible allocation of tax categories within the tax system. For example, among various tax types (tax systems), a coordinated and complementary tax system is formed based on the matching of multiple taxes, which consists of a few major types supplemented by other kinds of taxes. The third is the optimization of the structure of tax system factors. At the micro-level, it refers to the combination and collocation of the constituent elements of each specific tax category, including taxation objects, form and level of tax rate, and tax reduction or exemption policies. The improvement of the tax structure is directly associated with the performance of the tax function as well as the healthy, efficient and coordinated development of the national economy. In its content, the optimization of tax structure is actually the optimization of tax system, because it not only underlines the increase of tax revenue, but also calls for all tax optimized. The above two elements involve the optimization of the tax system, i.e., structural tax revenue, and the structural optimization of tax revenue (tax system). Therefore, the conceptual difference between the optimization of tax structure and the optimization of tax system may be the focus of the following two divergences, namely, refining the tax system depends on the growth of tax revenue and enhancement of tax system, but the goal of tax system is to establish wellstructured and well-rounded tax institutions, for both tax (tax system) structure and tax structure optimization. In contrast, the optimization of the tax structure is based on optimizing the tax structure (tax system) and then optimizing the starting point of the tax structure. However, the optimization of the structure of tax elements acts as the premise. If the tax rate is not well designed, an optimal tax structure will be impossible to achieve. The optimization of the tax structure is an endless and dynamic process. Concomitant with the improvement of the economic level and the adjustment of the economic 14

Dictionary Editing Room of Institute of Linguistics of Chinese Academy of Social Sciences. Modern Chinese Dictionary (5th edition). Beijing: The Commercial Press, 2007, p. 1643.

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3 China’s Tax System Structure: Issues and Solutions

structure and as tax collection and management capabilities improve, new imbalances and maladjustments will appear in the internal components of the originally relatively optimized tax structure. This will inevitably require timely accommodation and optimization of the original tax structure to promote the comprehensive, coordinated, and sustainable development of the national economy.

3.1.2.2

Relationship Between the Optimization of the Tax Structure and the Adjustment of the Tax Structure

Such terms as “optimizing the tax structure” or “adjusting the tax structure” are often seen in everyday life. What is the relationship between the optimization of the tax structure and the adjustment of the tax structure? Do they refer to the same concept? According to the definition of the Contemporary Chinese Dictionary, adjustment is defined as “changing the original situation to make it adapt to the objective environment and requirements”.15 It can be seen that there is a close relationship between the adjustment of the tax structure and the optimization of the tax structure: both require that the unreasonable elements of the original tax structure be updated contingent on economic and social development so that it can “adapt to the objective environment and requirements”. However, there are certain differences between the two: first, the conceptual denotation of adjustment is greater than that of optimization, or only those “scientific and reasonable” adjustments can be regarded as tax structure optimization. However, occasionally, the limited cognition of reformers and other factors could lead to the deterioration of tax structure adjustment. For example, China had kept a flat tax system since the “tax simplification” reform in 1973 for a long time. Second, the optimization of the tax system structure requires not only “changing the original situation to adapt to the objective environment and requirements” but also that such changes can achieve “excellent” effects, which is the fundamental purpose of tax system structural adjustment in various countries (as shown in Fig. 3.2). In the adjustment of the tax structure (tax system reform), governments of all countries, as rational economic agents, expect to implement scientific and reasonable tax policies to optimize the tax structure. Therefore, by adjusting the tax structure, governments’ real vision and fundamental purpose is to “optimize the tax structure” rather than to “deteriorate the tax structure”, an undesirable situation. From this point of view, the adjustment of the tax structure is synonymous with the optimization of the tax structure, which also explains why people sometimes mix up the two concepts.

3.1.2.3

Three Theoretical Bases for Optimizing the Tax Structure

It is generally believed that based on the basic ideas and policy claims of tax system optimization theory, the following three schools of tax system optimization theory 15

Dictionary Editing Room of Institute of Linguistics of Chinese Academy of Social Sciences. Modern Chinese Dictionary (5th Edition). Beijing: The Commercial Press, 2007, p. 1354.

3.1 Theoretical Analysis of the Tax Structure Optimization

61

Fig. 3.2 Relationship between tax structure optimization and tax structure adjustment

are the most representative among Western scholars: the theory of optimal taxation, the supply-side theory, and the theory of public choice. Optimal tax theory in the West has mainly developed along these three theoretical schools (Chunhong Hao 2005).16 (i)

Optimal Tax Theory

Since the 1920s, optimal tax theory has become an important theory. Its representative scholars are Ramsey, Atkinson, Stiglitz, Mirrlees, Feldstein, and Diamond. To increase revenue, the government must pay a certain price, which is reflected in the “excess tax burden”. This means that the interference caused by taxation affects the allocation of resources and leads to the loss of economic efficiency. Therefore, it is necessary to seek an optimal tax instrument to generate sufficient fiscal revenue at the minimal excess burden (Zhang Hecheng 2007).17 To find this optimal tax instrument, Western scholars have studied three core problems. (1) Optimal commodity tax theory. Via strict mathematical proof, Ramsey (1927) found that the optimal commodity tax should have a set of differential tax rate structures, and the tax rate on each commodity should be inversely proportional to the sum of the reciprocals of its supply and demand elasticities. This is the famous Ramsey problem. Its policy implication is that taxes on life necessities should be heavier than those on luxuries, which contradicts the principle of tax fairness and 16

Hao, Chunhong. Study on the Optimization of China’s Tax System under the Constraints of Multiple Objectives. Beijing: Chinese Financial & Economic Publishing House, 2005. 17 Zhang, Hecheng. Optimal Tax Research, Ph.D. Dissertation. Beijing: Northeast University of Finance and Economics, 2007.

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has been criticized by many scholars. (2) Optimal income tax theory. Vickrey put forward an advanced theory of progressive income tax in 1946 for the first time. He explored how to make individual progressive income taxes not only promote the realization of income distribution goals but also without affecting individual incentives to work. Later, the study was completed by Mirrlees. The main arguments of this theory are as follows: improving the welfare of the poor does not demand a high progressive tax rate, the optimal tax rate should be approximately linear, and a specific tax exemption level should be granted; the optimal marginal tax rate is very low, normally from 20 to 30%, and no less than 40% (Weiying Zhang 1997).18 (3) The optimal equilibrium theory of commodity tax and income tax. Many economists have expressed their views on how to match commodity taxes and income taxes to achieve the best policy effect, taking into account the two principles of efficiency and fairness. It mainly focuses on two aspects. First, the coexistence of commodity tax and income tax is necessary. Income tax is a good tax, but in the allocation of resources, the role of commodity tax cannot be replaced by income tax. Second, the choice of tax mode depends on the government’s policy objective. What kind of tax model a country ultimately chooses depends on the balance between fairness and efficiency (Xi Li 2012).19 (ii)

The Supply-side Economics

Supply-side economics is an important economic school after Keynesian economics. Its representative figures include Laffer, Mundell, Roberts, and Ture. The basic economic thought of the supply school is to emphasize the economic role of supply factors and advocate that the government should take stimulating supply and improving production efficiency as its main objectives. Therefore, the ideal tax system advocated by the supply school is to give priority to efficiency and make allowances to fairness. They argue that it is not advisable to adopt a high progressive tax rate to achieve the goal of fairness because this will not only destroy efficiency but is also not conducive to improving fair distribution. Therefore, expanding the tax base and reducing the nominal tax rate are the best ways to coordinate fairness and efficiency (Yongjun Wang 1995).20 In addition, the supply of tax preferences serves as the focus of the supply school’s tax optimization theory. They consider the tax system the most effective means and method to stimulate supply. The key factor is to lower the marginal tax rate, which determines the after-tax real rate of return received by people involved in economic activities, thus affecting people’s incentive to engage in economic activities (Yongjun Wang 1995). Therefore, tax reduction should take the form of reducing the marginal tax rate rather than reducing the average tax rate or simply reducing the tax burden. 18

Zhang, Weiying. Selected Papers by James Morris-Incentive Theory under Asymmetric Information, Beijing: The Commercial Press, 1997. 19 Li, Xi. Study on Rationality Judgment and Optimization of Tax Structure in China at the Present Stage, Ph.D. Dissertation, Zhejiang University, 2012. 20 Wang, Yongjun. Principle of Tax System Optimization. Beijing: Chinese Financial and Economic Publishing House, 1995.

3.1 Theoretical Analysis of the Tax Structure Optimization

(iii)

63

The Public Choice Theory

Public choice theory, as a peripheral theory between economics and political science, has been gradually developed since the late 1940s. Its core tenet is to reveal the political process of individual choice shaped into social choice via the method of market behavior analysis in economics. The most prominent representative of this school is Buchanan, who won the 1986 Nobel Prize in Economics. The theory of public choice covers a wide field, including the analysis of fiscal and tax issues. However, the application of public choice to the study of fiscal revenue is attributed to Buchanan’s efforts and attempts. In Public Finance in Democratic Process: Fiscal Institutions and Individual Choice, Buchanan tried to develop a financial choice theory. The theory holds that the optimal tax instrument is such a tax instrument that people participating in public choices can theoretically arrive at unanimous agreement. This tax instrument must be linked to the production process of income and expenses. If taxpayers estimate that the benefits they enjoy from government public services are greater than the value of the taxes they pay, they will pay taxes to the government. Therefore, a good tax system refers to the amount of public goods provided by the fiscal revenue raised by this tax system, and the tax share allocated to each taxpayer can be widely accepted by taxpayers (Buchanan 1988).21 To establish a comprehensive and unified optical tax system, we must solve the problem of the expressive mechanism of individual true preferences. Therefore, public choice theory holds that optimizing the tax system should not only enable individuals to truly express their preference for public expenditures but also limit the level of public expenditures to the optimal level of public will (the optimal supply of social public goods) (Buchanan 1988). This optimal level is determined through individuals’ public selection process.

3.1.2.4

Criteria to Evaluate Tax Structure Optimization

The criteria used to evaluate whether a tax structure is optimal are essentially those of the “ideal tax system”.22 By studying the evolution of tax principles, from Adam Smith’s four principles of taxation to Wagner’s four dimensions and nine principles, to the contemporary Western overarching principles of taxation,23 we can find constant changes and improvements in people’s understanding of the ideal tax system or the standard of optimal tax structure. In different periods of social development, 21

James, Buchanan. Freedom. Market and State: Political Economics in the 1980s, translated by Wu Liangjian and others. Beijing: Beijing Institute of Economics Press, 1988. 22 Project Group of the State Administration of Taxation. Drawing on International Experience to Further Optimize China’s Medium-and-Long-Term Tax structure. Beijing: Public Financial Research, No. 5, 2009. 23 The three highest contemporary western principles of taxation are the principles of efficiency, fairness, and stability. See Hao, Ruyu, et al. Tax Theory Research. Beijing: Economic Science Press, 2002. Wang, Chengyao. National Taxation. Beijing: China Financial and Economic Publishing House, 1997.

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people have different understandings of tax principles, which are constantly developing and deepening. However, among many tax principles, people’s cognition of the two core principles of fairness and efficiency remains completely consistent. Musgrave, a well-known contemporary American scholar of finance, endorsed the two principles of fairness and efficiency as the yardstick for tax system evaluation (Ruyu Hao et al. 2002).24 Therefore, the two core principles, fairness and efficiency, are the most recognized benchmarks for the evaluation of tax structure optimization. Certainly, a few scholars have discussed the evaluative criteria of tax structure optimization from other angles. For example, Vito Tanzi argued for using the following eight indicators: high concentration, low dispersion, low tax base erosion, low collection lag, low dependency, high objectivity, appropriate penalty, and low collection cost as the criteria to measure the quality of an effective tax system (Daopeng Fu 1999).25 From the perspective of tax practice, the government’s tax behavior involves the interests of both parties. An ideal tax structure must be able to accommodate the common requirements of both parties. Judging from the game analysis of modern tax revenue, the government, to achieve its tax policy goals, depends not only on the government’s tax system design strategy but also on taxpayers’ strategic behavior. The government’s tax system and the effects of its policy implementation will be affected by the behavior of taxpayers in many ways. It can be seen that only a tax structure that meets the common interests and requirements of both sides can be regarded as a truly optimal tax structure and play an effective role in tax functions.

3.1.3 Tax Structure Model and Selection of Main Tax Categories The tax system structure model, also known as the tax system model, is a tax system in which the state chooses the appropriate main tax categories according to the situation and allocates the tax category with different functions to form a tax system with clear main tax, distinct subsidiary tax, and coordinated and complementary tax categories. It is of great significance to establish a tax structure model suitable for our national conditions that gives full play to the role of tax functions. A country’s tax system structure model is not fixed forever. Appropriate adjustments are needed in accordance with changes in socioeconomic development, tax collection and administration, and other factors. The key feature defining different tax structure models is the proportion of the major tax and the main types of taxes.

24

Hao, Ruyu et al. Taxation Theory Research. Beijing: Economic Science Publishing House, 2002. Fu, Daopeng. Theory of Effective Tax System and Tax System Reform in China. Financial Research, No. 5, 1999.

25

3.1 Theoretical Analysis of the Tax Structure Optimization

3.1.3.1

65

Choice of the Main Tax Categories

The main types of taxes play a leading role in a country’s tax structure. To become a main type of tax, it must have two characteristics. First, it can raise more revenues, accounting for a rather sizable proportion of the total tax revenue and provide considerable support to secure national fiscal revenue. Second, its collection must be very extensive, exerting a great influence on the economy and society and having a great regulatory function.26 Other factors, including tax paying habits, tax collection and administration conditions, will also have an impact on the setup of the main tax category. Considering the soul of the tax structure, the main types of taxes will not only act on the tax structure of the whole country but also act as an important indicator to distinguish different types of tax structures (Ziji Deng et al. 2001).27 In the tax structure of a country, there are usually one or more main types of taxes, also called single tax or multitype taxes, respectively, which need to be determined according to the specific situation of the country. The practices in various countries around the world in setting up the main categories of taxes can be grouped into three different situations, thus forming the three most popular kinds of tax structures. First, the turnover tax is taken as the main type of tax, i.e., the tax system with turnover tax as the main tax type, which are adopted by, for example, a majority of developing countries. Second, income tax is established as the main type of tax, i.e., the tax system with income tax as the main tax, which are adopted, for example, by most developed countries. Third, turnover taxes and income taxes are both designed as the main types of taxes, i.e., the tax system with turnover tax and income tax as the main tax types, which are adopted by, for example, some developed and developing countries. The dual tax structure mode can also be subdivided in terms of the proportion of turnover tax and income tax. For example, by analyzing tax sample data in many countries and regions, Guoqiang Ma (2015) found that the ratios of the main types of taxes ranged from 1 to 3 and divided the types of tax structure into five classes (as shown in Table 3.4).28 In a mixed tax system, when there is a main type of tax, there must be auxiliary tax categories. Auxiliary tax categories play a complementary role in the tax structure, which can be adjusted for special objects, thus forming a relatively sound tax system. Therefore, it is of great significance to set up auxiliary tax categories and main types of taxes to complement each other to improve the structure of the national tax system.

3.1.3.2

Tax Structure with Turnover Tax as the Main Tax

This tax structure is based on turnover tax as the main type of tax. This model emphasizes the important role of turnover tax in collecting financial income and adjusting 26

Deng, Ziji. Research on Tax Structure. Beijing: Chinese Financial and Economic Publishing House, 2000. 27 Deng, Ziji. Tendency and Trend of World Tax Reform. Taxation Research, No. 5, 2001. 28 Ma, Guoqiang. Research on the Basic Theory of Tax structure. Taxation Research, No. 1, 2015.

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Table 3.4 Types of tax structure by ratio of the main taxes Types of tax structure

Ratio of income tax proportion (A) to commodity tax proportion (B)

Super-sized income tax

A/B ≥ 2. 5

Super-sized commodity tax

B/A ≥ 2.5

Primary-secondary combination of income tax and commodity tax

1.5 ≤ A/B ≤ 2.5

Primary-secondary combination of commodity tax and income tax 1.5 ≤ B/A ≤ 2.5

1.5 ≤ BA ≤ 2.5

Income tax equal to commodity tax

1 < A/B < 1.5 or 1 ≤ B/A ≤ 1.5

Note The ratio of the main types of taxes is equal to the proportion of income tax to commodity tax, or the proportion of commodity tax to income tax

the supply–demand structure of products while weakening the role of income tax in income distribution and regulating the total supply and demand. Although turnover tax (commodity tax) has many advantages, such as extensive collection, concealment of taxation, stability of tax revenue, and simpler conditions of tax collection administration, it also lacks flexibility of tax revenue, which makes it difficult to play its role in promoting fair income distribution and economic stability. Therefore, this mode is more suitable for most developing countries with underdeveloped tax collection and administration.

3.1.3.3

Tax Structure with Income Tax as the Main Tax

The tax structure with income tax as the main tax emphasizes the crucial role of income tax in macrocontrol and income distribution while weakening the role of turnover tax in raising financial revenue and adjusting the supply–demand structure of products. Income tax is taxed according to the net income of taxpayers. Therefore, the increase in income tax keeps pace with the progress of the national economy, and the elasticity of income tax revenue is greater. In particular, under the progressive tax system, income tax not only plays a role in stabilizing the economy by acting as the “internal stabilizer” of the economy but also levies taxes according to taxpayers’ ability to pay, which is conducive to fair income distribution. However, this tax system also has some shortcomings, such as a narrow scope of collection, poor income stability, and challenging collection and management. This tax structure mode is more suitable for some developed and developing countries with a higher level of tax collection administration development.

3.1 Theoretical Analysis of the Tax Structure Optimization

3.1.3.4

67

Tax Structure Comprised from Turnover Tax and Income Tax as Two Main Taxes

This kind of tax system can bring into play the main advantages of both turnover tax and income tax and allow them to complement each other’s shortcomings. Increasing tax revenue can make full use of the income rigidity of the turnover tax and the income elasticity of the income tax to achieve complementarity. In regulating the economy, it can exert the influence of market resource allocation of the turnover tax and the economic stability function of the income tax simultaneously. Fair income distribution can play the basic adjusting role of the progressive tax rate of income tax and the supplementary adjusting role of the differential proportional tax rate of turnover tax. Therefore, in taxation practice, most developed and developing countries choose the dual tax structure mode, but the weight of the two main types of tax in the tax system is different (as shown in Table 3.5).

3.1.4 Administrating Tax According to Law as the Ultimate Goal of Tax Optimization At present, to promote the construction of rule-of-law China in the tax field is to strive to create a new normal for tax administration according to law. This new normal requires people to update their traditional ideas. Taxes are levied by tax authorities in accordance with the tax law that is used by the government to manage taxpayers. Table 3.5 Dual tax structure in some countries and regions (2010) Types of dual tax structure

Countries or regions Developed economies

Developing economies

Income tax with more weight Australia, Switzerland, and commodity tax with less Canada, Denmark, New weight Zealand, Sweden, Norway

Kazakhstan, Bhutan

Equal weight of income tax and commodity tax

Belgium, Iceland, Singapore, Japan, Austria, Luxembourg, Britain, Italy, Finland, Spain, France, San Marino, Korea, Germany, Ireland, Malta, Israel, Cyprus, Netherlands, Portugal

South Africa, Egypt, Mongolia, Tunisia, Peru, Ukraine, Azerbaijan, Thailand, Morocco, Seychelles

Commodity tax with more weight and income tax with less weight

Czech Republic, Greece, Slovenia, Slovakia

Latvia, Georgia, Colombia, El Salvador, Chile, Poland, Belarus, Hungary, Estonia, Honduras, Costa Rica, Romania, Brazil, Turkey, Armenia, Lithuania, Mauritius

Sources Modified Research on Basic Theory of the Tax Structure by Guoqiang Ma

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3 China’s Tax System Structure: Issues and Solutions

Under the background of the new normal of the rule of law in China, the connotation of administrating tax by law should be embodied in the full implementation of the principle of law-based taxation. In other words, the main body of the market “can act without legal prohibition” and the government department “cannot act without legal authorization”. Tax law should become the law that grants, regulates and monitors government taxation. Therefore, the concept of administrating tax by law should move from power-oriented to rights-oriented, from management to the rule of law, and from the rule of man to the rule of law. Then comes the question of how to administrate tax by law. Currently, the core task is to accelerate tax system reform, optimize the tax structure, and establish a modern tax collection and administration system with scientific tax categories, optimized structure, and sound law according to the requirements posed by the 13th Five-Year Plan. The pivotal task of deriving an optimal tax system is to comprehensively optimize the three layers of structure in the tax system, including types of taxes, tax categories, and tax elements, to reform the unscientific and poor tax category and tax element structure, rationally adjust the structure of the tax categories and speed up the construction of the tax law system. In short, only by optimizing the tax structure in an all-round way and establishing a modern tax system featuring fairness and efficiency can all the taxation behaviors of both tax collectors and taxpayers be put on the right track of modern rule-of-law taxation to achieve a favorable social order of taxation according to law. Therefore, optimizing the tax structure itself is not an end. The ultimate goal is to achieve tax administration according to law.

3.2 Analysis of the Tax Structure Based on International and Domestic Standards Since the reform and opening up more than 30 years ago, the changes in China’s tax structure have been closely related to the development of the market economy. The reform and perfection of the tax law system have also been closely related to changes in economic policies. The first stage was from 1984 to 1993, abbreviated as “84 tax reform”. Its main task was to restore the tax law system and overhaul the industry and commerce tax. The second stage was from 1994 to 2003, abbreviated as “94 Tax Reform”. Its main task was to establish a tax system that was compatible with the market economy system, to overhaul the whole tax system and to reflect the market economy’s requirements for tax law unification and fair tax burden. The third stage was from 2004 to 2014, abbreviated as “04 Tax Reform”. Its main task was to establish a more standardized and well-conceived tax system, adjust the tax system locally, implement “structural tax reduction”, and push the tax system toward fairness and rule of law. In recent years, China’s economy has entered a decisive period of development, and as one of the important tools to regulate the economy, it is vital that taxation should be in line with the current economic progress of China. Although a series of

3.2 Analysis of the Tax Structure Based on International …

69

adaptive tax reforms have been carried out before, China’s current tax structure is still incompatible with economic development and relatively lagging behind, which requires further deepening of reform and optimization. Therefore, this book will conduct a comparative analysis of China’s current tax system in terms of the tax system standards of developed countries, green tax system standards, and China’s tax classification standards, hoping to draw on experiences and insights for China’s tax structure adjustment.

3.2.1 Analysis Based on the Organization for Economic Cooperation and Development Standards The Organization for Economic Cooperation and Development (hereinafter referred to as OECD) is an intergovernmental economic organization mainly with 34 market economies as member countries.29 The OECD member countries collectively comprise nearly 60% of the world’s goods and services. Therefore, its statistical data on tax structure are of great referential value internationally. The OECD member countries mainly classify taxes into six categories, namely, taxes on income, profits and capital gains, social security contributions, taxes on wages, salaries, and labor, taxes on property, taxes on goods and services, and other taxes, as shown in Table 3.6 and Fig. 3.3. As seen in Table 3.6 and Fig. 3.3, in 1965, OECD member countries mainly levied three types of taxes, including goods and services taxes, income taxes, and social security taxes, supplemented by property taxes. In approximately the following 20 years, the proportion of social security taxes increased, and the tax structure dominated by these three major tax categories was relatively stable after 1985. The following is an analysis of China’s tax revenues based on the OECD classification (as shown in Figs. 3.4 and 3.5). From Fig. 3.4, we can see that China is a country with turnover tax as the main tax category, and the revenue of goods and services tax is much higher than other taxes. However, when the revenue of social security premiums is added, it is found that the proportion of the revenue of social security premiums is larger than income tax revenue and smaller than turnover tax revenue. During the 16 years from 1998 to 2013, the status of the turnover tax as the main type of tax did not change. However, from 2008 onwards, the increase in income tax revenue gradually sank lower than that of the revenue from social security premiums, and the difference between the two increased year by year. From 1998 to 2006, property tax revenue accounted for a relatively small ratio, but in 2006, it began to show a steady increasing tendency and gradually became the main type of tax aside from turnover tax and income tax. Judging from the classified revenues of the four major types of taxes, the turnover tax increased from 668.9 billion yuan in 1998 to 7808.2 billion yuan in 2013, an 29

The OECD has 37 member countries by the end of 2020 when the first draft of this translation is completed. (notes by the translators).

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3 China’s Tax System Structure: Issues and Solutions

Table 3.6 Main tax categories of the OECD countries Unit: % Year

Taxes on income, profits, and capital gains

Social security Taxes on contributions goods and services

Taxes on wages, salaries, and workforce

Tax on property

Other taxes

1965

34.7

17.6

38.4

1.0

7.9

0.4

1985

36.9

22.1

33.7

1.1

5.3

0.8

1998

34.8

24.5

33.2

1.0

5.4

0.9

1999

34.3

24.6

33.4

1.1

5.6

0.9

2000

35.1

24.5

33.1

1.0

5.5

0.7

2001

34.6

25.2

32.8

1.0

5.4

0.7

2002

33.9

25.4

33.3

1.0

5.5

0.7

2003

33.5

25.6

33.6

1.1

5.6

0.6

2004

33.7

25.4

33.6

1.0

5.5

0.6

2005

34.5

24.9

33.2

1.0

5.6

0.6

2006

35.4

24.6

32.5

1.0

5.6

0.6

2007

36.0

24.5

32.1

1.0

5.6

0.6

2008

35.4

25.2

32.1

1.1

5.4

0.6

2009

33.5

26.4

32.5

1.1

5.6

0.6

2010

33.2

26.4

33.1

1.0

5.5

0.5

2011

33.5

26.1

33.0

1.1

5.5

0.6

2012

33.6

26.1

32.9

1.1

5.5

0.6

2013

33.7

26.1

32.7

1.1

5.6

0.6

Source OECD, “Revenue Statistics”, 2016

various taxes in the total tax revenue

Fig. 3.3 Changes in the tax structure of OECD member countries from 1965 to 2013—proportions of various taxes in the total tax revenue. Source OECD, “Revenue Statistics”, 2016

3.2 Analysis of the Tax Structure Based on International …

71

Fig. 3.4 China’s tax revenues from 1998 to 2013 based on the OECD classification. Source According to relevant data released by the National Bureau of Statistics of China

Fig. 3.5 Proportions of various taxes in the total tax revenue in China from 1998 to 2013 based on the OECD classification. Source According to relevant data released by the National Bureau of Statistics of China

increase of nearly 11 times. The income tax increased from 92.6 billion yuan in 1998 to 289.9 billion yuan in 2013, an increase of nearly 31 times. The property tax increased from 33 billion yuan in 1998 to 127.21 billion yuan in 2013, an increase of nearly 38 times. Although turnover tax has always been in a dominant position, the growth rates of income tax and property tax are greater than that of turnover tax with a steady upward tendency. As Fig. 3.4 presents, China has always taken turnover tax as the main type of tax, and its share is much larger than that of other taxes. Obviously, the growth rate of other taxes is relatively stable but minor. In particular, although income tax has experienced considerable growth since 2001, its proportion

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3 China’s Tax System Structure: Issues and Solutions

is still relatively small-scale. In terms of the proportions of various tax categories, in 1998, turnover taxes accounted for more than 61%, income taxes accounted for only 8.5%, and property taxes accounted for 3%; in 2013, turnover taxes accounted for 54%, income taxes accounted for 20% and property taxes accounted for 9%. The fluctuation in the percentages of the above taxes shows that turnover tax still stands out, occupying more than half of the total tax revenue; while the ratio of income tax has increased from a single digit to 20%, a significant increase; the share of property tax has also increased by three folds. By comparing the tax structure of China classified by OECD standards to that of OECD member countries, it can be observed that OECD members take income tax, goods and services tax, and social security contributions as their major tax categories, of which income tax and goods and services tax are equally distributed, with a share of approximately 35%. By contrast, tax revenue on goods and services stands out in China’s tax structure, up to approximately 60% of the total tax revenue. The income tax has maintained a percentage of approximately 20% since it increased to 19.7% in 2001. Evidently, the tax structure of China is not balanced when compared with that of OECD member countries. The ratio of goods and services tax is too large, while the absence of social security contribution and the relatively small portion of income tax are visibly obvious. In summary, gauged against the OECD analytical criteria, the development of tax categories in China is unbalanced. Although the social security fee is added to the graphic analysis, it has not yet been imposed in China. Therefore, levying the social security fee is of great significance for balancing the tax structure of China. Whether compared with developed countries or developing countries, China’s income tax revenue accounts for a relatively low portion of the total tax revenue, and there is much room for improvement. International practice demonstrates that the introduction of social security contributions is significant for macro tax burden and tax system optimization. The high percentage of goods and services tax, i.e. turnover tax will lead to widening the gap between the rich and the poor due to its function of tax shifting, while the low proportion of income tax will inevitably limit its regulatory function. Since the levy of personal income tax in China in 1980, with the rapid economic development and the continuous improvement of people’s income levels, it has undergone a number of adjustments and improvements, and the revenue has also been rising, but the ratio of personal income tax revenue in the total tax revenue has been on the low side. Admittedly, the cause for the low scale of personal income tax is not solitary, amid which taxpayer, as a main participant of tax payment, is an important factor. With China’s rapid economic development and deepening transformation, personal income has shown a trend of diversification. However, taxpayers’ awareness of tax payments under law has not scored much progress, and insufficient awareness of the rule of law has become one of the obstacles to the reform of individual income taxes. As shown in the individual income tax system in the world’s developed countries, developing a better income tax system requires improving people’s awareness of the rule of law on the whole, and then personal declaration and other links can be converted from form to practical operation to promote an increase in the proportion of income tax in the total tax

3.2 Analysis of the Tax Structure Based on International …

73

revenue. Undoubtedly, developing a firm belief in the rule of law is not only helpful to the reform of the personal income tax system but also extremely crucial to the development of China’s overall tax structure.

3.2.2 Analysis Based on World Bank Standards According to the classification standard of tax revenue in World Development Indicators released by the World Bank, taxes are divided into income taxes, turnover taxes, property taxes, and other taxes. The income tax type includes income tax (including capital equity tax) and social insurance tax (not yet levied in China), while the turnover tax type includes goods and services tax and international trade tax. The World Bank used the gross national income per capita in 2010 to classify countries into different groups. Among them, the low-income economies were those that had average incomes of 1,005 USD or less, the lower-middle income group greater than 1,005 USD and less than 3,975 USD, the upper-middle income countries greater than 3,976 USD and less than 12,275 USD, and the high-income countries more than 12,275 USD.30 The proportion of various taxes in total tax revenue for these four types of economies is shown in Table 3.7. Applying the classification standard of the World Bank to the Chinese data, the results are summarized in Figs. 3.6 and 3.7, Table 3.7. As seen from Figs. 3.6 and 3.7, China is a country with turnover tax as the main tax, with income tax as the second largest contribution, but the proportion of income tax in the total tax revenue is relatively low (social security fees not included in the calculation). Compared with countries of various income levels, China’s income tax accounts for less than 30% of that of high-income economies (data in 2009). While most countries have already imposed social insurance taxes, only low-income countries such as those in the Middle East and South Asia have not yet done so. Compared with other countries, China’s turnover tax accounts for a larger share, while the ratios of property tax and other taxes are not much different, and their percentages are relatively low. By comparing the tax structure of China classified under the World Bank standard with that of countries with various income levels, we can see that in the tax structures of high-income countries, income tax and turnover tax make up a large part of the total tax revenue, and the percentage of income tax is over 60%. In the tax structures of middle-income and upper-income countries, income tax and turnover tax also account for a larger proportion of total tax revenue, and the ratios of income tax and turnover tax are basically equal. In the tax structures of lower-middle income countries, similar to that of low-income countries, income tax and turnover tax occupy a large share in total tax revenue, and turnover tax 50% or more. In 2010, China’s GDP reached 5926.6 billion USD, and its gross national income was only 4,270 USD per capita, 30

Qiao Wang and Weiqun Xi. Comparative Tax System. Shanghai: Fudan University Press, 2013, p. 3.

24.72

East Asia and Pacific areas

31.40

19.77

19.77, 25.40

21.84

Low-income and middle-income countries

29.35 29.89

Latin America and 21.11 Caribbean Region

33.33 28.26

High-income countries (EU)

21.84

18.68

27.27

Upper middle-income countries

20.69

Europe and Central Asia

21.84

Lower middle-income countries

1997

27.00

10.00

37.00

21.00

24 23

23.00

26.00

2009

12.22

1.15

24.44 38.04

10.23

4.60

0 0

10.47

30.77

1.16

0.65

27.17 41.38

13.79

8.05

1997

1980

22.47 22.47

1980

Low-income countries (except China)

Social security contributions

Income tax (including capital gains tax)

Types of countries Income tax

Table 3.7 Proportion of various taxes in total tax revenue

10.00

20.00

36 37

22.00

-

2009

26.67

47.19

28.74

26.67 27.17

20.45

25.29

29.21 28.09

1980

44.19

43.96

34.88

37.21

28.26 28.74

39.08

40.23

1997

39.00

42.00

31.00

36.00

27 27

36.00

36.00

2009

Goods and services tax

Turnover

21.11

17.98

27.59

2.22 1.09

7.95

18.39

38.20 38.20

1980

10.47

5.49

11.63

15.12

6.90

9.20

1997

4.00

4.00

6.00

7.00

4.00

5.00

2009

International trade tax

6.67

2.25

3.45

3.33 3.26

3.41

4.60

3.37

1980

(continued)

3.49

1.11

4.65

3.49

3.26 3.23

2.30

3.45

1997

Property and other taxes

74 3 China’s Tax System Structure: Issues and Solutions

16.87

24.4

South Asia

Sub-African Africa

20.73

1997

19.00

27.00

2009

1.11

0.00

7.69

1997

1980

23.08

1980

Middle East and North Africa

Social security contributions

Income tax (including capital gains tax)

Types of countries Income tax

Table 3.7 (continued)

2009

2.78

40.96

10.77

1980

40.24

12.70

1997

29.00

31.00

2009

Goods and services tax

Turnover

38.9

39.76

26.15

1980

26.83

17.46

1997

3.39

13.00

6.00

2009

International trade tax

2.41

10.77

1980

4.88

9.52

1997

Property and other taxes

3.2 Analysis of the Tax Structure Based on International … 75

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3 China’s Tax System Structure: Issues and Solutions

Fig. 3.6 China’s tax revenue from 1998 to 2013 under the World Bank Standard. Source According to relevant data released by the National Bureau of Statistics of China

Fig. 3.7 Proportions of China’s various taxes in the total tax revenue from 1998 to 2013 under the World Bank standard. Source According to relevant data released by the National Bureau of Statistics of China

which makes China grouped in the upper middle-income economies according to the World Bank’s classification standard. China’s tax structure resembles that of lowermiddle income and low-income countries. Low-income countries and the majority of lower middle-income countries have not levied social insurance taxes, nor have China, which is one of the main reasons for the imbalance of the tax structure in China. According to the analytical standard of the World Bank, the more developed the economy is, the greater the proportion of income tax (including social insurance tax) and the lower the dependence on turnover tax. The more underdeveloped the economy is, the more it depends on turnover tax. As far as China’s current situation is concerned, turnover taxes and income taxes are relatively disproportionate, but China has not yet levied social security taxes, so the proportions of both taxes are at a

3.2 Analysis of the Tax Structure Based on International …

77

relatively low level. In terms of the proportions of corporate income tax and individual income tax, China is on average with lower middle-income countries, while compared with upper-middle-income or high-income countries, China’s income tax revenue level is still relatively low and there is much room for improvement.

3.2.3 Analysis by Green Tax Standard Since the 1980s, the use of taxes and other economic means to promote the sustainable use of natural resources and environmental protection have attracted widespread attention from environmentalists and fiscal academia.31 Especially in the 1990s, there was an upsurge in environmental tax research centering on the initiative of environmental taxes, specifically the implementation of carbon taxes on global climate change among international environmental economics and public finance communities (Boveberg and Mooij 1994).32 Over the past two decades, many developed countries have also used environmental taxes as a tool of environmental policy and have gained significant practical experience in environmental protection and industrial adjustment. Due to the increasingly prominent environmental problems in China, on June 10, 2015, the Legislative Affairs Office of the State Council published the full text of the Environmental Protection Tax Law of the People’s Republic of China (Opinionsoliciting Draft) and its explanations drafted by the Ministry of Finance, the State Taxation Administration, and the Ministry of Environmental Protection to solicit opinions from all sectors of society. On May 8, 2015, the State Council approved and transferred the No. 26 Document, Opinion on Key Tasks in Deepening Economic Reform in 2015 proposed by the National Development and Reform Commission and advised “organizing and implementing the reform of taxes and fees on coal resources, formulating reform plans for taxes and fees on resources other than crude oil, natural gas and coal, and studying how to expand the scope of resource tax collection”. The 5th Plenary Session of the 18th CPC Central Committee held in October 2015 also put forward requirements for green development, environmental protection, and resource issues. China’s tax system reform should seize this opportunity for environmental management and tax system reform to establish the basic framework for an environmental tax system and lay the foundation for the sustainable development of China’s tax system and economy. A “green” tax system that captures the tax system takes into consideration the proportion of tax revenue and sewage charge revenue related to environmental protection in the total tax revenue. Seven of the tax categories in China since the tax reform

31

W Meng. A Tentative Analysis of the Relationship between Resource Tax and Environmental Tax. Journal of Finance and Accounting, No. 36, 2010. 32 Wu, Yajun. Discussion on Some Theoretical and Empirical Issues of China’s Green Tax System. Economic Science, No.1, 2005.

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3 China’s Tax System Structure: Issues and Solutions

in 1994 are linked to the ecological environment, namely, resource tax, consumption tax, urban land use tax, vehicle and vessel tax, vehicle purchase tax, urban maintenance and construction tax, and farmland occupation tax. The following is an analysis based on data of the revenues from the seven tax categories and the degree of greenness related to environmental protection in China (as shown in Figs. 3.8 and 3.9). From 1998 to 2013, as it shows, the revenues from the seven environmental-related taxes increased year by year. Among them, the resource tax and the city maintenance and construction tax showed a low growth rate. Although they were levied earlier, their total revenue and growth rate were still modest. Consumption taxes, urban land use taxes, vehicle and vessel taxes, and farmland occupation taxes have seen rapid

Fig. 3.8 China’s environment-related tax revenues from 1998 to 2013. Source According to relevant data released by the National Bureau of Statistics of China

Fig. 3.9 Data on tax greenness in China from 1998 to 2013. Source According to relevant data released by the National Bureau of Statistics of China

3.2 Analysis of the Tax Structure Based on International …

79

increases since 2007. The vehicle purchase tax began to be levied in 2001, and there was a period of rapid growth after 2007. As the figure shows above, the change in tax greenness in China tends to be stable, and it decreases in 2000, 2005, and other specific years but still maintains an upward tendency in terms of environmental tax revenue. Therefore, tax greenness is dwarfed by the fast growth of taxes other than environment-related taxes. Low greenness is not caused by the decrease of environmental tax revenue, which though increases, but with a slow growth rate, resulting in an overall modest share in total tax revenue, and so the green degree of tax revenue in these stages becomes diluted. Compared with the OECD members, the tax greenness in Greece is 11.85%, Norway 10.75%, and Japan 5.49% (based on the data in 1993), while the green degree in China is obviously lower. Even if compared with developing countries, among the 19 developing countries (excluding major oil-producing countries) selected by Bahl (1992), their transportation tax (including fuel and vehicle tax) accounted for more than 10% of the total national tax revenue, but the value-added tax on refined oil in China’s fuel tax accounts for less than 5% of that. In summary, through the analysis by green standards, we can see that China’s tax greenness is obviously on the low side, with much room to improve. In terms of specific taxes, environmental taxes have not yet been levied, and special taxes for major pollution sources have not yet been taken into consideration. There are many types of charges collected for the environment, and no conclusive decisions have been made on their merger or cancellation. Disputes over setting tax rates and collection methods of resource taxes still exist, which are not conducive to the improvement of the tax green degree in China. Tax greenness and environmental tax function as tools of environmental policy as well as means of ensuring sustainable economic development. Based on China’s actual national conditions, the emphasis on realizing the greenness of the tax system can be placed on levying new environmental taxes, environmental pollution taxes, and some resource taxes, which can be supplemented by reforming the current tax system and eliminating subsidy policies that are harmful to the environment. The tax system needs to aim for a green tax because it is based on peopleoriented values. The traditional and single economic development mode, which wastes resources and destroys ecology, has seriously endangered people’s basic quality of life. Therefore, the economical and green mode of compound sustainable development is the rational path for people’s production activities. It is not the ultimate goal to measure tax revenue by the yardstick of greenness. The green tax represents not only the importance attached to environmental resources in a country’s tax system but also the people-oriented concept deeply embedded in the framework of the tax system.

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3 China’s Tax System Structure: Issues and Solutions

3.2.4 Analysis Based on Direct and Indirect Tax Standard Francois Quesnay (1694–1774), one of the founders of classical bourgeois political economics, the founding father and key representative of the French Physiocratic school, put forward the theory of tax shift and destination with “pure products” as the core, dividing direct tax and indirect tax according to the criterion of transfer. This is the earliest tapping into the division between direct and indirect taxes. Zhigang Zhu (2013) argues that, on the one hand, direct taxes can regulate the redistribution of social wealth, which is more consistent with the principles of equitable tax burden and affordability put forward in modern tax laws; on the other hand, indirect taxes can only exert a modest impact on socioeconomic development because they are more consistent with the principles of universality and efficiency. It follows that direct and indirect taxes complement each other, and only through reasonable allocation can they truly meet the fundamental requirements for optimizing the tax structure. China’s current tax system is based on the tax reform in 1994. Six taxes, namely, value-added tax, business tax, consumption tax, resource tax, city maintenance and construction tax, and customs duty, constitute the indirect tax system. Fifteen tax categories, mainly including corporate income tax and personal income tax (income tax for foreign-invested enterprises and foreign enterprises, urban land use tax, real estate tax, fixed asset investment direction adjustment tax, land value-added tax, farmland occupation tax, vehicle and vessel use tax, slaughter tax, vehicle and vessel license tax, agricultural tax, stamp tax, animal husbandry tax, deed tax, banquet tax, and ship tonnage tax), constitute the direct tax system. Value-added tax, business tax and consumption tax are the major indirect tax categories, while direct tax mainly includes personal income tax and corporate income tax. Among them, on January 1, 2000, fixed assets investment regulation tax was suspended; vehicle purchase tax was levied in 2001; slaughter tax and agricultural tax were suspended in 2006; the original vehicle and vessel use tax and vehicle and vessel license tax were abolished in 2007, while the vehicle and vessel tax was levied; banquet tax was suspended in 2008, and income tax of foreign-invested enterprises and foreign enterprises was abolished and incorporated into corporate income tax; urban real estate tax was abolished in 2009 and incorporated into real estate tax. During the tax reform from 1994 to 2009, the tax categories in the direct tax system were changed after being adjusted. At present, the direct tax system comprises 11 tax categories (farmland occupation tax, land value-added tax, vehicle and vessel tax, real estate tax, stamp tax, deed tax, urban land use tax, ship tonnage tax, individual income tax, vehicle purchase tax, and corporate income tax). Indirect taxes remain unchanged, as shown in Figs. 3.10, 3.11, and 3.12. According to the data analysis in Figs. 3.10, 3.11, and 3.12, indirect taxes have been dominant in China for the past 16 years. In 1998, China’s total tax revenue was 926.28 billion yuan. Direct tax revenue accounted for 28% of the total tax revenue, and indirect tax revenue accounted for 72%, with the latter making up a larger share. In 2001, China’s total tax revenue was 1530.138 billion, with direct tax contributing 37% and indirect tax revenue contributing 63% of the total tax revenue. The main

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81

Fig. 3.10 The proportions of direct tax and indirect tax in the total tax revenue in China from 1998 to 2013. Source According to relevant data published by the National Bureau of Statistics

Fig. 3.11 China’s macrotax burden from 1998 to 2013, direct tax percentage of GDP and indirect tax percentage of GDP. Source According to relevant data released by the National Bureau of Statistics of China

reason for the significant increase in the percentage of direct tax revenue during this period was ascribed to the substantial increase in corporate income tax and personal income tax, as well as the levy of vehicle purchase tax in 2001. In 2004, the total tax revenue of China was 2416.568 billion yuan, of which direct tax revenue accounted for 19% and indirect tax revenue accounted for 81%. During this period, a significant decline in the proportion of direct tax occurred because corporate and personal income taxes grew slowly compared with their increase in 2001, while indirect taxes, such as value-added tax, business tax, and tariffs, saw an enormous increase. From 2006 to 2013, direct and indirect taxes made up a relatively stable proportion of total tax revenue. Indirect taxes accounted for a large proportion, at approximately 70%, while direct taxes accounted for a relatively small percentage. As presented in Fig. 3.12, although the indirect tax still exceeds the direct tax in proportion, the difference between them narrows down, and it decreases year by

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3 China’s Tax System Structure: Issues and Solutions

Fig. 3.12 The proportions of direct tax revenue (social security premium added) and indirect tax revenue in the total tax revenue in China from 1998 to 2013. Source According to relevant data released by the National Bureau of Statistics of China

year. In 2013, the direct tax (calculated by adding social security fees) accounted for 48% of the total tax revenue, and the indirect tax revenue accounted for 52%. It can be seen that the two taxes are in a state close to equilibrium. Furthermore, if a social security tax is levied, China will become a country that places equal stress on direct taxes and indirect taxes. Along with the transition of economic structure, the economic connotations involved in various taxes have changed greatly compared to the initial stage. Therefore, the classification of direct and indirect taxes in various phases of China differs. However, according to the most fundamental criteria, that is, whether the tax burden can be shifted, the most typical direct taxes in China are personal income tax and corporate income tax. Value-added taxes, consumption taxes, and business taxes are the main components of indirect taxes. As shown in Fig. 3.11, China’s macrotax burden rate was 10.91% in 1998. In 2013, it rose to 18.73%, with an increase of 7.82%. In the same period, the direct tax burden rate increased by 2.68%, and the indirect tax burden increased by 5.14%. This shows that with the rapid development of the economy, China’s tax revenue has accordingly increased considerably, and the rates of macro tax burden, direct tax burden and indirect tax burden have also increased significantly. However, in terms of the rate of macro tax burden, when compared with other countries, China is still a country with lower tax burden, less than those of developed countries such as France (42.9%), the United States (24%), Japan (28.6%), and Germany (35.7%) (based on the data in 2011), and lower than those of developing countries like South Korea (26.1%), Mexico (18.5%), and Hungary (39.1%) (based on the data in 2000). With respect to the proportion of direct tax revenue to total tax revenue, China is not only lower than developed countries such as France (72.81%), the United States (81.46%),

3.2 Analysis of the Tax Structure Based on International …

83

Japan (81.32%), and Germany (70.38%) but also lower than developing countries such as India (36.00%) and Brazil (54.61%) (based on the data in 2011). In terms of the increase rate, in the same period, the increase rate of indirect tax burden is twice that of direct tax burden. Although macro tax burden, direct tax burden, and indirect tax burden are all growing in amount, the margin between them is clearly uneven. The foregoing description indicates that the proportions of macro tax burden and direct tax revenue in China’s total tax revenue have much room to improve, and the growth of direct and indirect tax burden is not comparable, also an urgent problem to be solved in tax reform. The above data analysis demonstrates that although China’s tax structure has undergone twists and turns since the tax reform in 1994, in the lens of direct and indirect taxes, the proportions of direct tax revenue and indirect tax revenue to the total tax revenue are basically quite stable. The ratios of direct tax in GDP illustrated in Fig. 3.11 and that of direct tax in total tax revenue in Fig. 3.12 are moving toward the same direction, roughly taking the same route as other countries. Low direct tax revenue not only indicates the unevenness of various tax burdens in China but also limits the tax adjustment function of the main tax categories, such as income tax and property tax. The direct tax revenue maintains a low level because not only the tax system but also the social management and tax collection administration failed to keep up with the pace of economic development. The difficulty of direct tax collection and management is one of the obstacles that fetters the development of direct taxes in China. In the future, to improve the share of direct tax revenue in China’s total tax revenue, efforts should be mainly made to increase income tax revenue, levy social security taxes, and raise the level of direct tax collection administration. The premise of setting up a sound tax structure and constructing a proportionate system between direct and indirect taxes is to design each tax category rationally, especially each main type of tax. At present, the low percentage of direct tax revenue in the total tax revenue is partially due to the underdevelopment of some main types of tax. The direct tax and indirect tax should be proportionate via adjustment in the tax base, tax rate, tax incentives, and so on.

3.2.5 Analysis of the Causes of the Changes in China’s Tax Structure The choice of a tax system determines the final formation of the tax structure. To make a reasonable choice, we must consider the economic foundation and social environment that China is facing. Therefore, in addition to analyzing tax structure data through different standards, we need to conduct a more in-depth analysis of the following aspects.

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3 China’s Tax System Structure: Issues and Solutions

Economic Factors

First, the impact of economic development on China’s tax structure is evident. China is a country in transition. With the continuous improvement of the market economy, the scale of goods and services transactions has been expanded. An increase in transaction volume leads to an increase in the tax on goods and services and its share of total tax revenue. At the same time, with the expansion of international trade, the tax revenue of import and export transactions is also growing. Second, economic progress will inevitably uplift personal income levels, and the important type of tax involved in it—the collection plan and the subsequent distribution pattern of personal income tax—will be greatly affected. This has also been confirmed by the levy and constant adjustment of personal income tax in China. Finally, the economic fluctuations brought about by economic development act on two important issues of income equity and economic stability, which are also very important issues confronting the Chinese government today. Usually, to alleviate these two major problems, it is necessary to adjust income tax, property tax, and other tax categories. By adjusting tax categories such as income taxes and property taxes, China can crack the hard nut of income inequality while avoiding greater economic fluctuations caused by the excessive share of direct taxes. The key point is to balance the proportions of direct tax and indirect tax while regulating income equity.

3.2.5.2

Political Factors

Amid the tide of economic globalization, China’s tax system should take into consideration not only the impact of domestic factors but also the political factors affecting the tax structure that largely come from international shocks. The current tax reform and tax structure is characterized by high international convergence. International shocks, often invisible, are necessary for tax competition. Under economic globalization, the flow of capital and labor force is freer. To attract the factors of production, tax competition in various countries forces the government to continuously reduce the capital and labor tax burden, resulting in a decline in the proportion of income tax. The value-added tax based on consumption has become a more important source of tax. In addition, there are also some tangible international shocks, such as China’s accession to the World Trade Organization. The WTO is characterized by close internal cooperation, including the implementation of a unified tax policy, which is essentially the transfer of tax sovereignty by member states to obtain an integrated interest, which in turn will inevitably change the tax system of the contracting states and affect their relevant tax income. Therefore, the study of tax structure optimization must incorporate political factors, and only with an international vision can we reap an edge in tax competition under international impact.

3.2 Analysis of the Tax Structure Based on International …

3.2.5.3

85

Cultural Factors

Cultural customs affect China’s tax structure in terms of taxpayers’ tax awareness, subjective recognition of public services provided by the government, customs and habits. Existing problems confronting China’s tax system are that citizens’ awareness of tax payments is not strong, and the degree of tax compliance is not high. These problems often lead to people’s strong resistance to the collection of direct taxes, which makes them difficult to collect. An indirect tax is added to the price paid by consumers for purchasing goods through a tax shift, which is more elusive and thus less difficult to levy. Therefore, considering the current social atmosphere of citizens’ tax awareness in China, the design of the tax structure should mainly focus on goods and services taxes, which can reduce tax noncompliance to a certain extent. Social customs can largely shape the choice of tax structure. In China, the public holds a strong recognition of personal ownership and inheritance of wealth but resists deprivation (e.g., taxation), making it more difficult to levy personal income tax, which poses certain challenges to the awareness spread of tax payment and the expansion of the tax base.

3.3 The Mathematical Relationship of the Influence of China’s Tax Structure on Economic Growth and Income Distribution Against the Background of Rule of Law In the empirical analysis of the impact of the tax structure on economic growth, most foreign literature has used the theoretical model of economic growth. It is found that if the rates of labor and capital income tax are raised, the rate of economic growth will generally be reduced, but the long-term effect on consumption tax is not significant. However, due to the varying degrees of the labor force, capitalization, and development in different countries, conclusions drawn will differ, so it is necessary to examine the elasticity of labor supply. Domestic research focuses on the empirical testing of empirical data, which can be roughly grouped into two themes. One is the study of the relationship between the tax structure and economic growth. For example, Xiaofeng Yuan (2009) used a linear regression model to study the effect of the tax proportion on China’s current macrotax burden and tax structure on economic growth in terms of tax scale and tax structure and pointed out the direction for taxation structure adjustment to promote the growth of economic scale and increase factor output. The other is the study of the relationship between the tax rate structure and economic growth. For example, Weiguo Wang and Xiaohua Yang (2006) used the cointegration regression model to analyze the effects of China’s capital, labor, and consumption taxation on per capita GDP in terms of the indicators of per capita GDP growth rates, labor tax rates, capital tax rates, and consumption tax rates and

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3 China’s Tax System Structure: Issues and Solutions

concluded that taxes on capital are not conducive to economic growth, taxes on labor have no significant impact on economic growth, and taxes on consumption facilitate economic growth. For the empirical analysis of the impact of the tax structure on income distribution, most domestic literature has studied the influence mechanism of various tax categories on income distribution. For example, Qiao Wang and Zhuwang Wang (2008) used the linear regression model to determine that the income gap among residents was widened by value-added taxes and consumption taxes in the current tax structure, while personal income taxes had a good effect on narrowing the income gap. Keqing Zhou and Rui Mao (2014), also using the linear regression model, concluded that China’s tax system had a reverse regulation effect on income distribution as a whole. In this chapter, we draw on the research model from the existing literature, reconstruct the econometric model, analyze the impact of China’s tax structure on economic growth through the VAR model and impulse response analysis method, and use the linear regression model to clarify the income distribution effect of the current tax structure from the economic development level, people’s livelihood expenditure level, macrotax burden, direct tax, and indirect tax.

3.3.1 Empirical Analysis of the Impact of China’s Tax Structure on Economic Growth Tax structure refers to the compositions of tax categories in a certain period of time, the proportion of tax revenue of each tax category in the whole tax revenue, and the structural ratio of tax revenue among various tax categories.33 Because different tax categories have different effects on economic growth, the composition of taxes will affect the development of a country’s overall economic structure. Since 2011, China’s economic growth has begun to slow down, and tax revenue exceeding economic growth has become a growing tendency. In this chapter, we adopt principles of econometrics to analyze the impact of China’s tax system structure on economic growth.

3.3.1.1

Model Assumptions and Data Selection

The tax structure is represented by the tax system structure (ts), tax burden level (tb), and tax resilience (tr), in which the tax structure is expressed by the ratio of direct tax (DT) revenue to indirect tax (IDT) revenue. Direct tax refers to personal income tax and corporate income tax, and indirect tax refers to value-added tax, consumption tax, and business tax. The tax burden level is expressed as the ratio of tax revenue 33

Li, Zhong. Study on the Impact of China’s Tax Burden on Economic Growth. Ph.D. Dissertation, Southwest University, 2012, p. 135.

3.3 The Mathematical Relationship of the Influence of China’s Tax …

87

(TAX) to GDP; tax resilience is expressed as the ratio of the tax growth rate (TAX) to the GDP growth rate (GDP). The actual GDP growth rate is chosen to represent economic growth. The time series data of tax structure and economic growth are selected from 1994 to 2014, as shown in Table 3.8. The VAR model is adopted to conduct empirical analyses on China’s economic growth and tax structure. The VAR model can be expressed as follows: Yt = a1 Yt−1 + a2 Yt−2 + · · · a p Yt− p + ε1

(3.1)

In Eq. (3.1), Yt is a vector of K-dimensional endogenous variables, Yt-i(i = 1, 2, … P) a vector of lagged endogenous variables, and P a lag number of lagged endogenous variables. a1, a2, …, ap are the coefficient matrix of K × K dimension to be estimated, b the coefficient matrix of K × D dimension to be estimated. εt is a vector composed of K-dimensional random error terms, whose elements can form a contemporaneous correlation but cannot correlate to their respective lag numbers or the variables on the right side of the model.34

3.3.1.2

Model Estimation and Testing

Since the relationship between economic growth and the tax structure is being examined, the economic growth rate (GDP) and tax structure (ts) are set as the main variables to observe, and two variables, tax resilience (tr) and tax burden level (tb), are added according to the relationship existing in the economic operation. Because all the variable sequences selected are time sequences, it is necessary to test the stability of the variables in the model before establishing the VAR model. If the sequence is stable, the VAR model can be established. If the sequence is nonstable, then the original sequence needs to be tested for difference or cointegrated. Therefore, the stability of the data is checked first. The ADF unit root test can be used here. From the results in Table 3.9, it can be seen that GDP, ts, tb, and tr have only one unit root, which indicates that they are all a first-order single-integration process I (1), so there may be cointegration between GDP and ts, tb, and tr. Eviews7.2 and Johansen’s maximum likelihood estimation can be used to test the cointegration among variables. There are too many variables involved in this model, and the time sequence samples are not long enough to test the cointegration between variables. However, because their first-order differential sequence is stationary, we can use the unconstrained VAR model for empirical research.

3.3.1.3 (i) 34

Generalized Impulse Response Analysis Based on VAR Model

Stability Test of the VAR Model

Fan, Huanhuan, Yanyi Li & Shengke Chen. Eviews Statistical Analysis and Application. Beijing: China Machine Press, 2011, pp 255–270.

Table 3.8 China’s tax structure, tax burden level and economic growth rate

88 3 China’s Tax System Structure: Issues and Solutions

3.3 The Mathematical Relationship of the Influence of China’s Tax …

89

Table 3.9 Unit root testing process Sequence

Test form

ADF values

(C, T, K)

1%

5%

10%

Significant level

Significant level

Significant level

Conclusion

GDP

(N, N, 2)

−1.235089

−2.685718

−1.959071

−1.607456

Non-stable

ts

(N, N, 2)

0.992665

−2.685718

−1.959071

−1.607456

Non-stable

tb

(N, N, 2)

2.159036

−2.685718

−1.959071

−1.607456

Non-stable

tr

(N, N, 2)

−0.439702

−2.708094

−1.962813

−1.606129

Non-stable

DGDP

(C, T, 2)

−3.949031

−4.532598

−3.673616

−3.277364

Stable

DTs

(C, T, 2)

−3.725461

−4.532598

−3.673616

−3.277364

Stable

DTb

(C, N, 2)

−2.984466

−3.831511

−3.02997

−2.655194

Stable

DTr

(C, T, 2)

−6.070088

−4.616209

−3.710482

−3.297799

Stable

Note The test form (C, T, K) represents the intercept term, trend term, and lag term, respectively; N indicates no corresponding term, and D represents the first-order differential operator

Based on the stability test of the selected data, the VAR model of GDP and ts, tb, and tr is estimated, and AR root estimation is applied to the stability testing of the structure of VAR model estimation. AR root estimation is based on the principle of calculating the value of characteristic root polynomials. That is, by comparing the calculated modulus of the reciprocal of the eigenvalue with 1, if the modulus of the reciprocal of all roots of the VAR model is less than 1, i.e., within the unit circle, it means that the VAR model is stable. If the reciprocal modulus of all roots of the VAR model is greater than 1, i.e., outside the unit circle, then the VAR model is not stable (as shown in Fig. 3.13). Fig. 3.13 VAR model root model

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3 China’s Tax System Structure: Issues and Solutions

Fig. 3.14 Analysis of impulse response of ts, tb, tr to GDP

The points in the unit circle in Fig. 3.13 represent the reciprocals of the AR eigenvalue. It can be seen from Fig. 3.13 that these points are all within the unit circle, so the estimated VAR model is stable and the results are valid. Since the obtained VAR model is stable and effective, on this basis, the impulse response of the generalized VAR model is employed to analyze the impact response of GDP and ts, tb, and tr, and the dynamic relationship between variables is described. In this chapter, an impulse response model with a lag period of 6 is selected. (ii)

Analysis of the impulse response of ts, tb, and tr to economic growth

As shown in Fig. 3.14, when a positive impact occurs on economic growth in the current period, economic growth does not respond immediately to disturbances from the tax system structure, tax burden, and tax resilience, and the response of economic growth in the first period is 0. After economic growth is positively impacted by the tax structure and tax burden levels, GDP growth remains greater than zero. After the first period, the disturbance of economic growth on the tax structure intensifies rapidly, and the response reaches the maximum in the third period. It then presented a downward trend but was still positive. After the fifth period, it remained stable, and the cumulative effect was 0.151365. This indicates that China’s current tax structure has promoted economic development, and the increase in direct tax revenue has boosted economic growth. After the first period, the disturbance of economic growth on tax burden increases gently. In the third period, it reached the maximum and then assumed a slow downward tendency, which was positive, and remained stable in the fifth period, with a cumulative effect of 0.144039. It shows that the growth of tax revenue in the initial stage plays a positive role in promoting economic growth, while the subsequent downward trend shows that the growth of tax revenue has no significant impact on economic development; that is, the rise of the GDP growth rate has significantly raised the tax burden. Ensued by the impact of tax resilience on economic growth, the GDP growth rate rapidly decreases to a negative value

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91

Fig. 3.15 Analysis of impulse response of GDP to ts, tb, tr

from the second period onwards, bounces back in the third period and turns into a positive value in the fourth period, where the impact action is weak. It recedes to a negative value in the fifth period and stays negative until the end of the period, with a cumulative effect of −0.129971. This demonstrates that the growth rate of tax revenue does not match the level of economic development, and it is necessary to optimize the tax structure. (iii)

Analysis of the Impulse Response of Economic Growth to Tax Structure, Tax Burden level, and Tax Resilience

As seen from Fig. 3.15, the overall impact of economic growth is positive in the whole impact response stage. At the beginning of the period, economic growth maximally responds to unit impulses immediately and then declines rapidly. Although there are slight fluctuations in the third and fourth periods, it slowly falls off after the fifth period. This means that economic growth is sensitive to its own information process, and economic growth is boosted in the initial stage, but in the long run, economic development remains stable. The tax structure’s disturbance to one standard deviation of economic growth in the first period of response is 0, then rapidly climbs up, reaches the maximum in the second period, and then quickly drops. In the fourth period, it exhibits a negative effect, then weakly fluctuates in the fifth and sixth periods, and tends to strengthen after the sixth period. This shows that economic growth drives the improvement of tax structure, and the negative effect thereafter shows that with the improvement of the tax structure, i.e., the increase of direct tax revenue, the influence of economic growth on tax structure improvement becomes waning, even negative. In the initial periods from the first to the fourth period, the disturbance of tax burden on the standard deviation of economic growth not only has a positive effect but is relatively stable. However, it is reduced to a negative value in the fifth period and then stays negative until the end of the period. This manifests that when the tax burden level is low in China, economic growth increases, but when the tax burden surges to a certain degree, it will in turn hinder economic growth and development. The

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Table 3.10 Analysis of variance decomposition based on the VAR model Period

S. E

GDP

ts

1

1.344874

100.00000

0.000000

2

1.975230

85.39555

3

2.295587

74.34984

4

2.483266

5 6

tb

tr

0.000000

0.000000

1.294078

7.170588

6.139784

8.359949

12.280270

5.009938

73.65710

9.819605

12.152790

4.370509

2.566482

74.17044

9.402521

12.055610

4.371432

2.585475

73.64271

9.607630

12.189510

4.560147

disturbance of tax resilience to one standard deviation of economic growth shows a weak positive response in the first period and then keeps strengthening, reaching a maximum of 0.32768 in the second period and then rapidly falling to a negative value in the third period. Even in the fourth period, the minimum value is reduced to −0.0684, after which the response slowly rebounds and resumes positive in the sixth period. It then maintains positive, but the response is very weak. (iv)

Analysis of variance decomposition based on the VAR model

The variance decomposition based on the VAR model evaluates the importance of different structural impacts by analyzing the contribution of each structural impact to the change in endogenous variables, which is measured via variance. Table 3.10 shows the results of the variance decomposition. As seen from Table 3.10, in the first period of the forecast, the forecast variance of economic growth is caused by the disturbance of economic growth itself. This is because the first input variable of variance decomposition was “GDP”. In the second period of forecasting, 85.4% of the variance in economic growth arises from the disturbance of the economic growth itself, 1.29% arises from the disturbance of the tax structure, 7.17% arises from the disturbance of the tax burden, and 6.14% arises from the disturbance of tax resilience. As the forecast period increases, the part of the economic growth forecast variance explained by the non-economic growth variable disturbance gradually grows, while the part explained by the economic growth self-disturbance gradually declines, but its percentage is still relatively large. In the fourth period, the economic growth decomposition results are basically stable. The economic growth variance is 73.66%, which is produced by economic growth disturbance. A total of 9.82% derive from tax structure disturbance, 12.15% from tax burden, and 4.37% from tax resilience.

3.3.1.4

Conclusion of the Empirical Research

By applying the generalized impulse response function method based on the VAR model, this section examines the long-term dynamic relationships between the tax structure (ts), tax burden level (tb), tax resilience (tr), and economic growth in China in the past 20 years (1994–2014). Economic growth has a significant impact on the

3.3 The Mathematical Relationship of the Influence of China’s Tax …

93

tax structure and tax burden. First, economic growth makes it easier to raise the level of tax burden. Second, economic growth increases the proportion of direct tax revenue in total tax revenue. However, as direct tax revenue rises to a certain extent, it will limit the growth rate of the economy and then inhibit the increase in tax burden. However, in our current tax system, the proportion of indirect taxes composed of value-added tax, business tax, and consumption tax is too high. To maintain a steady growth of the economy, China needs to reduce the share of indirect taxes and raise the proportion of direct taxes on the premise of maintaining the stability of the existing tax structure, that is, to increase the ratio of income tax.

3.3.2 Empirical Analysis of the Influence of China’s Tax Structure on Income Distribution Under the Rule of Law At present, China’s overall economic scale and per capita GDP level are rising, but the income distribution is widening, which has become a major obstacle to the sustainable development of society. According to the data released by the National Bureau of Statistics, China’s Gini coefficient reached 0.469 in 2014, which far exceeded the international alert line of 0.4. Tax policy is one of the important measures for the government to adjust the distribution of individual income, and it plays an active role in narrowing the income gap between residents. Therefore, first, China should deeply study the impact of the current tax structure on income distribution in China. Second, China should optimize and reform the current tax structure to achieve the goal of reducing income differences.

3.3.2.1

Model Assumption, Variable Selection and Data Selection

According to the general mechanism of the tax structure affecting income distribution, the regression model is constructed as follows: Gini t = C + β1 × G D P Rt + β2 × P L E t + β3 × tb Rt + ζt Gini t = C + β1 × G D P Rt + β2 × P L E t + β3 × I DT Rt + ζt

(3.2)

Gini t = C + β1 × G D P Rt + β2 × P L E t + β3 × DT Rt + ζt The Gini coefficient, the most commonly used indicator to measure the income distribution gap in the world, is hereby used as the explained variable. Income disparity in countries with a market economy is measured as follows: a Gini index below 0.2 expresses perfect equality; 0.2–0.3 relative equality; 0.3–0.4 adequate equality; 0.4–0.5 large income gap; and above 0.5 severe income gap. The international community believes that 0.4 is the alert line against extreme economic inequality and that if a country’s Gini coefficient exceeds 0.4, it is prone to social

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Table 3.11 Gini coefficient and variable data in China Year

Gini

GDPR

PLE (%)

tbR (%)

IDTr (%)

DTr (%)

2007

0.484

14.16

5.43

13.52

9.05

4.46

2008

0.491

9.63

5.86

13.60

8.90

4.70

2009

0.490

9.21

6.38

13.81

9.33

4.48

2010

0.481

10.45

6.48

13.70

9.37

4.32

2011

0.477

9.30

7.03

13.99

9.27

4.71

2012

0.474

7.65

7.69

14.14

9.37

4.77

2013

0.473

7.67

7.61

14.15

9.23

4.92

2014

0.469

7.40

7.73

14.08

9.04

5.03

Note The livelihood expenditure data are collected from China’s Statistical Yearbook from 2007 to 2014, and China’s Gini coefficients from 2007–2014 are published by the National Bureau of Statistics

unrest. Although domestic and foreign literature has not proven the exact relationship between the economic development level and the income gap, it does prove that they are closely linked. Therefore, the level of economic development is regarded as an important control variable. Based on the empirical analysis of the impact of the above tax structure on economic development, we use the actual GDP growth rate to represent the level of economic development. In recent years, China has been increasing people’s livelihood expenditures because the increase in the level of people’s livelihood expenditures will alleviate the gap in income distribution to some extent. People’s livelihood expenditures generally cover education, health care, social security, and employment. In China, education and medical facilities are mainly concentrated in cities, and the social security system mainly serves urban residents. The opportunities for rural residents to enjoy high-quality education, medical facilities, and social security are much fewer than those of urban residents. In contrast, the enlargement of people’s livelihood expenditures may widen the income gap between urban and rural residents and then widen the income gap between residents in general. Therefore, we take the level of people’s livelihood expenditure as the second control variable, which is expressed by the proportion of people’s livelihood expenditure in GDP.35 Finally, we select the explanatory variable. First, the macro tax burden level can be used to express the impact of the whole tax system on the income distribution gap among residents; then, direct tax and indirect tax can be used to indicate the impact on the income distribution gap among residents (as shown in Table 3.11).

35

Zhou, Keqing & Rui Mao. Research on the Mechanism of the Impact of Tax Structure on Income Distribution. Taxation Research; No. 6, 2014.

3.3 The Mathematical Relationship of the Influence of China’s Tax …

3.3.2.2 (i)

95

Model Regression and Testing

Multivariable Linear Regression Fitting

By using EViews to estimate the model, the regression results are obtained, presented in Table 3.12. From the results of linear regression, we can see that the values of the goodness of fit of Models (1), (2) and (3) are very high, and the F values are 26.63358, 82.58418 and 35.33964, respectively, which means that the model is significant at the 5% level. The t-statistic value of the regression coefficient shows that the regression coefficient is significant. From the point of view of sequence correlation, the values of D. W. are 1.7446, 2.605158, and 2.759811, and there is a serial correlation at the 5% level. (ii)

Heteroscedasticity Test

Table 3.12 Regression results of each model

Note ***means P value < 1%, **1 ≤ P value ≤ 5, and *P value > 5

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3 China’s Tax System Structure: Issues and Solutions

The existence of heteroscedasticity affects the results of linear regression, making the F test and t test meaningless. Therefore, the Breusch-Pagan test results for heteroscedasticity are given (as shown in Fig. 3.16). Figure 3.16 shows that the R2 values of Models (1), (2), and (3) are 0.806779, 0.758857, and 0.950235, respectively, which are greater than the chi-square value at a 0.05 level of significance, so there is no heteroscedasticity in the three models, and the conclusions drawn by the model are meaningful.

Fig. 3.16 Heteroscedasticity test results for each model

3.3 The Mathematical Relationship of the Influence of China’s Tax …

3.3.2.3 (i)

97

Analysis of Empirical Results

Analysis of the Impact of Control Variables and Macro Tax Burden on the Income Distribution Gap

Model (1) reflects the influence of control variables and macro tax burden on the income distribution gap. Its adjusted R2 value is 0.917, and the F value is 26.634, which shows that the model has strong explanatory power. Among them, the actual GDP growth rate and the coefficient of people’s livelihood expenditure are both negative, indicating that both can lower the Gini coefficient and reduce the gap in income distribution. The coefficient of macro tax burden is positive and passes the test at a 5% significance level. This indicates that China’s tax system exerts a negative impact on income distribution as a whole, not conducive to narrowing the income distribution gap. There are still irrational elements in China’s tax system. (ii)

Analysis of the Impact of the Tax Structure on the Income Distribution Gap

This chapter draws on Arnold’s (2008) research method to estimate the impact of the residual tax variable on the Gini coefficient by ignoring other tax variables in the tax variable parameters of the estimated equation. The method assumes that those neglected variables are not related to the model; the increase in the proportion of one tax category can be compensated for by the decline in the proportion of another tax category so that the total tax amount remains constant. In Model (2), the coefficient of indirect tax is positive, which is tested at a significance level of 5%. This reveals that indirect taxes in China have a negative effect on residents’ income distribution. In other words, it has a strong regression. In Model (3), the coefficient of direct tax is negative and passes the test at a significance level of 5%, indicating that the increase in direct tax revenue in China will reduce the Gini coefficient as well as the gap in income distribution among residents.

3.3.2.4

Conclusion of Empirical Research

Judging from the empirical results, China needs to increase the collection of direct taxes. The Gini coefficient increases by 0.022% with every 1% increase in macrotax burden, decreases by 0.009% with every 1% increase in direct tax burden, and increases by 0.012% with every 1% increase in indirect tax burden. Therefore, the effect of indirect taxes on expanding the income distribution gap among residents is greater than that of direct taxes. At present, China’s indirect taxes account for a larger proportion of total tax revenue than direct taxes, which will widen the income distribution gap among residents and fail to play a proactive role in regulating the income distribution gap. Therefore, to better safeguard the fairness and justice of society and advance sustainable economic development, China should further reduce the tax burden of indirect taxes and gradually raise the share of direct taxes in the total tax revenue. To narrow the income distribution gap of residents, it is necessary to reduce the collection of indirect taxes, increase the collection of direct taxes, improve the

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income tax system, and increase expenditures on people’s livelihood. To increase the contributions of direct taxes, it is necessary to strengthen the tax collection and administration system, which can be bettered by intensifying the control and supervision of tax sources, enhancing the legal system related to tax collection and management, and establishing an effective tax inspection and penalty system to bring into full play the tax structure’s regulating role in income distribution.

3.4 Lessons from Tax Structure Reforms Abroad 3.4.1 Diachronic Analysis of Tax Structures in Other Countries 3.4.1.1 (I) (i)

(ii)

The United States

Changes and Causes of the US Tax System The first stage: from 1787 to 1913. During this period, the tax structure of the United States was characterized by indirect taxes as the main tax. After the founding of the United States, there was no unified national tax system. It was not until 1787 when the Constitution of the United States was enacted and came into force in 1789 did the federal government have independent taxation power. Tariffs became an important source of fiscal revenue in the twentieth century. Since then, the United States has established a tax structure with tariffs as the main tax. Subsequently, to raise revenue to fund the American Civil War, the federal government passed the Revenue Act of 1862. Personal income tax was then collected for a period of time, which played an important role during the Civil War. After the war, due to the opposition of the aristocratic landlord class, it was forced to be abolished in 1872. It was not until 1913, after numerous fights, was income tax re-levied. Since 1861, the federal government has expanded the scope of domestic consumption tax, which has increased the proportion of consumption tax in total tax revenue. For the above reasons, the US tax structure at this stage showed the characteristics of indirect taxes as the main tax. The second stage: from 1913 to the mid-1970s. At this stage, the US tax structure was characterized by direct taxes. In this period, the United States experienced two world wars, during which income tax, as a principal source of military expenditure, constituted a rising proportion of total tax revenue since it was releveled in 1913 and finally became a major tax in the US tax structure. In 1935, the United States passed the Social Security Act, levying payroll tax, which was a social security tax. At first, it mainly raised funds for pension insurance and then expanded to include hospitalization insurance, unemployment insurance, housing subsidies, and other domains.

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The third stage: from the mid-1970s to the present. At this stage, direct taxes still served as the main tax, entering the compound tax stage, and the tax structure was relatively stable. The main status of personal income tax was consolidated, and the proportion of social security tax was continuously increasing. Social security tax became the second largest type of tax in the United States, second only to personal income tax, and gradually formed a compound tax structure together with income tax, social security tax, and goods and services tax as the primary taxes and property tax as the main supplement. The Status Quo and Causes of the US Tax Structure Taking the data from 1965 to 2013 published on the OECD website as an example, the current status of the US tax structure is analyzed from the perspective of the macro tax burden level, tax structure, and tax category structure. The tax categories analyzed here are based on the classification of the OECD, mainly considering that it is more convenient to compare tax systems between various countries horizontally. Tax burden analysis. The level of macrotax burden in the United States is relatively low among major developed countries. As shown in Fig. 3.17, since 1965, the United States has kept the level of macrotax burden between 23 and 29%, at a minimum of 23.3% and a maximum of 28.4%, with relatively small fluctuations and relatively stable. Tax system analysis. According to the six major types of taxes classified by the OECD, taxes on goods and services and other taxes are indirect taxes, while the other four are direct taxes. As seen from Fig. 3.18, direct taxes hold an absolute dominant position in tax revenue in the US. Since 1965, the proportion of direct taxes has been above 77%, with a maximum of 83.97%. The fluctuation range is very small, within 7%. By contrast, the proportion of

US tax burden Fig. 3.17 The proportion of total tax revenue to GDP in the United States from 1965 to 2013

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— —Direct tax — — Indirect tax Fig. 3.18 The proportion of direct and indirect taxes in total tax revenue in the United States from 1965 to 2013

(iii)

(iv)

indirect taxes is relatively smaller, with the highest only 22.76% in 1965, never exceeding 23%, and the fluctuation range is also small. For the tax system, the US tax structure has remained stable, without much change, and direct tax has always served as the main tax. Tax category analysis. From Fig. 3.19, it can be observed that the US tax on income, profits, and capital gains, as the dominant tax, accounts for more than 41% of total tax revenue, a much larger share than other taxes, with a fluctuation of appropriately 10%. The proportion of social security taxes has been on the rise. In 1975, it surpassed the goods and services tax and became the second major type of tax. After entering the twenty-first century, it varied slightly, with a very small range of fluctuation ranges. The ratio of property tax and tax on goods and services were relatively stable, with a small fluctuation range of 5–7%, and the variation was roughly the same. In summary, the current tax system of the United States is a compound tax structure with income tax, social security tax, and goods and services tax as the main tax and property tax as the main supplement. Causal analysis. The first cause relates to economic factors. The main reason why the United States has a tax structure with direct taxes as the main reason is mainly attributed to economic development. During the two world wars, the United States mainland was not engaged in warfare, so it secured a relatively independent and stable environment for economic development in the United States. As a war profiteer, the United States had frequent international trade with the rest of the world, which played a crucial role in promoting the

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— —Income, profits, and capital gains tax— — Social security tax — — Property tax

—×—Goods and services tax

Fig. 3.19 The proportion of major taxes in total tax revenue in the United States from 1965 to 2013

development of the US economy. After the Industrial Revolution, the level of urbanization was greatly improved. The majority of the population clustered in cities, which was conducive to the use of the source deduction method to collect income tax and convenient to check people’s income levels, thus creating favorable conditions for income tax collection. However, progress in mechanization greatly improved skilled workers’ wages and welfare. After a long period of accumulation, a certain amount of funds was accrued, and industrialization boosted job opportunities so that labor as a factor was put into the market on a larger scale. The income of individuals was taxed, which resulted in a greater share of income tax. Income tax replaced tariffs as the first major type of tax, and the tax structure of the United States then transitioned from indirect taxes to direct taxes. As shown in Fig. 3.20, the per capita GDP of the United States has kept a high-speed increase, and the level of economic development has continued to rise. With the rapid development of the economy, income tax in the United States gains a broad and expanding tax base, which has strengthened and consolidated the main position of direct taxes in the tax structure. The second relates to political factors. When designing the tax system, the U.S. government not only attached importance to efficiency but also made allowances for fairness. In the early days, the United States took economic development their focused policy objective, so indirect taxes such as commodity taxes were set as the main types of taxes. After the Industrial Revolution, the U.S. economy was already among the leading powers in the world. Coupled with American citizens crying out for fairness

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— —Per capita GDP Fig. 3.20 Per capita GDP of the United States from 1970 to 2014

on the rise, the government began to pay increasing attention to social equity. Personal income tax wins governments’ favor because its progressive tax rate is conducive to narrowing the gap between the rich and the poor, and its function of “automatic stabilizer” contributes to the stability of social equity and keeps the proportion of direct taxes relatively stable. The rise of a social security tax, on the one hand, derives from its inherent fairness. On the other hand, as the U.S. economy developed, it put more emphasis on improving the welfare of its citizens, thus enlarging the scope of government expenditure. Social security and public expenditures increased, and the scope of social security also expanded, covering pensions, medical care, unemployment, disability, and other fields. Therefore, once America enacted a social security tax in 1935, the ratio of the social security tax surged rapidly and finally became the second largest type of tax, second only to the personal income tax, playing an important role in the American tax system. Meanwhile, the American government adapted to economic development by reforming the tax system and continuously optimized its tax structure therein. In particular, the reforms during the Reagan presidency in the 1980s and the Bush presidency in the twenty-first century are worthy of note. In the 1970s, the U.S. economy was in a state of “stagflation”, and a higher tax burden suppressed consumption and reduced investment capacity. To effectively solve economic problems, the Reagan Administration in the 1980s reduced government intervention in the economy by lowering the income tax rate, broadening the tax base, cutting down government expenditure, and abandoning tax incentives to restore the regulatory role of the market. Lessening the tax burden, stimulating investment, and promoting economic development enabled the U.S. economy to move out of the economic downturn and effectively revived itself. The Bush Administration also made tax cuts, lowered

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the income tax rate, increased the preferential treatment for individual education expenses, stimulated the economy, and created more job opportunities. The third relates to cultural factors. American culture is characterized by fairness, rule of law, and social contracts, which drive American citizens to pursue the fairness of taxation, have a high awareness of tax payments, and take tax compliance as an ordinary part of life. Moreover, the U.S. government also has the cognizance to levy taxes by law, adhere to the principle of the social contract, and insist on the coexistence of obligations and rights, which provides convenient conditions for collecting and managing income tax.

3.4.1.2 (I) (i)

(ii)

(iii)

France

The Change and Causal Analysis of French Tax Structure The first stage: from 1914 to the 1940s. At this stage, the French tax system was at the point wherein indirect taxes were the main tax body. At the time, it was in the midst of two world wars. Like the United States, the French government levied income tax to meet the huge military expenditure, but unlike the United States, France’s income tax did not meet the needs of the costs incurred by war. The government could only levy a payment tax in 1917, which was what we now call business tax. As business taxes have the advantages of simple taxation, low cost, and a wide taxation scope, they effectively met the expenditure needs of the French government at that time and laid the foundation for the establishment of the main position of business taxes. After that, the scale of business tax collection gradually expanded and became the main type of tax at that time. The second stage: from the 1950s to the 1970s. At this stage, France accomplished its tax structure transformation, i.e. its main tax type changed from indirect taxes into direct taxes and social security tax as the principal tax category. The predecessor of the French social security contributions, with its inception in 1945, was the social contribution surcharge. With the continuous development of the economy, the social security system in France became increasingly improved, and the scope of social security became increasingly wider, constituting many branches such as medical care, disability, retirement, pension, childbirth, and even death and basically achieving universal coverage. The expansion of coverage caused the government’s financial expenditure to expand accordingly. As a result, social security contribution revenue continued to grow and develop, and the proportion of social security taxes in the total tax revenue also rose. In the mid-1970s, it exceeded commodity and labor taxes and topped the largest tax category. Coupled with the increase in the ratio of income tax, the French tax system completed the shift from indirect to direct taxation. The third stage: from the 1980s to the present. At this stage, the structure of the French tax system did not change, still having direct taxes as its main tax type. However, the percentage of each tax category underwent significant

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changes. The proportion of social security contributions declined, but its main status remained unchanged. The ratio of income tax increased further, while the ratio of tax on goods and services, which belonged to indirect taxes, fell considerably. The Status Quo and Causes of the French Tax Structure Tax burden analysis. France is a high-tax-burden country. Its tax burden is much higher than the average of OECD countries, with the lowest level being 33.1% since 1965, which is still much higher than the peak of the United States. The macrotax burden in France showed a clear upward trend. As of 2013, the highest value reached 45% (as shown in Fig. 3.21). Tax system analysis. Figure 3.22 shows that the French tax system is mainly structured of direct taxes and supplemented by indirect taxes, and the gap between the two displays a widening trend. By 2013, the gap between the two grew from the initial 17.9–46.91%, with direct taxes accounting for an overwhelming share. Tax category analysis. As shown in Fig. 3.23, there is a relatively large fluctuation in tax categories in the tax structure of France, especially in the following three taxes: social security contributions, income, profit and capital gains tax, and tax on goods and services. Among them, the proportion of goods and services tax showed a downward trend, with the ratio falling from the initial 38.41–24.07%, with a decline of 14.34% points. In contrast, before the mid1990s, income, profit, and capital gains tax demonstrate a relatively stable trend of small fluctuations, but in the late 1990s, its proportion suddenly rose to a new height. Although it declined slightly, on the whole, its proportion still increased to a large extent and gradually became equal to the goods and services tax. The proportion of social security contributions changed more

— — France tax burden Fig. 3.21 The proportion of total tax revenue to GDP in France from 1965 to 2013

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— — Indirect tax

Fig. 3.22 The proportion of direct taxes and indirect taxes in total tax revenue in France from 1965 to 2013

— —Income, profits, and capital gains tax

— —Social security tax

— —Property tax— —Goods and services tax —×—wage, salary, and labor taxation— —Other taxes Fig. 3.23 The proportion of major taxes in total tax revenue in France from 1965 to 2013

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tortuously. Before 1993, its proportion enjoyed an upward trend and then fell back, showing a wandering trend around the initial proportion. Nevertheless, it is still the largest tax in France. The ratio of property taxes shows a slight upward trend. Tax on wage, salary, and labor relatively stabilized, without much change in proportion. Causal analysis. The first cause relates to economic factors. The reason why social security contributions surpassed the goods and services tax in the 1970s and became the largest tax category was that it was intrinsically linked to the economic situation at that time. At that time, the world economy suffered from the Great Depression, and France was no exception. To maintain its high social security expenditure, the French government had to levy new social security taxes, raise its withholding rate, and levy new taxes such as a social contribution surcharge, which pooled a large sum of social security taxes. However, to lower its tax burden, the French government had to reduce other taxes, thus resulting in a revenue shrinkage of goods and services tax. This explains why a social security tax has become and continued to maintain its status as the main tax category.

The second relates to political factors. From the above analysis, it can be seen that both the fluctuation of the proportion of social security contributions and the sudden increase of the ratio of income, profit, and capital gains tax occurred in the 1990s. These changes had much to do with the French reform during that period of time. France carried out a tax reform in the 1990s. The reform implemented some measures to increase the share of income tax. For example, it raised the rate of income tax on the sale of stocks that were to be purchased after September 20, 1995 and canceled the tax credit for insurance premiums paid for life insurance contracts that lasted for at least six years. Discounts on securities income were no longer applicable to interest paid in the form of bonds. These measures played a key role in the increase in the proportion of income tax. In addition, income tax in France, in terms of its proportion, has not become the main type of tax as in the United States because the economic system of France differs from that of the United States. France is a mixed economic system combining market regulation and government planning regulation. The government occupies most of the national income while assuming the responsibility of providing public services in education, health care, social security, and other fields. The low proportion of residents’ income is one of the factors that has caused France’s income tax to remain low. In the 1980s, France relaxed its restrictions and realized privatization. After a period of development, the ratio of income tax was increased, making the French tax structure more rational. The third relates to cultural factors. The “stagflation” economy in the 1970s also had a great impact on France. Although the economic downturn put considerable pressure on the government to bear high welfare expenditures, due to the influence of the French democracy concept, the government could not relieve this pressure by sacrificing the welfare of citizens but only sought a new way to manage it. Since it was impossible to reduce expenditures, the government had to choose to increase its

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income collection to solve the problem. The traditional French democracy thought, among other important factors, influences the French government’s decision-making.

3.4.1.3 (I) (i)

(ii)

Germany

Changes and Causes of the German Tax Structure The first stage: from 1870s to World War II. At this stage, Germany implemented a tax structure with indirect taxes as the main tax and gradually evolved into a tax structure with direct taxes as the main tax. As in many developed countries, indirect taxes such as the consumption tax consisted of the main types of taxes in Germany during this period. Prussia was the first to levy income tax as early as 1891, and other states followed suit. However, after World War I, Germany was defeated, facing huge indemnities of 226 billion marks as well as a series of sanctions. Together with the need to revive the domestic economy, the highly centralized German government decided to abolish the state income tax and to levy income tax and corporate tax, which laid the foundation for the modern income tax in Germany. In addition, Germany started to legislate its social security system in 1881, and over the ensuing decade, it established sickness insurance, accident insurance, disability insurance, etc. It took the lead in the establishment of a social insurance system among developed countries. However, at this time, income tax and social insurance contributions did not rise to the main levies. The percentages of income tax and social insurance tax of the total tax revenue were relatively low. Germany still adopted indirect taxes as the main tax in its tax system. The second stage: from World War II to 1980. After the rapid economic recovery and the improvement of the system, the tax structure of Germany embraced a new era, realizing the tax structure with direct taxes as the main tax. In 1968, Germany reformed its transaction tax into a business tax, which was what we now call the value-added tax, eliminating some drawbacks such as double taxation and making it more adaptable to the needs of economic development. After World War I, due to the German people’s hard work combined with effective economic policies and other factors, the German economy developed rapidly, providing a broad tax base for the expansion of income tax. At the same time, an increase in income tax was also needed for the sharp increase in military expenditures in World War II. In addition, in 1911, Germany added a new widow’s pension plan and enlarged the scope of disability insurance to include working-class people. It introduced unemployment insurance in 1927. In 1938 and 1957, it also built a pension system for craftsmen and farmers. The continuous improvement of the German social security system also created conditions for an increase in social security tax, which led to an upward trend in social security tax revenue. Revenue expansion from income tax and social security tax greatly changed the previous tax

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structure of indirect taxes as the main tax and uplifted direct taxes to the new main taxes of the tax system. The third stage: from 1981 to the present. During this phrase, Germany still had a tax structure with direct taxes as the main tax, but the social security tax replaced the income tax as the main type of tax. In the twentieth century, Germany had basically established a relatively complete social security system, and its coverage continued to roll out. Social security contributions became the main tax category, which was similar to France. In 1990, Germany also carried out income tax reform, lowered the personal income tax rate, nullified some tax incentives, increased investment through tax cuts, and stimulated economic growth, which was also one of the reasons for the decline in the proportion of income tax. Meanwhile, it also reflected that the German tax system underwent constant optimization and adjustment along with economic development. The Status Quo and Causes of the German Tax Structure Tax burden analysis. Germany is a country with a high macro tax burden. Since 1965, its lowest macro tax value was 31.5%, and the highest was close to 37%, with an overall rising volatility. Since the 1980s, it has relatively stabilized, fluctuating at approximately 35%, and the volatility was low (as shown in Fig. 3.24). Tax system analysis. Figure 3.25 mainly presents the changes in the German tax structure since the middle to late twentieth century. The current tax structure in Germany is dominated by direct taxes, and the fluctuation range is small, showing a steady development trend. Direct taxes maintain a ratio at approximately 70%, especially since the mid-twentieth century, wherein the proportion has been kept above 70%, which is an absolute advantage.

— —Germany tax burden Fig. 3.24 The percentage of total tax revenue to GDP in Germany from 1965 to 2013

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— — Direct tax

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—

— Indirect tax

Fig. 3.25 The proportion of direct taxes and indirect taxes in total tax revenue in Germany from 1965 to 2013

(iii)

(iv)

Tax category analysis. From the perspective of tax categories, it can be clearly seen that the tax structure in Germany has changed. Social security contributions basically show an upward trend and have been slightly adjusted since the twenty-first century (as shown in Fig. 3.26). In contrast, income, profit, and capital gains tax shows a downward trend, which is roughly symmetric with the changes in social security tax. The fluctuation of goods and services tax, which is the main tax of indirect taxes, is relatively minor, and the basic proportion of 25–30% mirrors that of income, profits, and capital gains tax. The ratio of property tax is very low, at less than 5%. Causal analysis. The first involves economic factors. The taxation structure of Germany is closely related to its own economic development. It was a miracle that Germany, as a defeated country in World War II, could recover in such a short time and resumed its status as a world power. Germany’s developed industrial system contributed a lot. Germany’s modernized energy, transportation, and telecommunications infrastructure was ranked first in the world in The Global Competitiveness Report 2009–2010 released by the World Economic Forum. Germany has a highly skilled and highly motivated workforce that plays a key role in economic development; German manufacturing industries have high production efficiency, and technology-intensive industries are developing fast. All these factors have contributed to Germany’s rapid economic development, which provides an effective guarantee for the collection of income tax and the construction of a social security system and offers a broad tax base. The increase in labor income also creates conditions for the

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— —Income, profits, and capital gains tax

— —Social security tax

— —Property tax

— —Goods and services tax

—×—wage, salary, and labor taxation

— —Other taxes

Fig. 3.26 The share of major taxes as a percentage of total tax revenue in Germany from 1965 to 2013

collection of personal income taxes. The higher level of the German economy and the industrial structure dominated by manufacturing and service industries are all important factors in the current tax structure, which also enables Germany to afford a heavy tax burden. The second is related to political factors. Germany is a developed country, and its per capita income also stays at quite a high level. The government’s policy objectives are not confined to economic growth but place more emphasis on fairness. Therefore, Germany constantly improves its social security system and raises the welfare level of the whole population. Social security contributions and income taxes are more in line with the government’s policy objective of pursuing fairness. Therefore, the government adjusts its tax system and structures the tax system with social security contributions as the main tax category and income tax as the auxiliary tax category. In addition, Germany’s tax collection and administration are professional, and taxation services are characterized by high efficiency and high quality. Germany has set up a financial court under federal fiscal law, which provides a strong backing for tax collection and management. With the improvement of the German tax collection and administration, income tax with higher requirements on the level of collection and management has become a more important tax. The high level of collection and

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administration also avoids injustice caused by taxation that can only be collected from taxable enterprises. The third is the cultural factor. Germany has a tax audit system, independent of the tax collection and administration department. The audit bureau is a deterrent, which makes taxpayers afraid to evade taxes because once they are investigated by the audit bureau, they will not only be ostracized by others but also feel personal shame. This is determined by German citizens’ conscious awareness of taxation. German culture has the same contractual spirit as the French and American cultures. It is natural for them to pay taxes and enjoy government services. Obligations and rights coexist. Thus, Germans rarely evade paying taxes, which reduces the loss of tax revenue.

3.4.1.4 (I) (i)

(ii)

(iii)

Japan

Changes and Causes of Japan’s Tax Structure The first stage: Before World War I. In 1868, Japan carried out a revolutionary reform, the Meiji Restoration. Before the Meiji Restoration, the tax system in Japan was in the ancient stage of direct taxes, with land tax as its main feature. At this time, the proportion of land tax revenue in the total tax revenue exceeded 80%, in an absolute dominant position. During the Meiji Restoration period, Japan upheld the strategy of military expansion, and the ensuing substantial increase in fiscal expenditures put great pressure on income. As a result, many new taxes were set up in Japan, such as alcohol and tobacco taxes in 1875, income tax in 1887, business tax in 1896, and inheritance tax in 1905. From then, the revenue of the alcohol tax increased greatly because of its rising tax rate. By 1899, the revenue share of the alcohol tax exceeded that of the land tax and became the largest tax category. The second stage: from World War I to 1949. During this period, Japan experienced two world wars. As a main combatant, Japan was confronted with a large military expenditure in its finance. In 1913, personal income tax rate was raised. In 1940, Japan implemented drastic reforms to its tax system: the direct taxes were divided into a comprehensive income tax system and a classified income tax system. Personal income became the focus of collection, and its tax rate increased continuously, with the highest, up to 74%, levied in 1944. Regarding corporate income, the implementation of an 18% corporate tax was announced. For indirect taxes, Japan streamlined the alcohol tax by setting different tax rates according to the attributes of various commodities, thus changing the uniform tax rate system of goods tax. In 1948, Japan levied a consumption tax, but it was abolished in 1949 because of the complexity of tax procedures and the difficulty in collection. Through a series of reforms, the proportion of direct tax revenue in Japan reached 64% by 1941, which marked the establishment of Japan’s direct tax system. The main types of taxes of this system were personal income tax and corporate income tax. The third stage: from 1949 to the present. After 1949, the Japanese tax structure underwent several changes. The first change took place from 1949 to the end

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of the 1960s, with income tax as the main category, followed by goods and services tax and social security contributions, which were still low then. The second change lasted from the end of the 1960s to the end of the twentieth century, wherein social security contributions exceeded the goods and services tax and became the second largest tax category after income tax. The third change began with the start of the twenty-first century when social security contributions surpassed income tax and topped the largest tax category. Due to the intervention of the United States, the report on Japanese taxation proposed by Shoup in 1949 played a pivotal role in conceptualizing and structuring the Japanese tax system after World War II. It includes the following major themes: establishing a tax system with income tax as the main tax; further expanding the tax base and adopting a progressive tax rate; reducing the tax rate of personal income tax; implementing an automatic declaration system and blue declaration system, etc. Japan carried out tax reform based on a report in 1950. Since then, income tax has become the main feature of Japan’s taxation, which indicates that Japan embarked on the road to a modern tax system. To address the economic crisis occurring in the 1970s. Japan made some adjustments to the tax system and introduced some new taxes, such as automobile weight tax and aviation fuel tax, and raised the tax rates on alcohol and automobiles. In the 1980s, considering the huge pressure brought by the high tax burden during the war and the general backdrop of individual tax rate lowered internationally, Japan further reformed its tax system by levying consumption taxes to further increase the portion of indirect taxes, gradually reducing income, corporate, and inheritance tax rates, reducing tax burden, and so on. In 1991, Japan’s legislation reformed the land tax system, newly established land price tax, and adjusted taxation on land-related fixed assets. The tax reform in 1994 cut down the income tax of ordinary workers, strengthened consumption taxation, and established a new local consumption tax, which solidified and boosted the tax reforms that had taken place since the 1980s. Japan placed more stress on social equity and carried out a series of reforms in the construction of a social security system, driving Japan towards an optimal tax system. (II) (i)

(ii)

The Status Quo and Causes of Japan’s Tax Structure Tax burden analysis. A clear upward trend occurs in Japan’s macrotax burden, and the overall increase has been large, rising 12 percentage points from 17.2 to 29.5%. However, the macro tax burden never exceeded 30% and did not exceed the average of the OECD countries in the corresponding period. Japan is not a country with a high macro tax burden among OECD countries (as shown in Fig. 3.27). Tax system analysis. As seen from Fig. 3.28, the current Japanese taxation is mainly structured by direct taxes, and the proportion of direct taxes is higher than those of Germany and France. After the 1970s, direct taxes on average accounted for more than 80%, even up to 87.22%. Thus, Japanese taxation is typical of direct taxes as the main tax. The ratio of direct taxes underwent a general tendency of increasing and decreasing, without large fluctuations. Direct taxes still constituted the dominant source of revenue.

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— —Japan tax burden Fig. 3.27 The proportion of total tax revenue to GDP in Japan from 1965 to 2012

— —Direct tax

— — Indirect tax

Fig. 3.28 The proportion of direct taxes and indirect taxes in total tax revenue in Japan from 1965 to 2012

(iii)

Tax category analysis. The tax categories and tax structure in Japan have changed significantly. The income, profit, and capital gains tax has declined considerably since the 1990s, and since the twenty-first century, it has gone up and down and amounted to approximately 30 to 40 percentage points. Social security contributions have been on the rise, with a sharp surge since the mid1960s. By the end of the 1990s, it had exceeded income tax and become the

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main tax category. Over the past 50 years, its growth rate reached as high as 19.81 percentage points. The proportion of goods and services tax first dropped and then climbed up, from the second largest tax category to the third largest tax category, with a ratio of less than 20%. Japan has changed from a unitary income tax structure to a dual tax structure with income tax and social security contributions as the main taxes (as shown in Fig. 3.29). Causal analysis. The first is related to economic factors. Like Germany, Japan was also a defeated country in World War II. However, because Japan adopted a development model suitable for its own national conditions, coupled with external assistance from the United States (typically exemplified by the Shoup report), the Japanese economy was quickly restored after World War II. Japan developed so rapidly that it rose sharply as a leading part of the global economy in Asia. Among all industries, the tertiary industry grew the fastest, followed by the secondary industry. Such an industrial structure conforms to the trend of economic development, which is conducive to the growth of GDP and the improvement of people’s living standards, thus facilitating the collection of income taxes. In addition, Japan attached much importance to the construction

— —Income, profits, and capital gains tax — —Social security tax — —Property tax

— —Goods and services tax

—×—wage, salary, and labor taxation

— —Other taxes

Fig. 3.29 The proportion of different main taxes in total tax revenue in Japan from 1965 to 2012

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of a social security system along with its economic rise, which made income tax and social security contributions the main tax categories. The second relates to political factors. As a centralized country, the Japanese government is empowered to implement strong macroeconomic regulation and control in response to changes in the economic situation, which is also an institutional factor for Japan’s repeated tax reforms. Through tax reforms, Japanese taxation was constantly adjusted and optimized. Moreover, in tandem with postwar economic restoration, the government’s policy objectives also favored equity, such as the national pension system established in 1961 and the reduction of the income tax rate, which also had a deep impact on Japan’s industrial structure. The third is the cultural factors. The Japanese always cherish a sense of respect for science, actively learning from the West with an open mind. Income tax is what they learned from Western countries. Japan carried out many reforms to its tax system according to its own national conditions and the Shoup reform proposals. With continuous improvement and optimization in its tax system, Japan made active efforts to move towards the taxation direction of the U.S. and other Western countries and built up the present tax structure.

3.4.1.5

Brazil

Changes and Causes of Brazil’s Tax Structure (i)

36

The first stage: from 1889 to the 1960s. At this stage, the Brazilian taxes were primarily indirect. Brazil introduced the tax system of advanced Western countries and gradually established a tax structure with indirect tax as the primary tax. It began to levy income tax in 1924. After the tax reform in the 1960s, the tax base of income tax was broadened by redefining the marginal tax rate and eliminating tax exemption, which was of great significance to the growth of income tax revenue and the improvement of the tax system. The social security system was also established amid the reform, and the collection of social security contributions further raised the proportion of direct taxes. Due to huge losses incurred in the “coffee economy” in the economic crisis of 1930 and the war, its tariff revenue suffered a heavy hit, and the proportion gradually declined. In 1964, the consumption tax was replaced by the tax on industrialized products,36 and in 1967, the sales tax was replaced by tax on the circulation of goods.37 Thus far, Brazil has gradually achieved a successful transition from the consumption tax and sales tax to the value-added tax. Thanks to the above factors, the share of direct taxes steadily rose, while the share of indirect taxes

The Brazilian tax on industrialized products is named IPI, short for Imposto sobre Produtos Industrializados, which is Portuguese—Note by translators. 37 The Brazilian tax on the circulation of goods and transportation and communication services is named ICMS, short for Imposto sobre Circulação de Mercadorias e Serviços, which is Portuguese— Note by translators.

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— —Brazil tax burden Fig. 3.30 The proportion of total tax revenue to GDP in Brazil from 2002 to 2013

(ii)

decreased, generating a proportional balance between the two and a shift to dual taxation. The second stage: from the 1970s to the present. At this stage, Brazil kept a dual tax structure, which attached equal importance to both direct and indirect taxes. In particular, after the 1980s, the Brazilian tax structure was mainly characterized by an equal ratio between direct and indirect taxes, both fluctuating at approximately 50% and neither enjoying overwhelming superiority over the other.

The Status Quo and Causes of Brazil’s Tax Structure (i)

(ii)

Tax burden analysis. Brazil’s macrotax burden changed considerably, rising by approximately 25 percentage points in just 11 years, moving from a lowtax country to a high-tax country. Its tax burden is not only heavier than many developing countries but also exceeds the average of OECD countries, ranking second in the Latin American region, second only to the highest-tax Argentina (as shown in Fig. 3.30). Tax system analysis. The proportion of direct and indirect taxes in Brazil differs greatly from that of developed countries. Since the early 1990s, although direct taxes have been slightly higher than that of indirect taxes in proportion, their difference has always stayed very small, and they are roughly in a state of equilibrium. Around the 50 percentage points, the two present a symmetrical distribution, no obvious trend of change is observed, and both remain relatively flat. Therefore, in terms of its tax system, Brazil’s tax structure maintains relative stability and is a dual tax structure with equal emphasis on both taxes (as shown in Fig. 3.31).

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— —Direct tax

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— — Indirect tax

Fig. 3.31 The proportion of direct taxes and indirect taxes in total tax revenue in Brazil from 2002 to 2013

(iii)

(iv)

Tax category analysis. In terms of tax category, Brazil’s tax system is still in a stable state. No conspicuous change occurred to the proportion of each tax, and the fluctuation was small. Although slight variations took place, the status of various tax categories in Brazil remained basically unchanged. Only the proportion of goods and services tax showed a slight downward trend, which was roughly reduced by 7 percentage points. Compared with other taxes, the change was significant. The proportion of income, profit, and capital gains tax presented an upward trend with a slight fluctuation, while other taxes basically remained stable. Although the proportion of direct taxes exceeded that of indirect taxes, the proportion of goods and services tax as an indirect tax took a dominant position at the tax category level. However, its proportion decreased, which did not affect its status as the main tax class (as shown in Fig. 3.32). Causal analysis. The first is the economic factors. At the beginning of the twentieth century, rubber and coffee were the dominant industries in the Brazilian economy. These products were sold to the outside world to gain profit, and tariffs naturally became the main tax. The “Brazilian Miracle” spanned from 1968 to 1974, during which Brazil’s industrial growth rate considerably overtook that of agriculture and plantations. The successful transformation of its industrial structure relatively lowered the proportion of tariffs. With the rise of the industrial economy, its national income increased, income tax accordingly began to become an important source of tax revenue, and the tax base

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— —Income, profits, and capital gains tax — —Social security tax — —Property tax

— —Goods and services tax

—×—wage, salary, and labor taxation

— —Other taxes

Fig. 3.32 The proportion of major taxes in total tax revenue in Brazil from 1990 to 2013

expanded with the development of the industrial economy. In the 1980s, the Brazilian economy fell into a downturn. Then, in 1994, Brazil initiated the “Real Plan”,38 which not only stabilized its economic growth but also effectively adjusted the industrial structure. The related goods and services tax was also increased by a large margin. The second relates to political factors. Brazil implemented a collection method consisting of a computer documentation system, taxpayers’ voluntary declaration, and tax collection by banks. During the 1960s reform, Brazilian tax collection and management were strengthened, penalties intensified, and tax payment deadlines were strictly restricted. In 1993, Brazil established the “SISCOMEX System”, which enabled the sharing of tax information between the private sector and the management sector. As a result, a paperless office environment was successfully fostered, facilitating the communication of information, thus providing an important guarantee for further improving the efficiency of collection, administration, and declaration and achieving outstanding effects. According to the data of the International Monetary Fund, Brazil ranks first in taxation capacity among 45 developing countries.

38

“Plano Real” in Portuguese—Note by translators.

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Forceful measures were implemented to collect and administrate taxes, which effectively facilitated the growth of direct tax revenues, played a key role in the adjustment and transformation of the tax structure, and effectively maintained the stability of the dual tax structure. The third relates to cultural factors. Brazil’s tax administration is service-oriented and coupled with the implementation of collection and management measures, Brazilians have developed a good sense of their responsibilities in regard to paying taxes. The shift in taxpayers’ tax awareness has also affected the changes in the tax structure.

3.4.1.6

India

Changes and Causes of the Indian Tax Structure (i)

(ii)

The first stage: from the 1880s to the 1980s. During this period, the Indian tax structure had indirect taxes as its main tax, and the status of indirect taxes was continuously strengthened. The proportion of indirect taxes was higher than that of direct taxes, and the gap between the two was widening. As early as 1886, India introduced income tax from Britain and then revised it in 1962. It carried out a large-scale tax reform in the 1980s and implemented a revised value-added tax system in 1986. In 1958, wealth tax was levied, ensued with inheritance tax started in 1963 and excess profits tax in 1964. Tariff, consumption tax, and sales tax, with high tax rates and wide tax base, were the main classes of tax in India (as shown in Fig. 3.33). The second stage: from the 1990s to the present. Although the tax structure at this stage was still dominated by indirect taxes, the main status of indirect taxes was waning, which meant that the tax structure underwent constant adjustment. From the development history of the tax structure in developed countries, the reduction of the proportion of indirect taxes accorded with the development trend of the tax structure. This stage represented the transitional period of India taxation from indirect taxes as the main tax structure to direct taxes as the main tax structure, as well as the period of tax structure optimization and adjustment. This reflected that the development of the Indian tax structure proceeded in line with the historical tide.

The Status Quo and Causes of the Indian Tax Structure (i)

(ii)

Tax burden analysis. India’s macro tax burden remains at a low level, not exceeding 18% at its highest and less than 10% at its lowest, deserving to be called a low-tax-burden country. India’s macrotax burden shows a distinct upward trend of fluctuation, and the fluctuation range is large. Tax system analysis. From the perspective of the tax system, India’s tax structure is primarily composed of indirect taxes and supplemented by direct

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— —India tax burden Fig. 3.33 The proportion of total tax revenue to GDP in India from 1965 to 2012

(iii)

taxes, which is exactly the opposite of those developed countries analyzed above. The proportions of the two taxes showed a trend of first increasing and then decreasing. The maximum gap between the two was 73.74%, while the minimum was only 24.66%. Fluctuations were large, presenting a spindleshaped change, and the turning point took place in the 1980s. Since the twentyfirst century, the proportions of the two taxes have gradually developed towards a more balanced direction, moving from a tax structure with indirect taxes as the primary tax to a dual tax structure with both direct and indirect taxes (as shown in Fig. 3.34). Tax category analysis. Revenue from goods and services taxes in India takes an absolute proportional advantage. Though with a downward trend, it still accounts for the highest proportion. The proportion hovered at approximately 60% in recent years and dropped by more than 10 percentage points over the past two decades, with significant changes. Income tax, as a direct tax, demonstrates an upward trend. Its proportion rose from less than 20% in the mid-1990s to nearly 40%. The trends of these two major taxes reflect the changes in the structure of the Indian tax system. The gap between direct tax and indirect tax is gradually narrowing down, and the tax structure with indirect tax as the main type is being replaced by the dual tax structure. For the goods and services tax, the ratio of the consumption tax presents a downward trend, but that of the sales tax is still rising, even slowly beating the consumption tax and becoming a main component of indirect taxes. The proportion of tariffs falls below 10%, and its status is quite different from that of the initial stage of the tax system (as shown in Fig. 3.35).

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— —Direct tax

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— — Indirect tax

Fig. 3.34 The proportion of direct taxes and indirect taxes in total tax revenue in India from 1965 to 2012

Tariff

Sales tax

Consumption tax

— — Goods and services tax — — Income tax — — Property tax Fig. 3.35 The proportion of major taxes in total tax revenue in India from 1995 to 2012

(iv)

Causal analysis. The first cause is economic factors. The main type of tax in India is indirect tax, which enjoys the merits of a wide range of taxation and a high tax rate. Indirect tax revenue increases along with economic development. India’s income tax design is too complex and involves a large number of tax

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incentives so that the proportion of direct taxes is reduced and the gap between the two tax types is widening. The second relates to political factors. Tax collection and administration in India is still at a lower level, and the phenomenon of tax evasion is very serious, leading to a serious loss of income tax revenue with high requirements for collection and management. In the 1990s, India carried out a tax reform. The tax rate was lowered and the amount of exemptions was increased, which improved taxpayers’ tax compliance and citizens’ awareness of paying taxes voluntarily. In addition, the reform enhanced the conditions of tax collection and management in ways such as improving the tax information system and reducing information asymmetry in the process of tax payment. A permanent account number was applied to identify each taxpayer, which strengthened the supervision and management of taxpayers and regulated their tax payment behaviors. Therefore, the reform effectively avoided the loss of taxation revenue. The proportion of direct taxes gradually increased and achieved U-shaped development, thus changing the excessive ratio of indirect taxes. India’s tax system was transformed from a system with solely circulation tax as the main tax to a tax structure with circulation tax as the primary tax and income tax as a supplement. The third relates to cultural factors. Because India had been under British colonial rule for a long time and suffered from the exploitation and oppression of British colonists, its tax system was built relatively late, and Indian people’s tax awareness was minimal. For this reason, there may be negative emotions and reluctance to pay taxes. With the continuous improvement and development of the tax system, especially after the tax reform in the 1990s, national tax compliance gradually improved, which also provided necessary conditions for the transformation of the tax structure.

3.4.2 Synchronic Analysis of Tax Structure in Different Countries 3.4.2.1 (I)

A Comparative Analysis of Tax Structure in Different Countries

Comparison of tax burden levels

The macro tax burden refers to the total tax burden of a country, which is measured here by the ratio of the total tax revenue of a country to its GDP in a certain period of time. As shown in Fig. 3.36, in the selected ten years of the twenty-first century, except for Brazil, the tax burden levels of various countries were basically stable, and the fluctuation range was relatively small. France and Germany are both countries with a high tax burden. Their tax burden levels are above the average of OECD countries, above 30% for Germany and above 40% for France, and there remains an upward trend for both. Japan and the United States are median-tax-burden countries, approximately 20–30%, lower than the OECD average. Japan’s burden is slightly higher than that of the United States. India is a typical low-tax country with a tax

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— — Brazil — — India

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— — France — —the United States

—×— Japan — — Germany — — OECD Average Fig. 3.36 A comparative analysis of tax burden in different countries (%). Source OECD data and Public Finance-Statistical Yearbook India

burden below 20%. The country that is especially unique in this regard is Brazil, whose tax burden has risen, turning it from a low-tax-burden country to a high-taxburden country (as shown in Fig. 3.36). (II)

Comparison of Tax Systems

(i)

Through the lens of the tax system, the general trend of the change path of the tax structure can be seen. The evolution path of tax systems can be roughly derived from the history of change in the tax structures of developed countries. The first is the ancient direct taxation phase in which a land tax is the main type of tax. After that, with the development of capitalism, Western countries pursued Adam Smith’s free economic policy, levied consumption taxes and other taxes, and levied high tariffs to protect the domestic capitalist industry and commerce, forming a tax structure with tariffs, consumption taxes, and other indirect taxes as the primary tax. However, as a result of hindering the free flow of capital and labor, tariffs became an obstacle to the further development of capitalism. The shortcomings of indirect taxes became increasingly apparent. In response to the need for military spending following the outbreak of world wars, the state gradually reduced tariff rates and imposed income taxes. Since income tax has the advantages of extensive and fair taxation, it soon became the primary tax type, and the tax structure entered the stage wherein modern direct taxes were utilized as its main tax. After that, with the establishment

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of various international cooperative organizations and the widespread need to solve economic crises, many countries carried out tax reforms and further improved and optimized their existing tax structures. From the perspective of the tax system, the changes in the tax structures of various countries are compared. From the perspective of the tax system, the tax structures of various countries commonly follow the general trend of tax structure change, that is, from ancient direct taxes to indirect taxes and then to modern direct taxes. The differences are as follows.

First, the transition from one tax structure to another took place at different time points among different countries. The United States and Japan shifted from indirect taxes as the primary tax to direct taxes as the primary tax earlier, approximately before and after World War I. In comparison, tax structure conversion in Germany and France was relatively late. Only during or after World War II did they gradually accomplish the transition. Brazil and India have not yet completed this transitional process, and indirect taxes are still the dominant source of revenue. Second, different countries are currently at different stages. Developed countries such as the United States, France, Germany, and Japan have basically switched to the stage of using modern direct taxes as the main tax, while the transition in developing countries such as India and Brazil, which are still at the stage of using indirect taxes as the main tax, is not yet finalized. (iii)

From the perspective of the tax system, the current situations of the tax structures in different countries are compared. Comparing the tax structures of the aforementioned six countries, it can be observed that they generally develop in accordance with the above trends, yet these countries are at different stages of development due to the uniqueness of their own national conditions. The six countries can be roughly grouped into three types.

The first type, represented by developed countries such as the United States, France, Germany, and Japan, has direct taxes as the main tax. These countries have developed for a long time, and their economies are at an advanced stage. The proportion of direct taxes is obviously higher than that of indirect taxes, and the gap between the two has not decreased. In France, the gap even has an expanding tendency. However, direct taxes here are modern direct taxes with income tax and social security tax as the primary tax, rather than ancient direct taxes with land tax as the main tax. The second type is the dual tax structure represented by Brazil, which is still amid the transitional stage of its tax structure reform, moving from indirect taxes as the main tax to modern direct tax as the main tax and remains slightly behind developed countries. The gap between the proportion of direct taxes and indirect taxes in Brazil is very small and roughly balanced. There is no absolute dominant tax system in Brazil; thus, there is a dual tax structure with both direct and indirect taxes. The third type is the tax structure with indirect taxes as the main tax, represented by India, which is still at the second stage and develops slowly. Indirect taxes make up the dominant contribution to Indian revenue, but the trend line shows that the

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proportion of indirect taxes is tailing off. India is on its way to alter to a dual tax structure like Brazil and may also continue to directly transition to a stage of modern direct taxes as the main tax in a short period of time (Figs. 3.37 and 3.38).

Fig. 3.37 The proportion of direct taxes in total tax revenue in six countries from 1990 to 2013

Fig. 3.38 The proportion of indirect taxes in total revenue in six countries from 1990 to 2013

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Comparison of Tax Categories (i)

The paths of change in the tax structures of various countries are compared from the perspective of tax categories. In view of tax categories, some similar characteristics of the structural changes of tax systems in different countries can be discerned.

First, income taxes, especially individual income taxes, play a key role in the transition of the tax structure from indirect taxes as the main tax to direct taxes as the main tax. The United States reintroduced income taxes in 1913, and Germany levied income taxes in 1891. The Japanese reform in 1940 focused on the collection of personal income taxes. France expanded its income tax during World War I. On the one hand, income tax was levied and expanded to suffice the costs of war; on the other hand, it was adapted to the needs of easing the contradiction between indirect taxes and capitalist development and conformed to the development trend of capitalism. Therefore, with the development of the capitalist economy, the improvement of domestic living standards, and the improvement of the level of collection and management, the proportion of income tax climbed up and finally topped the leading factor in the transformation of tax structure. Second, social security contributions also played an inimitable role in the process of the tax structure transformation. With the gradual development of the capitalist economy, while various countries achieved rapid and steady economic growth, their governments set forth to focus on the establishment of social security mechanisms to improve the welfare of the people. Particularly in developed countries, such as France and Germany, social security systems cover many fields, such as pensions, medical treatment, unemployment, disability, retirement, and childbearing. Basically, a sound social security system covering a wide range of areas from “cradle to grave” is built. Although the social welfare levels of various countries differ, they are all working on the construction and improvement of social security systems and the expansion of their coverage. It is precisely because of the incremental progress of social security systems that the proportions of social security contributions are also increasing and representing relatively high proportions of the tax categories. Social security contributions are the main tax category in France and Japan, and the proportions of social security contributions of the two countries rank first, followed by Germany, the United States, and Brazil. Japan’s social security contributions are the most representative, with a low proportion before the 1960s. At the end of the twentieth century, it exceeded the goods and services tax, becoming the second largest class of taxes. After entering the twenty-first century, it overtook income tax in proportion and grew into the primary type of tax; the increase in the ratio of social security contributions played a pivotal role in the changes of the tax structure and its optimization and adjustment. Third, the proportion of goods and services taxes has declined to varying degrees. In the process of the tax structure transformation, the change in the proportion of goods and services tax is also very important. Generally, the ratio of goods and services tax shows a downward trend. Tariffs played an important role in protecting

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the development of domestic industry and commerce in the early history of capitalist development. However, with the development of the capitalist economy, high tariffs turned into shackles hindering the free flow of capital and labor in the international arena. Various countries reduced tariffs to attract foreign investment while also investing capital in higher profit areas abroad. In particular, the establishment of multinational corporations and economic cooperation organizations both between regions and globally requires lowering or even eliminating tariff barriers. The reduction of tariffs conforms to the development trend of capitalism and advances the transformation of the tax structure from indirect taxes as the main tax to direct taxes as the main tax. The implementation of value-added tax in the tax reform of various countries has greatly diminished repeated taxation, which has led to a decrease in the revenue and proportion of indirect taxes. For consumption taxes, the tax reform of various countries tends to lower the consumption tax rate of ordinary commodities. It is only for some high-end luxury goods that a high tax rate is imposed, which reflects the governments’ policy change from pursuing efficiency to pursuing fairness. The decline in the proportion of these relatively high types of taxes on goods and services has led to a gradual decline in the proportion of goods and services tax and a change in the tax structure. (ii)

From the perspective of tax category, the current situations of the tax structures in various countries are compared. In recent years, although the United States, France, Japan, and Germany have all adopted a tax structure with direct taxes as the main tax, their main types of direct taxes are not exactly the same. In terms of tax structure, there are still some differences among the four countries, which can be roughly divided into two categories. The first is represented by the United States, wherein the main type of tax in the direct tax system is income tax, and its proportion is much higher than the other taxes with an absolutely large margin. The second category is represented by France, Japan, and Germany, wherein the main tax in the direct tax system is social security contributions, whose proportion recently took up more than 35%, and Japan’s even exceeded 40%. The second largest type of tax in Japan and Germany is income tax, running opposite to the United States. The second largest type of tax in France is the goods and services tax. The proportion of income tax occupies third place, which is lower than that of indirect taxes (as shown in Fig. 3.39).

The proportion of direct taxes in India and Brazil is lower than that of indirect taxes, but the proportion of indirect taxes in Brazil is lower than that in India, presenting the feature of a dual tax structure. The ratio of direct taxes such as income tax and property tax in Brazil and India is lower than that of goods and services tax. The proportion of income tax in Brazil is lower than that in India, and the gap is large (as shown in Fig. 3.40). Comparing tax structures among various countries, it can be noted that the proportion of property tax in the total tax revenue of each country is relatively low. Although property tax amounts to more than 10% in the United States, it accounts for less than

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Fig. 3.39 The proportion of income tax in total revenue in six countries from 1995 to 2013

Fig. 3.40 The proportion of goods and service tax in the total tax revenue of six countries from 1995 to 2013

10% in other countries, even less than 5% in Germany, and still shows a downward trend. In India, it is less than 1%, taking up a meager share (as shown in Fig. 3.41).

3.4.2.2

The Causes for the Tax Structure Changes

The change of a tax structure is caused by many factors. This includes economic factors such as the economic development level and industrial structure of a country,

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Fig. 3.41 The proportion of property tax in the total tax revenue of six countries from 1995 to 2013

as well as political factors such as changes in government functions and policy objectives, government tax reform, and tax collection and management. It also involves cultural factors such as the historical and cultural traditions of a country and people’s tax awareness. The comprehensive influence of various factors gives rise to changes to tax structures and different characteristics to the tax structures of various countries. (I) (i)

Economic Factors The level of economic development. The level of economic development of a country plays a decisive role in the tax structure of a country. It is not only the main factor that brings about the change of the tax structure in different countries but also one of the main factors that generates differences in the tax structures of different countries in the same span of time. Generally, according to the level of per capita GDP, an indicator of the level of a country’s economic development, countries are divided into four levels: low-income countries, lower middle-income countries, upper middle-income countries, and high-income countries. The higher the per capita income level is, the higher the proportion of income tax in the tax structure. In comparison, a lower proportion of goods and services tax suggests a tax structure dominated by direct taxes. The reason is that the commodity economy of countries with low per capita GDP is in the early stage of development. Commodity transactions are relatively highly frequent, which has a natural advantage for the taxation of turnover. Therefore, in countries with lower income levels, the proportion of indirect taxes with turnover tax as the main type of tax is higher. With the improvement of the economic development level, the income of the people and their enterprises increases, which creates a broad and abundant tax base for the collection of income tax and plays an important role in the increase of the

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share of income tax in the total tax revenue. The per capita GDP of developed countries such as the United States, France, Germany, and Japan has reached the high-income threshold, so they present a tax structure dominated by direct taxes, while the per capita GDP of Brazil and India is much lower than that of developed countries, so the proportion of indirect taxes in the tax structure is relatively high. Industrial structure. The industrial structure of a country is also somewhat related to its tax structure. Generally, the economic structure of developing countries is mainly composed of traditional industries, and the proportion of secondary industries is often higher than that of tertiary industries. Some countries are even based on the economic structure of agriculture and animal husbandry, and their economic structure model is relatively simple. Therefore, its tax structure usually contains a higher proportion of indirect taxes. Most developed countries celebrate a complex economic structure, and tertiary and high-tech industries account for a large proportion, which creates conditions to collect complicated income taxes. Before World War II, as a single product economy dependent on the export of agricultural and mineral products, Brazil mainly relied on exporting its own primary products, such as sugar, gold, coffee, and rubber, to foreign countries as the main economic source. Therefore, tariff became the primary tax. Although the “Brazilian Miracle” reduced the proportion of indirect taxes in Brazil, due to the middle-income trap in Latin America, the Brazilian economy has been seriously declining since the 1980s. As a result, it is difficult for the income tax proportion to achieve a breakthrough in its development. Therefore, it has never exceeded the proportion of goods and services tax. Brazil keeps a dual tax structure today. Political Factors Government functions and policy objectives. During the embryonic period of capitalism, the government adopted a mercantilist policy so that capitalism could build up primitive accumulation. Currency was considered wealth, so the government encouraged exports and restricts or even prohibits imports. To protect wealth in the form of currency, high tariffs were levied to secure the development of domestic industries, thus breeding a tariff-based tax structure. During the period of liberal capitalism, the market mechanism took shape, and Adam Smith’s classical liberalism theory was prevalent. The government no longer interfered excessively in the economy but acted as a “watchman”. Its functions were limited to the protection of national and personal security, the construction of public facilities that individuals were incapable or unwilling to perform, and the free development of the market economy. The proportion of tariffs was greatly reduced, the commodity economy developed rapidly, goods and services taxes developed, and income taxes began to be levied and played a functional role. When the economy proceeded into a period of monopoly capitalism, the lessons of the economic crisis drove the government to reconsider the role of “visible hands”. Keynesianism was favored by the government, which resumed its intervention in the economy and even

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(iii)

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expanded its functions. However, “stagflation” in the 1970s posed challenges to Keynesianism, and the concept of “government failure” arose. There was a slew of schools of thought, such as monetarism and the supply side. The government functions once again shrank, and the market and the government worked together. Economic development and economic crises challenged the government’s functions. To appease the public, encourage its people to step out of the shadow of economic crises, and avoid social chaos, the government has paid increasing attention to the improvement of people’s welfare and to the realization of social equity. As a result, the proportions of personal income tax with a progressive tax rate and social security contributions in tandem with the improvement of the welfare level became increasingly higher. Finally, both comprised the primary tax types in developed countries, and the “automatic regulation function” of income tax further reflected the objective of fairness. The market economy of developing countries, such as India and Brazil, is not as developed as that of developed countries such as the United States. The principal function of the government is still to develop its economy, with efficiency as its foremost goal, and to exercise more interventions. Goods and services taxes are the main type of tax to increase the government’s income and thus enhance its ability to intervene. Therefore, the proportion of social security contributions is not high, and the goods and services tax is still the major tax category. Government tax reform. In the process of changing the tax structure of various countries, tax reforms have had significant effects on the improvement of taxation structures. For example, the reform of France in the 1990s was conducive to raising the proportion of income tax, which played a certain role in optimizing its taxation. The large-scale tax reform carried out by Japan in 1940 substantially increased the proportion of direct taxes, overhauled Japan’s tax structure, and achieved the transformation of the tax structure. Each tax reform works to adapt the existing tax system more to the needs of economic development at that time. Tax reform is arguably a transformation in the superstructure, and the changing economy is the economic basis of the change in the superstructure. Every tax system that comes to terms with changes in the economy constitutes another optimization and upgrade of the tax structure. Level of collection and administration. Whether a tax can become the main tax category depends not only on the institutional setting but also on the role of the actual collection and administration level of the taxation department. If a country has established a relatively sound tax collection and management system, it can guarantee that the full amount of tax revenue will be collected on time. Only then can it be decided whether the tax that is actually dominant is the tax category that the government wants. Otherwise, a large amount of tax evasion will lead to a significant discrepancy between the actual situation and the expected result. A sound collection and administration system should subsume the following aspects. The first is to have a sound legal security system. Tax collection must be legislated by law. The principle of law-based taxation requires that taxation should be legally enforceable,

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and then taxpayers will pay taxes in turn. The second is to have professional tax collectors. Tax collectors need not only excellent professional knowledge and skills but also strict self-discipline and can levy taxes according to law. Neither abuse of power nor neglect of duty may take place to ensure the full collection of tax revenue. Third, the relevant supporting facilities should be in place. After years of exploration, developed countries have established relatively sound tax collection and management systems and facilities suitable for their national conditions, which can effectively avoid or reduce the phenomenon of tax evasion. They also develop a relatively complete system to ensure the collection and management of complex income taxes, which firmly safeguard the primary position of direct taxes. The conditions of tax collection and administration in developing countries are relatively outdated, and there are a large number of people employed in agriculture. It is difficult to collect and manage income tax. Therefore, these countries are only able to levy taxes on goods and services, which a lower level of collection administration can do. However, with the progress of the collection and management facilities and the improvement of their systems in these countries, the level of collection and administration is gradually enhanced, the phenomenon of tax evasion is diminishing, and the ability to collect income tax is improved, which will leave a certain effect on the changes in tax structure. Cultural Factors History and culture. The historical and cultural background of a country also has an impact on its tax system. From as early as ancient Greece and Rome, Western countries practiced and understood the concept of contracts. It can be said that the spirit of contract is the core element of Western culture. A contract is a promise or a series of promises guaranteed by law. The spirit of contract places emphasis on equivalence and compensation, which, if applied to taxes, embodies the consistency of rights and obligations. Citizens sign contracts with the state, and thus, citizens enjoy the security, protection, and services provided by the state. As a cost, citizens must pay taxes to ensure that the nation has sufficient funds to provide these services. Therefore, it is natural to pay taxes in Western cultures. The spirit of contract also includes the spirit of freedom and equality. Public ownership, private ownership, and clear property rights play a restrictive role in preventing tax collectors from levying taxes arbitrarily. Western culture attaches great importance to privacy and personal space. It is illegal to enter private places without permission. This kind of cultural rule-of-law is more conducive to the protection of taxpayers’ interests, and taxpayers are more willing to pay taxes when they are protected. Therefore, there are few cases of tax evasion in Western countries, which pushes the change of tax structure toward the direction of government regulation. However, many developing countries suffer from economic devastation and lack the strong capital accumulation processes of Western countries. Their main job remains to develop the economy. Hence, only goods and services taxes are available for them to choose as the main type of tax to secure sufficient tax revenue collected for national construction.

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Citizens’ tax awareness. The level of collection and administration determines whether the taxation authority can collect the full amount of tax. Whether citizens will voluntarily pay taxes is also related to the amount of tax that may be collected. If people’s tax awareness is generally high, then the workload of tax collectors will be reduced accordingly, so will the cost of tax collection, and unnecessary loss of social welfare will be prevented. It is not only conducive to the full and timely collection of taxes but also conducive to improving work efficiency and reducing audit costs. Essentially, it kills two birds with one stone. Such a country enjoys naturally favorable conditions for the collection of income tax, which facilitates the formation of a tax structure with direct taxes as the main type. Most developing countries were originally colonial and semicolonial societies, wherein the people were subjected to the persecution of being levied heavy taxes and thus the tradition of unwillingness to pay taxes was passed down. Citizens are unconsciously hostile to tax authorities and are reluctant to pay taxes voluntarily, which also explains why it is difficult for these countries to use income tax as the main type of tax. Another reason for low tax awareness is related to the inadequate propaganda of taxation and untransparent information. People know very little about taxation and do not fully understand the use of taxes, and naturally tax payment is against their will. Another reason is that the rule of law is not perfect. If the law is sound and the penalties for tax evasion are detailed and fully enforced, it may reduce the phenomenon of nontaxation. If inspection and supervision are in place, it can reduce the phenomenon of nonstandardized collection and management by the tax collection administration department. It is also possible to draw taxpayers’ goodwill and trust closer to the tax collection administration department so that taxpayers will pay taxes voluntarily. Therefore, the factors influencing citizens’ tax awareness are not only cultural and traditional but also linked to the functioning of the tax collection administration department, as well as the rule of law and the soundness of the systems.

3.4.3 Implications of Those Changes for the Optimization of China’s Tax Structure 3.4.3.1

Promoting Tax Reform to Stabilize the Dual Tax System in the Medium and Long Term

In the course of tax structure reform in developed countries, the transition from the tax system based on indirect taxes to that based on direct taxes is an inevitable trend of historical development. The ultimate goal of China’s tax structure reform must also follow this historical development law and take it as the direction for future tax reform. However, China is still a developing country. Its level of economic development cannot reach the level of developed countries in the short term. Neither can it quickly

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fulfill the structural transformation of the tax system with direct taxes as the main tax. The experiences of historical development show that it took a long time for developed countries to transition from having indirect taxes as the primary tax to direct taxes as the primary tax, and there was a transitional period of a dual tax structure, similar to the current tax system in Brazil. Therefore, China’s current tax system reform should take the dual tax system as its transformation goal by gradually increasing the proportion of direct taxes, reducing the proportion of indirect taxes, channeling efforts to narrow the gap between the two major tax systems, and transitioning to the dual tax structure.

3.4.3.2

Developing the Economy to Change the Structure of the Tax System

It can be clearly seen from the history of the tax structure development of various countries that the changes in the structure of the tax systems have evolved gradually along with the progress of the economy. In the early days of capitalism, as the economy was just in the early stages, the level of economic development was low, and the goal of capital accumulation brought recognition to the principal status of tariffs. The need for further economic development then prompted countries to open their doors to tariffs; it was also the development of the economy, which led to an increase in per capita income, an increase in corporate profits, and the creation of income tax, which flourished thanks to the economic boom. The rapid development of the economy has gradually raised people’s demands for social welfare, which has also promoted the rise and expansion of social security contributions. It can be argued that the reduction of tariffs, the increase of income tax, or the rise of social security tax are all closely related to the level of economic development at that time. In other words, the level of economic development is the dominant factor determining the structure of the tax system. China’s current tax reform should take into consideration current economic development. China’s per capita income level is not very high globally, far lower than that of developed countries. Therefore, at present, it is not suitable for China to stride to a tax system with direct taxes as the main tax. Instead, the dual tax structure that is compatible with China’s current economic development level should be chosen as the reform goal. In addition, economic development is the fundamental driving force for upgrading China’s tax reform. To complete the tax system reform, it is necessary to vigorously increase productivity and raise the level of per capita income in China to lay down an economic basis for the transformation of the tax system. Once the transition to the dual tax structure is completed, the way will be paved for the transition to the tax structure dominated by direct taxes.

3.4.3.3

Improving Tax Collection and Administration

As mentioned above, the level of tax collection and administration in a country is largely related to the implementation effect of tax reform and has a special effect on

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the transformation of the tax structure. Most developed countries have established a relatively sound tax collection administration system, and their level of collection and administration is relatively high. Therefore, income taxes with higher requirements for collection and management can account for a larger proportion of the tax structure. However, the level of tax collection and administration in developing countries needs to be upgraded, and it is difficult to collect income taxes efficiently and in full, resulting in serious tax evasion and retarding the proportional increase in direct taxes. China’s tax collection and administration are undergoing continuous improvement. Though not as robust as in developed countries, it develops faster than other countries such as India. Nonetheless, China should still learn from the experiences of developed countries to constantly better its tax collection and management system, upgrade the level of tax collection and administration, and offer any firm “logistics guarantee” for tax reform.

3.4.3.4

Reforming the Current Personal Income Tax to Change the Tax System

Throughout the taxation reforms of developed countries such as the United States, France, Germany, and Japan, one common feature can be observed in their transition from indirect taxes as the main tax to direct taxes as the main tax: the proportional adjustment of personal income tax directly affects the direct and indirect tax ratio. It is arguable that personal income tax plays a decisive and leading role in changing a tax structure. Compared with those developed countries, there are still many problems existing in China’s personal income tax. Only by cracking down these problems can China effectively increase the proportion of income tax and accomplish the fundamental reform of China’s tax structure.

3.4.3.5

Levying Social Security Tax to Improve the Tax System

Another major type of tax that plays an important role in tax reform is social security taxes. Social security tax in the United States is the second largest class of tax, while in France, it is the largest tax, and its proportion has been quite high. With economic development, people’s demand for social security is increasing. In theory, it is necessary to give full play to the role of the social security “safety net”, and it requires full coverage of the social security system. After being first introduced by the United States in 1937, social security taxes quickly began to be levied in other countries. Its stability and compulsoriness secured a stable source of funds for the social security system and provided fair social security benefits to social members. By contrast, China’s current social security payments are still in the form of social security premiums, which are implemented in various cities and provinces characterized by weak enforcement power, low collection intensity, and large differences in regional treatment. The timely implementation of fee-to-tax reforms and the levying

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of social security taxes will contribute to the improvement of the tax system and the soundness of the social security system.

3.5 Principles and Policy Suggestions for Optimizing China’s Tax Structure Since the reform of “replacing business tax with value-added tax” was completed, China’s tax structure has been further optimized. At present, China’s tax structure is basically in normal operation, the major tax categories are distinctive in their function, and the auxiliary tax categories can meet objective needs, forming a tax structure with turnover tax and income tax as two main taxes. However, many problems still exist in the current tax structure. Therefore, against the backdrop of vigorously promoting the rule of law in China, China should speed up the pace of tax structure optimization and ultimately achieve the goal of administrating taxes according to law.

3.5.1 Principles for Optimizing Tax Structure 3.5.1.1

Adhering to “Top-Level Design”

“Top-level design”, based on the principle of systems theory, takes an overall perspective of a task and fully considers all levels and parts to find a solution to the problem at the highest level. It has three main characteristics: top-level decisiveness, overall relevance, and practical operability. Adhering to the idea of “top-level design” is conducive to avoiding the practice of “treating only where the pain is”, resolving the accumulated shortcomings from the source, and making breakthroughs in key reform areas, which is of great significance for guiding economic development and overhaulness. At present, reforms to optimize the tax system involve the adjustment of the taxation structure and the selection of main tax categories, as well as the rational setting of the structure of tax categories and the structure of taxation elements. This is precisely the overall reform task of China’s taxation in the coming years. Naturally, it is necessary to follow the “top-level design” approach to avoid “patching” the tax structure in a piecemeal fashion and strive to achieve more results with less effort.

3.5.1.2

Securing Fiscal Revenue and Stabilizing Tax Burden

In the reform of optimizing the tax structure, ensuring fiscal revenue is the most basic function and priority of tax collection in various governments. Meanwhile, the government shall not take the opportunity for tax reform to increase the burden of taxpayers. Instead, it must stabilize the tax burden, give people a good expectation of

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tax system reform, and reduce the resistance to tax system reform. Therefore, when optimizing the tax structure, China should consider the capability of taxation to gather revenue. In particular, in designing the main class of taxes, taxes with large coverage, a wide range of tax sources, and relative stability or potential for growth should be selected (Renyue Han 2011). Only in this way can the fiscal function of taxation be realized, and the financial revenue needed by the government to provide public goods be guaranteed. Currently, China’s economic development and reforms have involved various key areas, such as industrial restructuring, social security, public education, and health care in the “deep water zone”, all of which require strong financial support from the government. Therefore, the reform of the tax structure should not retard the fiscal function of taxation but facilitate the implementation of various government reform measures. Undoubtedly, while emphasis should be placed on the fiscal function of taxation, it shall not harm the tax base or economic development but foster the tax sources.

3.5.1.3

Improving Tax Efficiency with Attention to Tax Fairness

Fairness and efficiency have long been recognized as two criteria for evaluating “ideal taxation” or optimizing tax structure. Therefore, in the future reform of tax structure optimization, China must also follow two criteria: tax fairness and tax efficiency. According to relevant economic theories, the market economy is an efficient economy that plays a dominant role in the allocation of resources. However, due to the existence of market failures, the distribution of resources in the market economy cannot reach Pareto optimality. Thus, the government can utilize appropriate tax incentives and control mechanisms to rectify market failures and channel resources towards optimal allocation. To achieve optimization, the tax structure should be reasonably set according to the various effects of different tax categories on economic efficiency. In terms of improving the efficiency of commodity production and exchange, the turnover tax outdoes the income tax, while in terms of regulating the fair distribution of income and automatically smoothing the economic cycle, the income tax outdoes the turnover tax. In addition, government taxation will generate substitution effects and income effects on market actors. Therefore, when setting up taxes, China should consider generally levying taxes with less substitutive effects to reduce the distortion of taxes on the market. At the same time, China should appropriately correct market behaviors with negative externalities and improve market efficiency. In short, when optimizing the tax structure, China should implement the two principles of fairness and efficiency, not only improving tax efficiency but also valuing tax fairness.

3.5.1.4

Adapting to the Changing International Tax Structure

With the rapid development of economic globalization, an increasing amount of international capital, technology, and other factors of production are flowing. International tax competition and coordination coexist, and the influence of international

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factors on the changes in the tax systems of various governments is also growing. Presently, countries around the world have gradually formed a trend of tax reform characterized by “low tax rates, broad tax bases, and simplified tax systems”. In particular, the global tax reduction trend is not diminished. Therefore, in the process of optimizing the tax structure, special attention should be paid to drawing on international experiences and constructing a new taxation that facilitates participation in international competition and opening up.

3.5.2 Policy Recommendations 3.5.2.1

Suggestions to Optimize China’s Medium and Long-Term Tax Structure

At present, China’s tax structure is based on turnover taxes and income taxes as the two main taxes. From Table 3.13 and Fig. 3.42, it can be seen that from 2004 to Table 3.13 The proportion of turnover tax and income tax from 2003 to 2015 Years Each taxation the proportion of turnover tax the proportion of income tax the proportion of other taxes the proportion of turrnover tax/that of income tax

2003

2004

2005

2006

2007 2008

2009

2010 2011

2012

2013

2014

2015

100 60.9 21.7

100 63.1 23.6

100 61.6 25.8

100 60.2 27.3

100 56.3 26.2

100 55.3 27.5

100 56.6 26.0

100 55.1 24.2

100 52.9 25.4

100 52.5 25.3

100 51.5 26.2

100 50.7 26.9

100 50.9 28.6

17.4

13.3

12.6

12.5

17.5

17.2

17.4

20.7

21.7

22.2

22.3

22.4

20.5

2.8

2.7

2.4

2.2

2.1

2.0

2.2

2.3

2.1

2.1

2

1.9

1.8

Notes (1) Turnover tax specifically includes domestic value-added tax, domestic consumption tax, business tax and tariff, and income tax specifically includes enterprise income tax and individual income tax. (2) All statistics are based on the data from the China Statistical Yearbook 2015

Fig. 3.42 The changes in the proportion of turnover tax and income tax in China from 2003 to 2015

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2015, the proportion of turnover tax in China decreased by 10 percentage points in 13 years, from 60.9% in 2003 to 50.9% in 2015, while the proportion of income tax increased by 6.9 percentage points, from 21.7% in 2003 to 28.6% in 2015. The ratios of the main tax categories (turnover tax and income tax) from 2003 to 2004 were 2.8 and 2.7, respectively, higher than the critical value of 2.5. In 2005, this ratio quickly fell to 2.4 and then slowly dropped to 1.8 in 2015. During the period from 2003 to 2015, China’s tax structure underwent rather radical alterations. According to the classification standard of tax structure types in Table 3.3, before 2005, China actually carried out a tax structure model with a single turnover tax as the primary tax, and the proportion of turnover tax was too large. After 2006, the tax structure was apparently transformed into the dual tax structure model with a combination of turnover tax and income tax. The main reasons for this change are as follows. First, from July 1, 2004, the three northeastern provinces of China took the lead in implementing VAT transformation pilot projects in eight industries, including equipment manufacturing and petrochemical industries. The scope of VAT pilot projects was expanded in 2007 and 2008 consecutively. Since January 1, 2009, the VAT reform has been implemented nationwide. This reform reduced the tax burden of enterprises on a larger scale and was conducive to promoting economic development. Second, with the continuous economic development and improvement of income levels, the income scale of corporate income tax and personal income tax in China is expanding, which raises the proportion of income tax. Therefore, is it reasonable for China to adopt the dual tax structure model with a combination of turnover tax and income tax? The answer is negative. As the proportion of turnover tax was still too large, as high as 50.9% in 2015, the tax burden of enterprises was too heavy, resulting in a large loss of efficiency in the production and exchange of goods as well as a reduction of economic efficiency. At the same time, the proportion of income tax was still low, only 28.6% in 2015, and more specifically, personal income tax only accounted for 6.9%. It is obviously difficult for income tax to play the role of regulating income distribution and to bring into force its function of “inner stabilizer” of the economy. Some scholars believe that in the future, China’s economic and social development should pay more attention to fair income distribution, and by reducing indirect taxes and increasing direct taxes, China should build a tax structure model with direct taxes as the main tax (Yijian Hu and Shuna Xu 2014). This point of view is clearly debatable because it is actually moving from the single indirect tax model of the past to the other extreme—the single direct tax model, which is not beneficial to the simultaneous use of the respective advantages of turnover tax and income tax so that they can cooperate with each other. Especially in recent years, an important feature has emerged in the changes of international tax structure: developed economies have shifted from a lopsided income tax to a moderate increase in the proportion of turnover tax, while developing economies have shifted from a lopsided turnover tax to a moderate increase in the proportion of income tax (Ziji Deng 2000). Therefore, a monotax model, either with turnover tax as the main tax or income tax as the main tax, is by no means the yardstick for judging the merits and demerits of the tax structure model. In fact, Professor Ziji Deng, a well-known Chinese scholar working

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on finance, proposed the “structural theory of the dual tax mode” as early as 1985, arguing that a duplicate system with equal emphasis on turnover tax and income tax should be established. Therefore, for medium- and long-term goals, China should gradually reduce the proportion of turnover taxes while increasing the proportion of income taxes by reforming its tax structure toward optimality. In particular, it is necessary to gradually increase the proportion of personal income tax and ultimately make the proportion of income tax parallel with that of turnover tax and to establish a dual tax structure model with equal emphasis on turnover tax and income tax (hereinafter referred to as the “dual tax model”).

3.5.2.2

Suggestions to Optimize China’s Medium and Long-Term Tax System

In response to the main problems in the current tax structure and the objectives of the medium- and long-term reform and drawing on the experiences of foreign tax structure optimization, China should build a medium- and long-term tax system based on the idea of “improvement, merger, levy, and abolishment” (see Table 3.14). As shown in the table, the basic framework of the turnover tax system and income tax system remains unchanged but mainly needs to improve their tax categories. In the property tax system, property taxes and urban land use taxes are merged into real estate taxes. Inheritance tax and gift tax are also levied. Among the other taxes, it is necessary to improve resource taxes and abolish urban maintenance and construction Table 3.14 The medium and long-term tax system Current tax structure system 1.value added tax turnover tax system 2.consumption tax 3.tariff 4.corporate income tax income tax system 5.personal income tax 6.property tax 7.land tax property tax system 8.Vehicle tax 9 . d eed t ax

other taxes system

10.resource tax 11.land value added tax 12.stampe tax 13.land occupation tax 14. tonnage tax on ships 16.Urban maintenance and construction tax and

Medium and long term tax structure system 1.value added tax turnover tax system 2.consumption tax 3.tariff 4.corporate income tax income tax system 5.personal income tax 6.property tax

Advice improve improve

improve merge

property tax system 8.Vehicle tax 9.deed tax 10.resource tax 11.land value added tax 12.stampe tax 13.land occupation tax 14. tonnage tax on ships other taxes system

new taxation

abolish

1 7 . t o b a c c o t ax

abolish 15.Urban maintenance and construction tax and education surcharges 16.tobacco tax

new taxation new taxation

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taxes, education surcharges, and tobacco taxes while starting to levy environmental protection taxes and social security taxes. In the medium and long term, China shall establish a dual tax system with turnover tax and income tax as its main types, the property tax system as an important supplement and the auxiliary tax category with specific functions.

3.5.3 Policy Recommendations to Optimize the Tax Structure 3.5.3.1

Optimizing the Turnover Tax System

The goal of optimizing the turnover tax system is to establish an efficient value-added tax system in accordance with the requirements of tax neutrality, improve economic efficiency, and adjust the consumption tax system to enhance its regulatory role. Through the reform of the turnover tax system, its proportion is appropriately reduced and better adapted to the needs of joining international tax competition under the background of economic globalization.

Improving VAT Since May 1, 2016, the financial industry, construction industry, real estate industry, and life service industry in China have fully implemented the reform of “replacing business tax with value-added tax” (hereinafter referred to as RBTVT), and the pilot projects of replacement of BT with VAT have been completed since it took place in 2012. Upon its completion, the problem of repeated taxation of VAT has been eliminated to a large extent, and the neutral role of VAT has also been better utilized. Due to too many factors to be taken care of in the reform of RBTVT, new problems and new contingencies arise in the current VAT system, which are mainly manifested in three aspects. First, the tax law is too complicated to conform to the principle of convenience and simplification. Due to the transitional nature of the work of RBTVT, the new legal norms of value-added tax have become a “patch-work” with the original two legal norms of value-added tax and business tax as the main content, resulting in an exceeding complexity of binding rules and policies. In particular, there are many technical terms that are challenging for taxpayers to grasp, such as providing taxable labor services, taxable services, and certain services of the modern service industry. Therefore, after the new value-added tax system is running smoothly and the time is ripe, it is suggested that the legal norms of value-added tax should be re-enacted and promulgated as soon as possible. Second, the setting of a four-tier tax rate undermines the neutral role of VAT. After the RBTVAT policy is implemented, four levels of tax rates are set up for VAT, namely, the first basic tax rate (17%) and three low tax rates (13, 11 and 6%). In theory, to formulate the most reasonable VAT system, multiple tax rates should be unified into one tax rate. However, complex real-life factors will affect the design of tax rates. Thus, most countries have one

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or two rates of VAT. A few countries impose a three-tier tax rate, and only a few countries impose a four-tier tax rate. It is suggested that the current four-level VAT tax rate should be merged into a two-level VAT tax rate, and the tax rate should be lowered appropriately (with a basic tax rate of 16% and a low tax rate of 12%). In this way, not only can the neutral role of VAT be better exerted, but the deduction chain of VAT special invoices can also be made smoother. Third, tax reduction and exemption policies are very complicated, which undermines the interlocking chain of VAT and restrains the full play of the neutral role of VAT. It is suggested that the tax reduction and exemption policy of VAT be abolished as much as possible, except for the exemption provisions.

Improving Consumption Tax China implements a selective consumption tax system, which mainly levies taxes on high-end consumer goods, luxury goods, high energy consumption, and nonrenewable and alternative petroleum-based consumer goods, reflecting the spirit of “levy to ban”. The current consumption tax has been levied on 15 commodities. The scope of taxation is still relatively small, and some commodities have lower tax rates. It is suggested that the consumption tax policy be improved in due course. First, China needs to expand the scope of consumption tax collection. With the development of the economy, China should levy taxes on new luxury goods such as houses, cars, and private jets. In addition, some heavy-pollution, high-energy consumption consumer goods are put in the scope of taxation, such as disposable plastic products, toners, printer toner cartridges, etc. Second, China needs to increase the tax rate of some protective tax items and enhance the specific regulatory function of consumption taxes, such as disposable chopsticks, solid wood flooring, battery boxes, paint, etc.

3.5.3.2

Optimizing the Income Tax System

The goal of optimizing the income tax system is to establish a fair and efficient income tax system in accordance with the requirements of promoting a fair and stable economy, gradually increasing the proportion of income tax, and giving full play to the role of income tax as the “internal stabilizer” of the economy and regulating income distribution. In recent years, China’s corporate income tax and personal income tax accounted for a rather stable proportion of the various tax revenues, and the growth was relatively slow. As shown in Table 3.15, the current proportion of corporate income tax in China is approximately 21%, which is relatively stable. Compared with the international level, the corporate income tax is still relatively moderate. The tax rate is levied at a proportional tax rate, with a basic tax rate of 25% and a low tax rate of 25%, which is also a moderate level internationally. Therefore, in the income tax system, corporate income tax mainly plays the role of gathering wealth and economic internal stabilizers, while the role of personal income tax is mainly to regulate income

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Table 3.15 The proportion of corporate income tax and personal income tax in China from 2005 to 2015 Years each taxation the proportion of corporate income tax the proportion of personal income tax the proportion of income tax

2005 100 18.6 7.3 25.8

2006 100 20.2 7.0 27.3

2007 100 19.2 7.0 26.2

2008 100 20.6 6.9 27.5

2009 100 19.4 6.6 26.0

2010 100 17.5 6.6 24.2

2011 100 18.7 6.7 25.4

2012 100 19.5 5.8 25.3

2013 100 20.3 5.9 26.2

2014 100 20.7 6.2 26.9

2015 100 21.7 6.9 28.6

distribution. However, the current proportion of personal income tax in China is less than 7% and relatively low in comparison with the international level. For example, in India, a developing country such as China, the proportion of personal income tax in 1999 reached 14.8% (Fuqiang Zhang 2003). Moreover, the implementation of a classified personal income tax system in China makes it difficult for personal income tax to fully play the role of adjusting the income gap, and there is even a phenomenon of “reverse adjustment”. It is clear that the main task of optimizing the income tax system is to improve the personal income tax system. At present, the goal of improving personal income tax is to thoroughly implement the spirit of the Third Plenary Session of the 18th CPC Central Committee and to implement the personal income tax system with a combination of classification and integration. The main recommendations are as follows. First, China needs to change the tax system model, that is, to implement a tax system that combines classification and integration. The current classified income tax system has the advantages of imposing differentiated taxes on different income types and having tax sources under easy control. However, it is impossible to implement a progressive tax rate based on the total income of a taxpayer and cannot properly manifest the principle of taxpaying ability and thus cannot play the role of regulating income distribution. Within the international community, most countries adopt a taxation model that blends classification and integration. In terms of personal income, the author’s suggestion is to collect recurring income from personal income. The specific approach is to add all the recurring income of the taxpayer in a certain year, such as wages, operating income, labor remuneration, income from property transfer, etc. The amount of other deductions is then subtracted, and the remaining income is levied at an excessive progressive rate. If it is non-recurring income (accidental income), then classification is applied. Second, China needs to adjust the tax rate structure, that is, to reduce the tax rate and marginal tax rate. In light of the development trend of personal income tax, various countries have reduced their tax rates and reduced the progressive grade to improve tax efficiency. As can be observed from Table 3.16, most countries adopt a four-tier tax rate, and the highest tax rate is generally between 35 and 50%. Considering the current structure of the personal tax rate and the policy objectives of reform, it is suggested that the four-tier excess progressive tax rate should be adopted for personal income, ranging from 10 to 40%. The marginal tax rate should be reduced to 40%, which is conducive to mobilizing the enthusiasm of high-income taxpayers

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Table 3.16 Progressive rate of personal income tax in some countries Personal income tax rate tax rate range progressive grade the United States 10%-35% 6 Thailand 5%-37% 5 Austria 21%-50% 4 Canada 16%-29% 4 Japan 10%-37% 4 Poland 19&-40% 3 Country

Country France Belgium Korea Australia Britain India

Personal income tax rate tax rate range progressive grade 10%-48.09% 6 25%-50% 5 9%-36% 4 17%-47% 4 10%-40% 3 20%-30% 3

Notes Tax rates in the United States are derived from practical tax references at www.usdragon.com/ Europe-madrid, 2004-12-02. Tax rates in the UK and South Korea are derived from the Introduction to the Foreign Tax System at www.tax861.gov.cn. Tax rates in other countries are derived from www. worldwide-tax.com

and improving economic efficiency. Significantly reducing the tax rate is beneficial to simplifying the tax system and improving tax efficiency. For the income levied by classified taxation, it is suggested that the existing 20% proportional tax rate should be kept and the policy of additional levy should still be implemented. This kind of addition and expropriation policy works for curbing people’s mentality of “getting rich overnight” and encouraging them to instead get rich through hard work. Third, China needs to improve the expense deduction system. Whether the expense deduction system is perfect directly affects the extent to which personal income tax adjusts the income distribution. At present, the sub-item deduction system implemented in China does not take into account taxpayers’ family or health factors, which seriously restricts the function of individual income tax in adjusting income distribution. China should learn from the successful experiences of foreign countries and improve its expense deduction system. For individual comprehensive income programs, two types of expense deductions can be set. The first category is called cost deduction items, which simply include the costs associated with earning income; the second category is called livelihood expense deductions, which simply cover the cost of maintaining basic living expenses. To embody the principle of taxability, five types of livelihood deductions can be adopted: child dependency deduction, basic deduction, spouse deduction, special deduction, and additional deduction. Fourth, China needs to strengthen the monitoring of tax sources and strengthen tax collection and administration. The current personal income tax plays an unsatisfactory role in regulating income allocation. There are two reasons for this: the tax system model and inadequate tax collection and administration. Therefore, after the implementation of the new tax system, tax authorities need to strengthen the monitoring of tax sources and further reinforce tax collection and management. The suggested measures are taken as follows. First, the method of collection and administration is based on the parallel use of source deductions and self-declaration of taxes. To ensure the smooth implementation of classification and a comprehensive income tax system, it is necessary to strengthen not only the collection and management of source withholding but also the management of individual self-declaration and

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tax payment. Second, China needs to gradually establish and improve the personal account system and property registration system and collect basic personal information, tax information and income information, that is, “One Person One Account Nationwide”. Third, China needs to establish personal credit tax files and severely punish tax evasion. Fourth, China needs to consolidate the links between tax departments and other government departments (including industry and commerce, public security, prosecution, etc.), heighten the penalties for tax evasion, and publicize the belief that “tax payment is glorious and tax evasion is shameful”.

3.5.3.3

Optimizing the Property Tax System

The goal of optimizing the property tax system is to establish a fair and efficient system to the requirements of promoting equity and improving the local tax system and to gradually increase the proportion of property tax and give full play to the role of property tax in promoting local economic development and regulating the distribution of social wealth. In the task of optimizing the property tax system, there are two main aspects worth of effort. One is to combine property taxes and urban land use taxes into real estate taxes; the other is to levy inheritance taxes and gift taxes. (i)

Reforming Real Estate Tax

At present, except for the pilot projects of real estate tax in Shanghai City and Chongqing City, other provinces and cities have not yet started to tax personal real estate ownership but have only levied personal property tax for commercial property. Therefore, according to the spirit of the Third Plenary Session of the 18th CPC Central Committee, real estate tax reform must be accelerated and gradually set as the main type of tax in the future local tax system. First, the current property tax should be merged with the urban land use tax. Since houses and land are always bound, it is difficult to delineate the value of houses and the value of land. Therefore, it is unscientific and hardly operable in practice to separate houses from land. Second, instead of taxing the assessed value of real estate, the ad valorem is levied. It is not only more scientific and reasonable to take the present assessed value as the taxation baseline than the original value but also in line with the international common practices of property taxation. After the implementation of ad valorem taxation, the problem of unfair taxation caused by the coexistence of two types of taxation bases for current property tax can be resolved. The value of real estate can be evaluated every three years. Third, China should expand its scope of taxation and learn from foreign advanced experiences. Most foreign countries adopt the basic principle of a “wide tax base and low tax rate”. However, for ordinary residential housing, tax exemptions or lower tax rates are applied. Therefore, it may be considered to extend the scope of taxation to all areas and to include the individual housing of residents in the scope

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of taxation to better adjust the gap in the distribution of wealth among residents. To avoid aggravating the housing burden of ordinary people, the policy of exemption for ordinary residential property should be taken into account. Fourth, China should set differential rates of tax. In terms of tax rate setting, China should draw lessons from foreign experiences and practices and set differential rates of taxes according to the different uses of real estate. Suggestions are as follows. First, the highest tax rate is applicable to golf courses and high-end villas. Second, the second highest tax rate is applicable to the real estate of tourist attractions and summer resort properties. Third, a higher tax rate is applicable to companies, enterprises, and other production and operation of real estate. Fourth, a lower tax rate is applicable to residential properties that are used for business purposes. Fifth, the lowest tax rate is applicable to residential housing. The people’s governments of provinces, autonomous regions, and municipalities directly under the Central Government shall, within the scope prescribed by the tax law, determine the applicable tax rates for their regions.

Introducing Inheritance Tax and Gift Tax Currently, the unfair distribution of income and the widening gap between the rich and the poor in China have brought a negative impact on social stability and the construction of a harmonious society. According to foreign taxation practices, the introduction of inheritance tax and gift tax is conducive to narrowing the gap between the rich and the poor in society and helping to maintain fairness at the starting point. In fact, the basic conditions for levying inheritance taxes and gift taxes have been preliminarily met in China, but the conditions for levying and managing them are still insufficient. Therefore, inheritance taxes and gift taxes should be levied at an appropriate time in the future. The first is the choice of inheritance taxation mode. At present, there are three modes of inheritance tax collection, namely, net wealth taxation, transferred wealth taxation and mixed taxation, each of which has its own advantages and disadvantages. Which mode to choose depends on a country’s economic situation, tax policy objectives, and historical practice of tax. Given China’s national conditions, it is suggested to adopt net wealth taxation, that is, to levy taxes on the total amount of taxable assets, regardless of wealth inheritance and distribution. In this way, the source of the tax is easier to control, and the tax rate is easy to define. The second is the identification of taxpayers. Internationally, the jurisdiction of inheritance tax usually follows the principle of a combination of personal jurisdiction and territorial jurisdiction. To implement the principle of reciprocity in international exchanges and safeguard national economic rights and interests, it is suggested that China adopt the principle of combining personal jurisdiction and territorial jurisdiction. The actual taxpayer of the bequest tax shall be the executor or inheritor, and the taxpayer of the gift tax shall be the property giver. The third is the determination of taxable objects. Taxable objects are identified as properties, including movable properties and immovable properties. Movables

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include cash and negotiable securities, while immovables mainly include land and housing. The fourth is the design of tax rates. Most countries adopt excess progressive tax rates, which are conducive to equality and can narrow the gap between the rich and the poor. For a long time, Western developed countries have imposed heavy taxes on inheritance at higher tax rates. In recent years, most countries have lowered their tax rates, with Japan’s highest tax rate at 70% and the highest tax rate of the U.S. at 50%. The highest tax rate in developing countries generally stays at approximately 50%. To avoid dampening the enthusiasm of our citizens to get rich through hard work, it is recommended that inheritance tax and gift tax be levied at a five-tier progressive tax rate, with a marginal tax rate of 50%.

3.5.3.4

Optimization of Other Taxes

The goal of optimizing other taxes is to improve the various auxiliary tax categories in accordance with the requirements of tax design and structural optimization and to give full play to the specific role of each auxiliary tax. In the task of optimizing other taxes, there are three main tasks: to improve the resource tax; to levy environmental protection tax and social security tax; to repeal city maintenance and construction tax, education surcharge, and tobacco leaf tax. (i)

Improving Resources Tax

Resource taxes play a crucial role in regulating resource-level income and promoting the rational development, utilization and effective protection of natural resources. However, the current resource tax system in China still awaits improvement. First, it is necessary to further expand the scope of taxation and improve the regulatory function. With the gradual aggravation of water resource shortages in China, China should consider levying resource taxes on water resources. When conditions are ripe, resources such as forests, grasslands and beaches should also be brought subject to taxation. Second, it is necessary to appropriately raise the resource tax bracket and give better play to its regulatory function. (ii)

Levying Environmental Protection Tax

To cope with the prevailing environmental problems and promote energy conservation and emission reduction, China has levied an environmental protection tax since January 1, 2018, changing the current sewage charge to an environmental protection tax and relying on legal and economic “tough” means to achieve China’s environmental protection goals. The Environmental Protection Tax Law that has passed rules that taxes on air pollution, water pollution, fixed waste, and noise shall be levied by local tax bureaus. (iii)

Levying Social Security Tax

In the tax structure illustrated by the OECD and IMF, a social insurance tax is regarded as a vital tax category. However, some scholars in China disapprove of this

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view and argue that social insurance (or security) taxes are a type of earmark for a fixed purpose and do not fall into taxation (Guoqiang Ma, 2015). Therefore, a social security tax is not considered a type of tax. Instead, it is listed in the group of “other taxes” from the perspective of improving the tax system. At present, China should promptly advance the change of social security premiums to a social security tax, which has become a consensus. In China, social security funds are collected in the form of social security premiums, which have problems such as weak enforcement and poor collection. Therefore, the best way to solve these problems is to levy social security taxes and bring social security payments under the scope of taxation. (iv)

Repealing Urban Maintenance and Construction Tax, Education Surcharge, and Tobacco Tax

Urban maintenance and construction taxes are not independently levied but imposed on the basis of VATs and consumption taxes. It is a tax upon tax, with the levied amount as tax base, not a scientific tax category. Thus, it is suggested to repeal this kind of tax. At the same time, education surcharges and local education surcharges should also be abolished. In addition, the tobacco tax is actually a “freak” retained from the agricultural specialty tax that was long canceled. Its levy purpose and significance are not very clearly defined. In fact, as an agricultural specialty tax, the production and sale of tobacco leaves is subject to the scope of value-added tax. Thus, the setting of the tobacco tax does not meet the principle of taxation.

Chapter 4

Improving the Tax-Sharing System Amid Rule-of-Law China

After more than a decade of practice and historical examination, China’s tax-sharing fiscal system has played an active role in the development of the social economy. However, some problems that occurred in due course have had undeniable adverse impacts on social and economic development. In particular, there is a clear gap when it is compared with the typical tax-sharing systems in developed market economies. In this context, it is particularly important to build a tax-sharing system under the rule of law. Strong legal safeguards are necessary for a system to be implemented and executed smoothly. The same is true for taxes. Tax legislation is a vital prerequisite for taxation to be fully utilized. To ensure the stability of a tax-sharing legislative system, there must be a law to be observed. Therefore, a sound and normative tax-sharing legislative system is indispensable in establishing and improving a tax system.

4.1 Relationship Between the Tax-Sharing System and the Rule of Law 4.1.1 The Juristic Basis of the Tax-Sharing System 4.1.1.1

Historical Origin of the Tax-Sharing System

The budgetary management system of tax sharing at different government levels, referred to as the tax-sharing system, is a system based on the principle of parity between fiscal and political powers, thus defining the scope of government expenditures at all levels on which basis to divide public revenues according to tax types at each level of governments. By dividing the tax revenue sources and the tax administrative authority among the central and local governments, this budgetary management system intends to rationalize the fiscal distribution relationship between the central and local governments and fully motivate governments at both central and © People’s Publishing House 2022 Q. Wang and W. Xi, Improving the Tax System amid the Rule-of-Law China, https://doi.org/10.1007/978-981-16-7033-6_4

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local levels.1 The tax-sharing system originated in some European countries in the mid-nineteenth century. At present, most of the countries that mainly rely on tax revenues adopt a tax-sharing system to handle the fiscal relationship between central and local governments. In some developed countries, the tax-sharing system has a history of more than 100 years, and it has been implemented mainly through the creation or amendment of the constitution, the enactment of a hierarchical administrative system and the division of administrative powers according to law. For example, when it established the Federal Republic through a federal constitution in 1887, the United States began to implement a tax-sharing system; Canada adopted a taxsharing system when it passed its federal constitution in 1867; the UK’s tax-sharing system was also established in the 20th century. The practice of the tax-sharing system reflects the demand for the development of the market economy. Since the founding of the People’s Republic of China, the fiscal and tax system has undergone a variety of adjustments to keep up with economic and social development and the transformation of government functions. Generally, it has witnessed a shift from a highly centralized fiscal and tax system with “unified tax collection and allocation” to a fiscal contract system of separate accounting for revenue and expenditure, known as “eating in separate kitchens”, and finally to the tax-sharing system. China’s budgetary management system was primarily centralized before the Reform and Opening up. To adapt to the economic situation of reform and opening up, China has further optimized the relationship of finance and power between the central and local governments since the early 1980s and adopted the fiscal system of “eating in separate kitchens”, that is, “dividing revenues and expenditures and delegating responsibility to different sub-national governments”. Subsequently, to further streamline administration, delegate power, mobilize the enthusiasm of enterprises, and solve the problems that occurred in implementing the system of “eating in separate kitchens”, the central government put into practice a fiscal administrative system of “dividing taxes, auditing revenue and expenditure, and delegating responsibilities” in 1995. The common characteristics of these two reforms are delegating responsibilities and seeking a budget balance on the basis of dividing the revenues and expenditures between central and local budgets. The reforms broke the traditional centralized system and fully mobilized the involvement of enterprises and local governments. Although the fiscal contract system satisfied the demand of economic system reform and national economic development within a certain period of time, there are many drawbacks to this system, resulting in a degree of national financial difficulty. Since 1979, the proportion of central fiscal revenue to national revenue declined from 39.68% in 1985 to 22% after eight years of development, while the proportion of national fiscal revenue to GDP fell from 22.79% to 12.6% over the same period. From 1982, the proportion of local extrabudgetary revenues to local budgetary revenues increased annually, but the government’s administrative capacity and the central government’s power to regulate and control revenues weakened. As a result, the central government was stuck in the dilemma of “borrowing money” from local governments. Furthermore, “eating in separate kitchens” caused 1

Hong, Yinxing, & Shang Changfa. Public Finance. Nanjing University Press, 2013, p. 308.

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some local governments to commit unlicensed acts that reduced taxes beyond their authority and conducted tax farming arbitrarily or in disguise. The uneven distribution of taxes between regions was not conducive to narrowing the regional development gap in the economy. Therefore, to regulate the behaviors of central and local governments, enhance the ability of central finance to organize revenue and support local finance, and strengthen its financial macrocontrol capacity, China implemented financial restructuring through the tax-sharing system and tax reform in 1994. The tax-sharing system served as a milestone in China’s fiscal history. In adopting the tax-sharing system, China aimed not only to gradually improve the central government’s finances, strengthen its macrocontrol capacity, and narrow the gap in regional fiscal revenue and expenditures but also to fully mobilize local governments’ enthusiasm in the management of the economy and finance. From its creation to its stable operation, the tax-sharing system has undergone a series of adjustments and improvements. It has laid a solid foundation for the reform of China’s fiscal and tax system and has played an important role in promoting economic development, perfecting the socialist market economy system, mobilizing the enthusiasm of central and local governments, expanding opening-up to the world, safeguarding social stability, and improving people’s quality of life. In addition to adapting to the socialist market economic system in the new round of fiscal and tax system reform, China must also establish an institutional foundation that fit in with the modernization of the national governance system and governance capacity”. The rule of law is the fundamental way to manage state affairs and finances. The modernization of national governance depends on legislation in all fields. The primary goal of deepening the reform of the fiscal and tax system is to manage finance in accordance with the law and comprehensively incorporate the tax-sharing system into the rule of law.

4.1.1.2 (i)

Juristic Theories of the Tax-Sharing System

Social Contract Theory

Social contract theory (French: Du Contract Social), also known as “civil contract theory”, usually refers to the relationship between the ruler and the ruled through one or several hypothetical contracts and discusses the legitimacy of political authority and the rationality of political obligations on both sides (and the resulting restrictions).2 The initial constitution was based on social contract theory. A man in his natural state entered the political society by signing contracts, agreeing to transfer some of his rights to the country and the government, and in doing so, voluntarily accepted the management of public power under the restrictions of contract. This contract is the constitution. The emergence of the contract formed the embryonic form of government in early times, and the government was inherently obligatory, self-interested, and superior in information resources. To deter the government from infringing upon the interests of citizens, the contract in itself regulates and restricts 2

Lesnov, Michael. Social Contract Theory, translated by Liu Ting etc., Jiangsu People’s Publishing House, 2010, p. 290.

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government power from its conception. Therefore, the government’s power should also be exercised under the guidelines and limitations of the contract. In other words, the operation of government power must follow the principle of the rule of law. In addition to the relationship between citizens and governments, there is a contractual relationship between governments. From the perspective of the allocation of taxing power, the contractual relationship is formed through the central government’s policy that first centralizes and then decentralizes tax revenues. Specifically, on the basis of a clear division of power, the central government obtains a bulk of tax revenue from taxes such as central and shared taxes, and the funds are often transferred to the local governments through transfer payments, thus forming a stable relationship with local governments concerning the division of interests. Taking the rule of law as the basis and principle for the exercise of power is not only the requirement of the contract for individuals but also the obligation of the government. The government should utilize public power conferred by the people, perform its own functions and realize the expectations of the people as stipulated in the constitution or contract. Therefore, the contract can be used as a criterion for judging whether the government acts properly and to provide a legal basis and guarantee for citizens to safeguard their own rights and resist government malpractice. At the same time, local governments can also protect their legitimate rights and interests through laws. (ii)

Principal-agent Theory

In the 1930s, the American economists Burleigh and Means proposed principalagent theory. They found that in practice, there were defects and hidden dangers for business owners to also have management rights. Therefore, they advocated that business owners should transfer the right to operate on the basis of reserving the right to claim it, thus improving the efficiency of enterprise operations. Its core lies in how the principal designs a compensation system (contract) to drive another person (agent) to act in the interest of the principal.3 Because of asymmetric information or target inconsistency between the principal and the agent, the drawbacks of high commission costs may arise. Therefore, an incentive mechanism and contract that can restrict the agent’s speculation and improve its management efficiency becomes the important basis as to whether the theory can be put into practice. The “principal-agent theory” has long been the logical starting point for modern corporate governance. In subsequent research, principal-agent theory was not only applied in corporate governance but also extended to the field of financial management. In general, the relationship between the central government and local governments is embodied in power relations, financial relations, and public administrative relations.4 At the same time, there is a principal-agent relationship between them. The central government, as the authority that governs everything in the country, is 3

Stiglitz JE, “Incentives, Risk, and Information: Notes Towards a Theory of Hierarchy”. The Bell Journal of Economics, No. 2, 1975, pp. 552–579. 4 Su, Mingwu. Analysis of Economic Behaviors of Local Governments in Institutional Changes. Economic Survey, No. 2, 2002.

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the principal, handing over local jurisdiction to the local governments and signing legal contracts with them to regulate and constrain their responsibilities, power, and interests. However, problems such as information asymmetry will still arise between governments. This is manifested in the fact that local governments are the performers of specific tasks, and they have more information advantages than the central government, which is the distributor of the tasks. This places the central government in a disadvantageous position by allowing for more information to be hidden in the process of task implementation. It can be seen that an incentive mechanism that can maximize the local governments’ own utility while also maximizing the interests of the central government can make the principal-agent relationship between the central and local governments more solid and effective. (iii)

Power Checking Theory

Power, as a “double-edged sword,” is mandatory, hierarchical, target-oriented, integrative, and purposeful. At the same time, it is potentially expansive, exclusive, seductive, and corrosive. Making good use of it can boost the nation, and abusing it can harm the people. Therefore, “to prevent abuse of power, power shall stop power”.5 The separation of power to check power can be both external and internal. External separation refers to social power’s constraints on state power, while internal separation includes horizontal and vertical checks and balances. The power constraints of the central government over the local governments discussed in this chapter are vertical checks, which play an important role in limiting local governments’ power and can increase the initiative and administrative efficiency of all levels of government in providing public goods. Power checks can improve local governments’ administrative efficiency through the “competitive effects” between governments. The implementation of the taxsharing system constrains the power of all levels of government to a certain degree in terms of financial resources. In 1956, in “A Pure Theory of Local Expenditure,” C. M. Tiebout assumed that residents of various communities would “continuously relocate” according to the public services of different communities, indirectly exerting pressure on the local government, thereby prompting them to exercise their power according to law. Resident migration will lead to a change in the total tax revenue of the government. In particular, young people with an entrepreneurial spirit will migrate to areas where they will be provided with better public services or benefits, which will contribute greatly to the economic growth and tax revenue in those areas. Therefore, a sense of potential crisis will create a sense of competition in the government and thus function as a restriction of power. On the one hand, the tax-sharing system gives local governments certain power over tax revenue. According to foot voting theory, local governments are more aware of the needs of local residents and tend to make decisions that are closer to public opinion. Consequently, the central government’s enormous sole power is checked by the local powers. On the other hand, the reform of the tax-sharing system has also 5

Montesquieu, Baron de. The Spirit of the Laws (Vol. 1). Beijing: the Commercial Press, 1961, p. 154.

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raised the central government’s fiscal revenue. Local governments have encountered the dilemma of centralizing financial power and decentralizing administrative power, which will inevitably reduce the provision of public services to a certain extent. An effective means to solve this problem payment transfer is by which the central government can implement top-down management and control of local governments. Therefore, the local governments and the central government have reached a situation of double restriction, which is not only conducive to providing better public services on the basis of respecting human nature but can also reduce government corruption and limit the monopoly of political power.

4.1.2 The Juristic Significance of the Tax-Sharing System 4.1.2.1

The Law-Based Tax-Sharing System: An Important Mean to Protect Citizens’ Rights

Residents empower the government through contracts that exist in the form of laws. Residents “feed” the government by paying taxes, which become the material basis for the government’s survival and operation. Financial power is not only related to the acquisition, retention and growth of the country’s material power but is also largely related to the rights of citizens, as it is an important power given by citizens to governments. Therefore, the government’s financial power should be controlled through legal means to protect the rights of citizens. To protect the rights and interests of citizens, the legal system shall first be improved. The state needs the rule of law to define the power of the government. People need legal measures to safeguard their rights and interests. The state shall check power by the highest form of law, and the allocation of state power, including separation of fiscal power, shall also be regulated by the state’s highest law, the constitution. As a fiscal system in China, the tax-sharing system is not only an important fiscal policy but also an important political system. It is related to the division of power between the central government and the local governments and requires legal protection and regulation. The tax-sharing system based on the rule of law is an important system for safeguarding people’s power, which is not only beneficial to the rational and normative division of financial power between the central government and the local governments but also better guarantees the autonomy of the local governments and the macro-control ability of the central government. In addition, this system will also better protect and safeguard residents’ preferences and rights. However, judging from the effect of the current tax-sharing system in China, the local governments’ fiscal revenues and expenditures appear to be strained. This is particularly true for counties and townships, and tax revenue alone cannot support normal financial operations. Coupled with the imperfection of the transfer payment system and the restrictions imposed on local government debt financing, infrastructure such as education, science, and technology has also added to the local financial burden. Therefore, the division and regulation of financial power will affect the relationship between the

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local governments and the central government, which is conducive to making sound systems in China and conducive to the perfection of China’s democratic system to safeguard democratic rights. The revision of the constitution has led to the continuous improvement of China’s democratic system under the rule of law. China’s fiscal and legal system has also been greatly affected. This is reflected in the changes in its principles, spirit and institutional framework. Compared with the past, the Constitution now pays more attention to the establishment of a sound social security system that is compatible with the level of economic development. It also emphasizes the protection of personal interests in terms of respecting and safeguarding human rights in the country, as well as the regulation, management, and supervision of financial power. Therefore, the rule of law is very important to China’s economic development.

4.1.2.2

The Law-Based Tax-Sharing System: An Important Part in Adjusting the Relationship Between the Central and Local Governments

Fiscal decentralization is the most important distribution of power in modern countries. Whether it is a unitary state or a federal state, the distribution of fiscal power is an important factor affecting the relationship between the central and local governments. Although different in different countries, the political systems are all based on and developed around fiscal power. The amount of financial power and resources allocated between central and local governments directly determines the realization of their respective interests and their satisfaction with the allocation and ownership of financial power and resources. Therefore, financial power is an important part of the distribution of power between central and local governments. It can also be said that the division and regulation of financial power will, to a large extent, affect the relationship and power between central and local governments in China. Therefore, only by combining the tax-sharing system with the rule of law can China better regulate and adjust the relationship between the central and local governments. The tax-sharing system divides taxes into three types according to the types of taxes and the characteristics of tax sources: central taxes, local taxes and shared taxes by the central and local governments. The power to levy tax is distributed layer by layer to the national tax system and local tax system to create hierarchical management, replacing the “principal-agent” relationship in the fiscal contract system, creating a system of turning over the central and local governments’ financial revenue to the state treasury by item, and defining the limits of financial power and expenditure responsibilities between the governments. The tax-sharing system under the rule of law will further affect the perfection and regulation of the transfer payment system. In addition, the transfer payment system is an important system. Its regulation and development will play an important role in the relationship between governments. In particular, it will compensate for the shortage of local governments’ funds and give full play to the positive role of fiscal funds. Therefore, whether the transfer of funds is fair will directly affect the exercise of financial power. In addition,

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there is a game relationship between the central and local governments in the allocation of financial power. The tax-sharing system based on the rule of law can better regulate the relationship between the central and local governments and guarantee balanced interests on all sides.

4.1.2.3

The Law-Based Tax-Sharing System: An Important Tool for Strengthening Social Supervision

The local government is closer to the life of the local residents and knows more about their preferences for public goods or services. Therefore, giving the local government a separate legal entity and more independent financial power allows the local government to better perform public functions and better serve the people. In ancient and modern China as well as foreign countries, if government power is not under supervision and restraint, government inaction or corruption will inevitably become common practice. The establishment of a tax-sharing system based on the rule of law delegates the responsibility of local affairs to local governments. Local governments adopt local residents’ preferences as their guidelines for governance and planning, making full use of local geographical resources and advantages and integrating national fiscal policies with their own fiscal power. As a result, the role of the local government is maximized, which can also fully motivate the local government. An examination of the history of the tax system reform reveals that there has been a lack of social supervision from the fiscal contract system to the tax-sharing system after 1994. As a result, local governments are mainly responsible for completing tasks from a higher level of government. They do not pay attention to local fiscal costs and revenues. “Vanity projects” and “image projects” are everywhere, and selfish acts are not rare and ignore other factors for the sake of performance. When the tax-sharing system is combined with the rule of law, residents pay taxes to the government as the price for the government’s provision of public goods and services, thus obtaining the power to supervise the government’s behavior and using the law as the basis for supervision. If the local government misconducts itself or cannot satisfy the taxpayer’s preference for public goods or services, the law becomes an important tool for the protection of their rights. Therefore, the tax-sharing system in accordance with the rule of law is conducive to matching the cost expenditure with the citizen’s equity in the provision of public goods. Supervision under the rule of law will encourage citizens’ participation in the supervision of public affairs. On the other hand, under the restriction and supervision of the law, the government will be more likely to regulate and control its actions. In addition, the government is a rational economic man and tends to protect its own rights and interests. However, investors and local residents can choose to live in regions with lower tax liabilities and better services according to foot voting theory, which can restrict the power of local governments and encourage them to optimize the provision of public goods and services and reduce the abuse of power by local governments.

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4.1.3 The Tax-Sharing System: An Important Part of China’s Move Toward the Rule of Law 4.1.3.1

The Tax-Sharing System as the Main Content of Fiscal Decentralization

It is generally believed that the central government and local governments maintain a degree of decentralization to protect the legitimate rights and interests of residents in the jurisdiction of the government at the corresponding level. To a certain extent, this can fully motivate local governments to make and implement policies in accordance with local conditions to carry out local autonomy. Fiscal decentralization is also the key and foundation for the decentralization of power between the central government and local governments. The purpose is to achieve local fiscal independence. The tax-sharing system introduced in 1994 is the fiscal decentralization system of China. The tax-sharing system is a hierarchical financial management system that deals with the relationship of financial power and administrative power between the central and local governments and between local governments at all levels. Its main purpose is to define the scope of revenues and expenditures and administrative authority between governments at all levels and to determine the division of financial and administrative powers on the basis of the division of tax. According to relevant theories of local autonomy, to deal with intergovernmental relations effectively, power shall be allocated reasonably between the central government and local governments, as well as between local governments at all levels. Under the current tax-sharing system in China, financial guarantees are provided for local autonomy to ensure that governments at all levels can effectively perform their functions; however, the tax-sharing system rationally defines the scope of administrative power and expenditures among governments at all levels to ensure that those governments perform their duties. Tax is the main source of government financial resources. Governments at all levels, when short of taxes, will be unable to perform their functions effectively due to lack of funds. Economic independence is the cornerstone on which local autonomy is built. Therefore, it is crucial for all local governments to win financial independence. From this perspective, the tax-sharing system has soundly and reasonably defined the administrative power of the central and local governments in terms of financial allocation and specified government expenditure responsibilities at all levels. The establishment of the tax-sharing system can effectively straighten out the financial relationship between the central government and local governments and help local governments at all levels fulfill their functions and effectively provide public services. Practice has proven that the tax-sharing system helps the division of financial power between the central government and local governments, and on this basis, the independence of local finance is achieved. However, decentralization under local autonomy often leads to fiscal competition among local governments at all levels, which mainly includes horizontal and vertical competition.

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In the market economy, governments at all levels, such as “rational economic men”, have their own interests in addition to the common ones and seek to maximize them. Therefore, when the total social wealth is certain, the financial policies of the state will inevitably affect governments at all levels. In addition, tax revenue is an important measure in China’s current official performance evaluation. There is no doubt that various local governments will surely seek more financial revenue through financial competition and obtain political achievements to be promoted. In a unitary country such as China, local governments at all levels tend to have a dual nature. Viewed from the central level, local governments are set up by the central government and are also restricted and led by the central government. Viewed from the local level, local governments at all levels, representing the interests of the areas under their jurisdiction, are often in a disadvantageous position in financial competition. Local governments should seek to protect their own interests from illegal infringement and to achieve their own fiscal independence. Therefore, an appropriate mechanism should be established to deter higher levels of governments from encroaching on the fiscal revenue of lower levels of governments to ensure the financial independence of local governments. Local governments should be given the power to obtain stable and sufficient fiscal revenue. In China, the tax-sharing system determines the income distribution relationship by allocating different taxes between the central government and local governments. The two parties are connected and independent, effectively preventing the central government from illegally intervening. Once the fiscal relationship between the central government and local governments is defined by the legal system, the legitimate rights and interests of local governments will be likely to be protected, and local autonomy will be achieved.

4.1.3.2

A Sound Fiscal and Legal System is the Premise and Basis for the Implementation of the Tax-Sharing System

The central government and local governments earn fiscal revenues and make expenditures in accordance with the law. Local governments also obtain certain tax administration authorities in accordance with the relevant laws and regulations. The taxsharing system is conducive to ensuring the normal operation of the market economy and is the inevitable result of the development of the market economy. It is mainly manifested in the following aspects. First, the introduction of the tax-sharing system is an objective requirement for macroeconomic regulation and control. To compensate for “market failures”, the government must implement macro-control, and taxation will become an important means. Second, the implementation of the tax-sharing system is an inevitable choice for the rational allocation of resources. Since the market economy has its own shortcomings, it is necessary for the government to carry out macrocontrol over areas where the market cannot play a role, as in the case of the construction of large-scale infrastructure and social welfare projects. Finally, the economic structure and social distribution need governments to play a role in regulation. Therefore, governments at all levels should give self-determination to the role of the tax-sharing system and make adjustments through budgets and income.

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The stable and healthy development of the market economy requires the support and guarantee of the legal system. The tax-sharing system also needs to be standardized and legalized. Local governments at all levels shall seek fair financial competition among themselves within the framework of laws and regulations, break down vicious competition in various regions, and on this basis, develop the macro-control functions of the governments. The rule of law is the inherent requirement of the market economy. The legal system supporting the tax-sharing system should be strengthened. To improve the current fiscal law, it is required that the important role of the tax-sharing system be further strengthened, which in turn will prompt the development of fiscal law. In the socialist market economy, fiscal law has many functions, such as regulation, restriction, guarantee, orientation, and adjustment. Compared with severe administrative measures that are governed by fiscal policies, fiscal law has significant advantages such as compulsion, standardization, stability, transparency and orientation. The tax-sharing system requires that its further improvement and development need to adopt the form of law to regulate the division of financial powers of local governments at all levels in the form of laws on which basis to standardize the tax system as well as the division of fiscal revenues and expenditures. In addition, China should pay more attention to regulating and improving the central government’s system of transfer payment to local governments. If the development of the tax sharing system lacks legal protection, it will be distorted in the actual implementation, although it has a certain degree of perfection and standardization in the preliminary design. If fiscal law-making lags behind, the implementation of the taxsharing system will be arbitrary and irrational. Therefore, governing and managing finance according to law is the objective requirement of the tax-sharing system.

4.1.3.3

Law-Based Tax-Sharing System is a Prerequisite for the Improvement of the Fiscal Law

The core of the law-making concerning the tax-sharing system is to supervise the state’s fiscal power and to confine the exercise of power within the institutional cage. That is, the state’s financial power is under the supervision of the constitution and laws. The tax-sharing system is implemented to adapt to the development of the market economy, which operates under laws. Therefore, a high degree of the rule of law is an important prerequisite and guarantee for the implementation of the taxsharing system. There is a difference between “the rule of law” and “the legal system”. The so-called “rule of law”, in contrast to “the rule of man”, is a form of political governance. Unlike “the rule of law”, “the legal system” is a political system that regulates people’s behavior in an institutional way. The relationship between them is that the implementation of the rule of law must be based on the implementation of “the legal system”. Only by establishing and improving the socialist legal system can the goal of the socialist rule of law be realized. A society ruled by law is based on the premise of a market economy, and it originates, proceeds, and develops together with a market economy. Therefore, in such an environment, rule-of-law government behavior is determined by the nature of the market economy. This is because the

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components of a market economy are not limited to enterprises and individuals but should also include government behavior. Only when there is an effective legal system can the behavior of these three components be constrained by law and the implementation of the socialist rule of law be guaranteed. At the same time, a ruleof-law society also requires fiscal power to be supervised and regulated by law. Tax revenue is the main source of government revenue. To regulate the behavior of the government, it is necessary to bring the government’s fiscal behavior under the supervision of the law. As far as China is concerned, the tax-sharing system is the core of fiscal revenue in the current tax system, and it is the basic aspect of China’s finance. It is not limited to the policy level. In today’s society that emphasizes the rule of law, it should be stipulated by the constitution. However, the major reform of the tax-sharing system does not have a specific law as a legal basis in China, which runs counter to the fundamental requirements of the socialist country ruled by law. Finance is the basic power of the state. “There is no government without finance”. Therefore, the government’s fiscal power should be regulated in the constitution and laws, and it should be clearly defined and divided. Specifically, the tax-sharing system shall be clearly specified at the legal level. Only in this way can China give full autonomy to the functions of the government, promote the development of the national economy and improve people’s living standards. It is also an important institutional arrangement determining a country’s prosperity and progress.

4.2 China’s Current Tax-Sharing System: Tax Revenue Sharing Game Between Central and Local Governments 4.2.1 A Reexamination of the Purpose of the Tax-Sharing System 4.2.1.1

Background of the Tax-Sharing System Introduced in 1994

The current tax-sharing system was introduced in 1994 when the rights and interests of various economic entities in the market economy became increasingly independent, and local governments at all levels were gradually pursuing their own interests. This is an inevitable trend of market economic development. In addition, free competition arose between independent economic entities, and it led to another byproduct, local protectionism. Due to the financial independence of governments at all levels, local governments once used administrative methods to limit the outflow of local resources to protect their own interests, which led to the “cotton war” and “silk war”. Others used administrative methods to prevent the inflow of foreign products. To encourage the development of the local tobacco and alcohol industries, some regions stipulated that only locally produced tobacco and alcohol could be served at all official receptions. Similar regulations existed for products such as automobiles. The

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country’s unified market was increasingly dividing itself, and regional blockades and trade monopolies were being strengthened. In contrast, with the increasing economic strength of local governments, the status of the central government declined daily, which was manifested by weak financial resources and a lack of macrocontrol capability. Before the tax-sharing system was introduced in 1994, the tax revenue of the central government was much lower than that of local governments. Take 1992 as an example. At that time, the revenue collected by the central government was only 85.3 billion Yuan, while the revenue collected by local governments reached 244.3 billion Yuan. The tax revenue of the central government only accounted for 1/4 of the country’s total tax revenue. Due to the serious shortage of revenues, the central governments had to “borrow money” twice from local governments, and afterwards, it “borrowed money and did not pay back”.6 To remedy this situation, the State Council promulgated the “Decision of the State Council on Implementing the Financial Management System of Tax-sharing System” (hereinafter referred to as the “Decision”) in 1994. The document emphasized that the central government sought “to promote the reasonable growth of the state’s financial revenue” and at the same time “to gradually increase the proportion of the central financial revenue and to appropriately increase the financial resources of the central government”.7 The “decision” pointed out that the principle of tax-sharing system reform should be the combination of administrative power and financial power and that the main content of the tax-sharing system was drafted under the guidance of this principle. The tax categories enjoyed by different levels of governments should be reasonably classified, separately levied and managed. A reasonable transfer payment system should be set up together with the new tax system. Specifically, the “Decision” pointed out that the tax categories necessary for safeguarding national rights and interests and implementing macroeconomic regulation and control were classified as central taxes; that the tax categories that were directly related to economic development and could grow steadily were classified as taxes shared by the central and local governments; and that the tax categories that were suitable for local collection and management and closely related to local economic development were classified as local taxes. Generally, the 1994 adjustment of the tax-sharing system was mainly attributed to economic factors and modulated the relationship between the central government and local governments with regard to financial resources. “Finance precedes administrative affairs”, and the influence of economic factors is the foundation of political and other factors. Therefore, from this point of view, it is historically inevitable to adjust the tax-sharing system primarily based on economic factors. However, in that context, the tax-sharing system that all parties compromised to reach was designed

6

Hexun Net. Thirty-year Reform, Tax-sharing System Reform in 1994. http://news.hexun.com/ 2008/1994fszgg/index.html. 7 The State Council of China. Decision of the State Council on Implementing the Financial Management System of Tax-sharing System, Bulletin of State Council of the People’s Republic of China. No. 30, 1993.

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with little consideration for the rule of law. The deficiencies in the system have been increasingly apparent in due course.

4.2.1.2

The Tax-Sharing System Developed Eventually into a “Tax Revenue Division”

Although the division of financial and administrative powers was emphasized at the beginning of the reform, there were no laws to guarantee that the central and local governments were relatively equal at the legal level of the tax-sharing system. In the specific competitive environment wherein the central government was both a “referee” and an “athlete”, the financial power in the tax-sharing system was gradually separated from the administrative power. The division of financial power between the central and local governments gradually degenerated into a dividing game where two parties competed only for tax revenue. First, the system of appointing officials, especially chief executive officers, by the higher level of governments determines how much responsibility the local government shoulders to fulfill “administrative power”. This does not require the approval and supervision of the local people but acts mainly as “accountability to the uppertier authorities”. However, the central government is not a direct recipient of local public goods or services. Therefore, it can only adopt indirect measures such as “performance appraisal” or “survey of public satisfaction” to see if local governments have completed their tasks. More importantly, the central government is relatively indifferent because it is not the direct beneficiary of local public goods or services. In the institutional arrangements for the “division of power” and “division of financial power”, higher levels of government are more concerned with the “division of financial power”. When taxes are the main source of revenue in the general public budget, both the higher levels and lower levels of government are more concerned about “tax revenue sharing” than the “administrative power” to shoulder responsibilities. Second, the “performance appraisal” of the lower levels of government by the higher levels of government is usually not entirely based on concern for the public but rather on the task objectives they have set. In the early period of China’s reform and opening up under the guidance of “efficiency first with consideration for fairness”, great importance was attached to the efficiency of economic development. This importance was manifested from the fact that the government at all levels took the “economic growth rate” as the main indicator in the evaluation of the lower level of government. Local fiscal revenue was also an important indicator in the evaluation. In some areas, a “one-vote veto” system was sometimes set up to place special emphasis on the tasks that the higher levels of government need the lower levels of government to complete. This system does not require strict management. The higher levels can arbitrarily roll out any indicators for performance appraisal, often trapping local governments in the tasks to be inspected and evaluated, thus ignoring, or being unable to provide local people with, public goods or services.8 8

Xiao, Yao. & Han Liqun, Geng Minde. Policy Focus: Please Do not Abuse One-Vote Veto, Sep. 21, 2011. See http://politics.people.com.cn/GB/15711070.html.

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It was in such an institutional environment that the “administrative power” reform and “financial power” reform began gradually deviating from each other. Governments at all levels were paying increasing attention to tax revenue sharing between governments, while people were unable to supervise local governments to see if they had fulfilled their responsibilities.9 This reform of the tax-sharing system with “Chinese characteristics” was not based on the clear division of powers between governments, nor was it a real fiscal and taxation decentralization in the sense of the rule of law. Local financial power, an act of “decentralization” granted by the central government, is not “fiscal decentralization” in its nature and could only serve as a “financial division of labor” at best.10

4.2.2 Tax Revenue Game Between the Central and Local Governments Due to Information Asymmetry Although the “decision” specifies the tax revenue sharing, tax legislative power and tax collection and management power of the central and local governments, it has a relatively low legal status. Essentially, it is a provision that the National People’s Congress and its Standing Committee have authorized the State Council to formulate. The legal normative documents related to the tax-sharing system established on the basis of this “decision” are mostly administrative. “Administrative power”, “financial power” and transfer payments are only general provisions and cannot be put into practice. However, since the central government has full power to make tax rules, adjust taxes, reduce taxes and exempt certain entities from taxes, it will make full use of the institutional advantages to arbitrarily change the proportion and ownership of local tax revenues and seek active measures to ensure the maximization of its tax share.

4.2.2.1 (i)

The Central Government Initiates the Game

The central government made arbitrary use of tax legislation and adjusted power to change the tax-sharing proportions and ownership

Table 4.1 is a comparison between the jurisdictions of the central and local tax categories in 1994 and 2016. The tax categories defined by the central government in 1994 were only consumption tax, customs duty, corporate income tax and business tax. The corporate income tax was then divided according to the ownership of the enterprises. The business tax of special industries was also a central tax. The revenue shared by the central and local governments was mainly from value-added tax and 9

Zhang X. Fiscal Decentralization and Political Centralization in China: Implications for Growth and Inequality. Journal of Comparative Economics. 2006(4), pp. 713–726. 10 Shen, Shouwen. On the Constitutional Nature of China’s Tax-sharing System. Present Law Science, No. 10, 2012.

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Table 4.1 Division of Central and Local Taxes in 1994 and 2016 1994

Central taxes

Local taxes

Shared taxes

1. Consumption Tax

1. Individual Income Tax

2.Consumption Tax and Value-added Tax (collected by the customs house)

2. Local Corporate Income Tax (except for specific sectors)

1. Value-added Tax (the central government accounts for 75%; local governments, 25%)

3. Customs Duty 4. Corporate Income Tax paid by the central enterprises

3. City and Township Land Utilization Tax

5. Business Tax, Corporate Income Tax, and Urban Maintenance and Construction Tax paid by railway departments and headquarters of banks and insurance companies

4. Property Tax

2. Stamp Tax on Stock Trading (the central and the local divide it fifty-fifty)

5. Agricultural and Animal Husbandry Tax 6.Regulating Tax on Fixed Assets Investment

7. Urban Maintenance and Construction Tax (Excluding 6. Corporate Income Tax paid by the local banks, foreign banks, and institutions paying to the central government) non-bank financial institutions 8. Business Tax (Excluding institutions paying to the central government) 9. Vehicle and Vessel Tax 10. Deed Tax 11. Slaughter Tax 12. Land Appreciation Tax 13. Agricultural Specialty Tax 14. Farmland Occupation Tax 15. Stamp Tax 16. Resource Tax (excluding Offshore Oil Tax) Adjust-ing period

1. Corporate Income Tax became a shared tax in 2002( the central government accounts for 60%; local governments 40%, excluding those institutions paying only to the central)

1. Abolition of Regulating Tax on Fixed Assets Investment in 2000

2. Collection of Vessel Tonnage Tax in 2001, which has been a central tax

3. Abolition of Slaughter Tax in 2003

1. The Stamp Tax on Stock Trading became a central tax in 2016

2. Individual Income Tax and Local Corporate Income Tax became shared taxes in 2002

4. Abolition of Animal Husbandry Tax and Agricultural Specialty Tax except Tobacco Tax in 2004, and Abolition of Agricultural Tax in 2006 5. The replacement of the Business Tax with the Value-added Tax in 2012 6. The Stamp Tax on Stock Trading became a central tax in 2016

2016

1. Consumption Tax

1. Resource Tax (excluding Offshore Oil Tax)

1. Value-added Tax (the central government accounts for 75%; the local, 25%) (continued)

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Table 4.1 (continued) Central taxes

Local taxes

2. Consumption Tax and Value-added Tax (collected by the customs house) 3. Customs Duty

2. Property Tax

Shared taxes

3. City and Township Land Utilization Tax

4. Business Tax, Corporate Income 4. Land Appreciation Tax Tax, and Urban Maintenance and Construction Tax paid by railway departments and headquarters of banks and insurance companies 5. Vessel Tonnage Tax 5. Deed Tax 6. Stamp Tax on Stock Trading 7. Offshore Oil Tax

6. Farmland Occupation Tax 7. Vehicle and Vessel Tax

2. Corporate Income Tax (the central government accounts for 60%; the local, 40%)

3. Individual Income Tax (the central government accounts for 60%; the local, 40%)

8. Stamp Tax (excluding the Stamp Tax on Stock Trading) 9. Urban Maintenance and Construction Tax (excluding institutions paying ONLY to the central government) 10. Tobacco Tax

tax on stock trading, while the revenue from other taxes belonged to regular local income. Figure 4.1 reflects the changes in central and local governments’ tax revenues from 1992 to 2014. The central and local revenues were close to each other in 1994,

Local governments’ tax revenue

Central government’s tax revenue

(By courtesy of National Bureau of Statistics of China) Fig. 4.1 Tax revenues of China’s central and local governments from 1992 to 2014 (CNY 100 million)

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with each government accounting for approximately 50% of the total revenues. With the development of the economy and the passage of time, some taxes have changed correspondingly, and the central government has readjusted the ownership of some taxes in the overall framework. Those are the main changes. (1) In 2002, the corporate income tax and the individual income tax were classified as taxes shared by central and local governments. Finally, the central and local governments shared the income tax at a ratio of 6:4. In 2008, separate corporate income taxes for domestic and foreign companies were abolished, and the two were merged into one. (2) The regulating tax on fixed assets investment was suspended, and local taxes such as animal husbandry tax, agricultural tax and slaughter tax were gradually abolished. (3) Since 2012, the whole country has gradually experimented with changing business taxes into value-added taxes by industry. (4) Of the stamp taxes, the tax on stock trading was adjusted in 2016 to be a central tax. As seen from Table 4.1, by 2016, the central government’s fixed income came from three more taxes than in 1994 in addition to consumption tax, customs duty and income tax on specific enterprises. They were vehicle tonnage tax, stamp tax on stock trading and offshore oil resources tax. In addition to the expanding value-added tax, the shared taxes extended to include corporate income tax and individual income tax. At this point, the central government and local governments have basically reached a situation where they share the main tax categories with the central government enjoying the priority. As shown in Fig. 4.1, although the tax revenue of the central and local governments has increased significantly since 1994, the tax revenue of the central government has increased more significantly than that of the local governments. The tax revenue of the central government has always been higher than that of the local governments. Most noticeably, from 2000–2010, the gap between central tax revenue and local tax revenue peaked at 780.7 billion Yuan in 2010. The central government’s tax sharing proportion also reached 58.6% in 2004. In addition, the main laws and regulations involved in the central government’s adjustment of the tax revenue sharing include “Notice of the State Council Concerning the Printing and Issuance of the Reform Scheme for Income Tax Sharing” (No. 37 of the State Council) which came into effect on January 1, 2002; “Decision of the Standing Committee of the National People’s Congress on the Abolition of the Agricultural Tax Regulations of the People’s Republic of China” adopted by the Standing Committee of the National People’s Congress on January 1, 2006 (Decree No. forty-sixth of the president of the People’s Republic of China);” the Corporate Income Tax Law of the People’s Republic of China” (Decree No. 63 of the President of the People’s Republic of China) which was examined and passed by the National People’s Congress and came into force on January 1, 2008; “the Pilot Scheme for the Change of Business Tax into Value-Added Tax” which, approved by the State Council and issued jointly by the Ministry of Finance and the State Administration of Taxation, went into effect on January 1, 2012 (No. 110 of Tax [2011]); “the Notice on Comprehensively Pushing forward the Pilot Scheme of Changing Business Tax to Value Added Tax” which, approved by the State Council and jointly issued by the Ministry of Finance and the State Administration of Taxation, came into effect on May 1, 2016 (Finance [2016] No. 36). Among them, there was only one tax law

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enacted by the NPC and its Standing Committee: the Corporate Income Tax Law of the People’s Republic of China. Most of others are administrative documents of the State Council or ministries. In other words, the central government adjusted tax revenue more by administrative means than by legal channels. (ii)

The main gaming strategy is expanding the shared taxes and increasing the central government’s proportion of the shared taxes

An important strategy of the central government’s initiative game is to readjust the taxes enjoyed by local governments under the framework of the 1994 tax-sharing system to the taxes shared by both the central and local governments. The most obvious examples are individual income tax, corporate income tax and value-added tax derived from business tax. Figure 4.2 shows the changes in fixed and shared revenues of the central and local governments from 1999 to 2013. It can be seen that (1) over the years, the fixed revenue of the central government is higher than that of the local governments; (2) over the years, the shared income of the central and local governments was much greater than that of the fixed income, while the central government took a larger proportion in the shared income. As a result, the central revenue is much higher than the local revenue. (iii)

The central government abused tax exemption to arbitrarily reduce the tax revenue belonging to local governments

Local governments’ revenue

Central government’s revenue

Revenue shared by the local and central governments Fig. 4.2 Regular Revenues and Shared Revenues of the Central and Local governments from 1999 to 2013 (CNY 100 million)

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As seen from Table 4.1, all the tax exemptions after 1994 were used to abolish taxes belonging to the local taxes. The cases include the abolitions of regulating tax on fixed assets in 2000, slaughter tax in 2003, animal husbandry tax and tax on agricultural specialty except tobacco in 2004, and agricultural tax in 2006. The central government-dominated arbitrary adjustment of the financial power relations between tax-sharing governments is precisely due to the lack of legal constraints. Since there was no legal basis, the prior agreement on the distribution of financial power among governments was changed at will by the central government that dominates taxing power, which had a significant impact on the certainty and stability of local financial operations, especially at the grassroots level. The taxsharing system is a product of the times, and its lack of a legal system reflects the main problems encountered by China in such a developing and transitional stage, namely, excessive administrative power and relatively weak legislative and judicial power. The tax-sharing system is not protected by the legal system. On the surface, it seems that legal documents are in need. When going deeper, we find that holders of rights at all levels regulated by the tax-sharing system do not have a standardized framework within which to discuss their respective interests and distribution. (iv)

Legal protection for the tax-sharing system is even more deficient below the provincial level

First, the local governments at all levels do not have tax legislation. Article 72 of the Law on Legislation of the People’s Republic of China stipulates that the local people’s congress and standing committee may formulate corresponding local regulations without contravening the Constitution, laws and administrative regulations. However, since the “decision” stipulates that “the legislative power for central taxes, shared taxes and local taxes should be concentrated in the central government to maintain the unity of central decrees, safeguard the national unified market and ensure equal competition between enterprises”, local governments have no power to levy taxes. Most of the local tax laws, regulations and the relevant implementation rules are formulated and promulgated by the central government. Local governments only have the right to adjust some taxes within the tax rate range of certain types of taxes and the right to formulate preferential tax policies.11 Second, the tax-sharing system below the provincial level is even less protected by the legal system. In 1994, the tax-sharing system mainly solved the contradiction between the central and local governments’ division of tax power. Article 7 of the “Decision” stipulates that all regions should implement reform supporting the tax-sharing system. The people’s governments of all provinces, autonomous regions, municipalities directly under the central government, and cities separately listed on the state plan shall formulate financial management systems for their own cities and counties in accordance with this “Decision”. In practice, most tax-sharing systems below the provincial level follow the central and provincial methods of tax division and decentralization, which has led to a significant increase in provincial and 11

Wang, Qiao. & Xi Weiqun. Improving the Local Tax System under Modern State Governance System. Beijing: Economic Science Press, 2015, p. 54.

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municipal financial resources. However, there is less fiscal revenue at the grassroots level, especially within the county and township governments.12 However, most of the legal sources on which the subprovincial tax-sharing system is based are the administrative documents of local governments.

4.2.2.2

Local Governments Passively Play the Game

Compared with the central government as a policy maker, local governments, as policy executors, have relatively more abundant information because they are closer to tax sources. The “rational man” assumes that they will take advantage of the asymmetry of tax collecting information to play a passive game, although they cannot use the relevant power of tax laws to pursue maximum tax sharing. (i)

Local governments use information asymmetry in tax collection and administration to impose “excessive tax” or “sports tax clearance” to regulate tax payments

Information asymmetry in tax collection and management refers to the condition wherein the local government knows more about the collection and payment of actual tax sources than the central government. The case of imposing an “excessive tax” often occurs when the proportion of tax revenue between the central and local governments changes. For example, the tax-sharing system in 1994 stipulated that the division of value-added tax should be based on the value-added tax in 1993, resulting in a sharp increase in local governments’ value-added tax at the end of 1993. Another typical example is the policy issued by the State Council in 2002, which changed the ownership of corporate income tax according to the ownership of enterprises, stipulating that the amount of local corporate income tax in 2001 should be taken as the basis, and the excess should be divided proportionally thereafter. As a result, the amount of local corporate income tax increased significantly in the last few months of 2001. The Ministry of Finance urgently reported the situation to the State Council, and the General Office of the State Council made a case to issue a circular to the local governments (The General Office of the State Council Published No.1 [2002]). According to the report,13 the income tax of local enterprises grew rapidly in November and in early and mid-December 2001, with increases of 9.923 billion Yuan and 8.982 billion Yuan, 139.4% and 187.1%, respectively, over the same period of the previous year. The growth rate continued to climb. As the end of 2001 approached, the increase was different every ten days. In the first ten days of December 2001, the growth rate was 157. 8%, and in the middle of December, the growth rate further hiked 198. 8% so that increases became stronger and stronger. 12

Xiong, Wenbiao. A Study of the Rule of Law in the Relations between the Central and Local Governments in Major Countries. Beijing: China University of Political Science and Law Press, 2012, p. 243. 13 The General Office of the State Council. Urgent Notice of the General Office of the State Council Forwarding the Report of the Ministry of Finance on the Increase of Income Tax of Local Enterprises in November and December 2001. Shanxi Political Newspaper, No. 4, 2002.

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Among them, 24 provinces, municipalities and regions increased by more than 100% in the first half of December. There were five regions with an increase of more than 500%, namely, Jiangxi Province, Ningbo City, Henan Province, Guangxi Zhuang Autonomous Region and Qingdao City, among which Jiangxi Province had the largest increase of 816%, which was 8 times as much as that of the same period in 2000.14 Although the Ministry of Finance and the National Audit Administration jointly identified the abnormal growth factors of corporate income tax in 2001, the local governments’ negative response to the reform was evident. A similar case occurred on May 1, 2016, before the full implementation of the “business tax to value-added tax” reform. Due to this reform, the business tax formerly owned by the local government became the value-added tax shared by the central and local governments. In the first quarter of 2016, there was an abnormal increase in business tax and value-added tax coming from business tax. For this reason, the Ministry of Finance and the State Administration of Taxation issued a special document stating that “it is strictly prohibited to collect taxes across months and quarters or adjust measures to collect taxes in advance … It is strictly prohibited to clear or pay overdue taxes by campaign … it is strictly prohibited to require taxpayers to pay upfront or overpay before May 1, and have tax refund or make underpayment after May 1 … It is strictly prohibited to collude with enterprises to adjust accounts, etc.” When local governments cannot effectively pursue legitimate interests through channels within the system, they will use information asymmetry to seek implicit games outside the system. This implicit game will not only increase the government’s management costs and affect the effectiveness of tax policies but will also undermine law-based taxation and affect the seriousness of tax laws. (ii)

Local governments take advantage of the information asymmetry of tax collection to regulate the completion of tasks

Statitory taxation requires local governments to collect all taxable sources under their jurisdiction without levying “excessive taxes” or “less tax than required”. However, in practice, higher levels of government often allocate the annual tax payable plan to lower levels of government to complete the total annual tax payment. This is a topdown “plan” carried out at all levels. According to the provisions of the tax-sharing system, the central government’s tax return to the local governments has increased by a factor of 1: 0.3 on the basis of the 1994 tax-sharing base. That is, the central government’s tax return to the local governments will increase by 0.3% for every 1% 14

The actual situation is that Jiangxi Province has increased by 816%, Ningbo City, 708.7%, Henan Province, 609%, Guangxi Zhuang Autonomous Region, 597.7%, Qingdao City, 577.2%, Inner Mongolia Autonomous Region, 496.9%, Zhejiang Province (excluding Ningbo City), 467.5%, Ningxia Hui Autonomous Region, 462.2%, Anhui Province, 404.5%, Guizhou Province, 376.5%, Xinjiang Uygur Autonomous Region, 352.9%, Jilin Province, 314.8%. Shandong Province (excluding Qingdao City), 235.6%, Tianjin City, 230.1%, Jiangsu Province, 223.5%, Chongqing City, 197.5%, Hubei Province, 179.2%, Hebei Province, 173.3%, Gansu Province, 167.4%, Dalian City, 164%, Shanxi Province, 155.7%, Yunnan Province, 142.8%, Hunan Province, 128.6%, and Shaanxi Province, 104.6%.

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increase in the total tax revenue of value-added tax and consumption tax. Since local governments can enjoy only a small proportion of incremental taxes, their actual enthusiasm for taxes is not high. However, the central government is unaware of the local government’s actual ability to fulfill their taxing duties. Consequently, local governments view the completion of their taxing task as the highest goal in practice. After the task is completed, local governments often take advantage of information asymmetry to delay collecting local payable tax sources to the next year.15

4.3 The Experiences of Tax-Sharing Systems Based on the Rule of Law in Typical Countries 4.3.1 An Examination of Tax-Sharing Systems in Typical Countries At present, most of the market economy countries in the world have adopted the taxsharing fiscal management system to adjust the distribution of fiscal power and taxing power between central and local governments. On the basis of the unitary administrative system in China, we examine the tax-sharing systems in unitary countries, including the United Kingdom, France, and Japan.

4.3.1.1

The United Kingdom

The United Kingdom is a country with a strict tax sharing system. The central and local governments strictly distinguish between their taxes, and there is no shared tax. The two levels of government set up different tax distribution systems. Under the legislative power of taxation, the United Kingdom is a typical centralized country. The legislative power of taxation is entirely at the disposal of the central government, and local governments are not entitled to it. However, local governments can make decisions on the levy and exemption of local taxes and at the same time have certain authority to adjust the tax rate. However, even so, the central government sometimes interferes with the local tax authority. In terms of tax allocation, Britain’s central tax revenue amounts to approximately 90% of the country’s total tax revenue, and all major taxes are exclusively owned by the central government.16 The specific taxes include personal income tax, capital gains tax, corporate tax, inheritance tax, oil income tax and stamp tax. Indirect taxes include value-added tax, fuel tax, tobacco tax, alcohol tax, customs duty, gambling 15

Jia, Kang. How to View the Tax Collecting Tasks, July 23, 2001. See http://www.people.com.en/ GB/jinji/36/20010723/517839.html. 16 Li, Hai. & Zhang Dafen. A Review of the International Experience of Tax-sharing System – Taking the Four Countries’ Tax-sharing System in Britain, France, Germany and the United States as an Example. Tax Studies. No. 11, 2014.

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tax, landfill tax, aviation tax and climate change tax. There are also social security taxes, investment interest taxes and others. In fact, the only local taxes are municipal taxes and business taxes. The municipal tax is levied on the appraisal value of residential property, wherein the taxpayer is the actual user of the property; the business tax is levied by the tax agencies subordinate to the local finance departments. However, business tax revenue is not directly owned by the local government. First, it must be turned over to the central government in full, and then the central government recalculates and redistributes it to the local government according to specific formulas, mainly corresponding to the number of residents in various regions. Therefore, business tax is often regarded as a central government tax, and its income is used exclusively to provide funds to local governments.17 To balance the financial power of local governments, since the central government accounts for most of the total fiscal revenue, the British central government’s transfer payments to local governments are also very large, with central subsidies accounting for approximately 60% of local expenditures. The British government divides transfer payments into general subsidies and special subsidies, mainly to ensure the equality of public services. General subsidies account for approximately 90% of the total subsidies, while special subsidies amount to only 10%. General subsidies do not distinguish between expenditure purposes and are mainly used to maintain the financial balance of the local government. Earmarking subsidies are for designated uses, such as the city’s public infrastructure, environmental protection, social security and other specific functional expenditures.

4.3.1.2

France

As a unitary country, France’s taxing power is also highly concentrated in the central government. Moreover, the central government not only has tax legislative power but also has the power to distribute tax revenue. The central government obliges the Ministry of Finance to formulate specific tax regulations and decrees. The standard rate of local taxes should also be approved by the Ministry of Finance. The taxing power of local governments is very small, and they only have certain limited power over some local taxes. The Ministry of Finance is also responsible for the collection and management of taxation by setting up the State Administration of Taxation and the Customs and Tariff Bureau. Local governments also have no power in tax collection and administration. Local taxes are collected on behalf by agencies of the State Administration of Taxation. However, the ultimate right of use is still vested in local governments. The right of use is returned to local governments monthly for 12 months after the local tax collection. In terms of tax classification, the central tax includes large and stable taxes such as value-added tax, income tax and consumption tax, and its tax revenue accounts 17

Kou, Tiejun. Legal Arrangements for the Division of Intergovernmental Financial power and Administrative power: Experiences of Britain, the United States, Japan and Germany and Their Enlightenment to China. Studies in Law and Business. No. 5, 2006.

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for approximately 75% of the total national tax revenue, while local taxes account for only 25% of the national tax revenue, of which real estate tax is the major source. Because the central government’s revenue is relatively high, France also has largescale transfer payments from the central government to the local government, and 35% of the total local expenditure depends on the central subsidies. Like Britain, the main purpose of the central government’s transfer payment to the local governments in France is also to guarantee the equalization of public services, which are divided into two types: comprehensive subsidies and special subsidies. Comprehensive subsidies, which account for approximately 70% of the total revenue, are the main form, whereas special subsidies usually account for only 30%. Like the UK, comprehensive subsidies are usually not earmarked, and their size generally depends on the size of the local population, as well as on the local tax capacity. Special subsidies are also used for specific expenditures of local governments, such as special projects.

4.3.1.3

Japan

There are three levels of government in Japan, and it is also a typical unitary country. In addition to the central government, all prefectures, towns and villages in the government hierarchy are local governments. Japan’s legislative system came into being after World War II, and it belongs to a legislative system in which centralization and local autonomy coexist. The “Local Autonomy Law of Japan” is a specific statute that guarantees local autonomy, but the fundamental confirmation of local autonomy is “The Constitution of Japan”. In form or in practice, the autonomy and independent status of autonomous bodies are guaranteed in the relationship between local autonomous bodies and the central government in Japan. Correspondingly, Japan’s tax-sharing system also reflects this unique relationship between the central and local governments. Specifically, in Japan’s tax legislation. Legislative power is more concentrated, but law enforcement power is relatively decentralized. In terms of tax revenue, income is relatively concentrated, but tax expenditures are relatively decentralized. Each of the three levels of government in Japan has its own tax category. The central taxes mainly include Personal Income Tax, Corporate Tax, Gasoline Tax, Alcohol Tax, Consumption Tax, Tobacco Tax, Aviation Fuel Tax, and Customs Duties. The major taxes in the prefectures include Resident’s Tax, Business Tax, Cigarette Tax, Real Estate Acquisition Tax, and Golf Course Utilization Tax. The taxes enjoyed by cities, towns and villages belonging to the grassroots government mainly include Residents’ Tax, Real Estate Tax, National Health Insurance Tax, Special Land Occupancy Tax and Mineral Products Tax. In terms of transfer payments, Japan’s central and local fiscal expenditure ratio is approximately 2:3 per year, but the tax revenue ratio is 3:2. The mismatch between administrative power and financial power makes transfer payments between governments indispensable. Fiscal transfer payments between governments at all levels in Japan mainly include four types: local delivery tax, treasury expenditure, local

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transfer tax and local special payment. Among them, the former two are the main forms, accounting for more than 90% of the total transfer payments.18

4.3.2 Lessons from Developed Countries Practising Tax-Sharing Systems 4.3.2.1

The Tax-Sharing System is Built upon a Clear Definition of Intergovernmental Power in Developed and Rule-Of-Law Countries

The purpose of establishing a tax-sharing system in a country well developed under the rule of law is to better promote the equal provision of local public goods.19 Therefore, the relevant laws and regulations will specifically clarify the functions and expenditure responsibilities of governments at all levels. Taking France as an example, Zhu Qiuxiang (2008) pointed out that France is a traditional centralized state, and local governments usually have no autonomy. In spite of this, the division of functions and responsibilities between different levels of government in France is relatively clear, and local finance also has greater autonomy. The central government only exercises legal supervision over local finance after the event. The situation in Japan is different from that in France. Japan’s intergovernmental division of powers is characterized by the central and local governments’ joint provision of major public goods. Except for national defense, foreign affairs and public security, which are clearly the responsibility of the central government, most other public goods or services, including education, health, social welfare, roads, rivers, industry and commerce, are provided jointly by the central and local governments. Although the central and local governments are jointly responsible for the provision of many public goods or services, it does not mean that the functions of local governments are only an extension of the functions of the central government. In contrast, the relationship between the two is more about cooperation and the division of labor. It is noteworthy that although the “administrative power” of governments at all levels in developed countries governed by the rule of law corresponds to “financial power”, “financial power” is not equal to “taxing power”, which needs to be guaranteed by standard transfer payments.

18

Liu, Lin. & Sun Lei. Overview of Japan’s Transfer Payment System and Its Experiences. Business Studies. No. 3, 2012. 19 Rostenkowski, D. D. Tax shared and the Constitutional Convention. DePaul Law Review. No. 17, 1967.

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A Legal System to Clearly Guarantee the Separation of Taxes and Powers Between Governments

Developed countries ruled by law have clear legal provisions on the division of fiscal power and taxing power among governments, which are generally reflected in the constitution or fundamental laws. For example, Sect. 8 of Chap. 1 of the U.S. Constitution stipulates that “The congress has the power to collect taxes”. Section 7 of Chap. 1 stipulates that “the proposal for taxation shall be put forward by the House of Representatives”. Regarding the taxing power of local governments, the tenth amendment of the U.S. constitution stipulates that “all the powers not prohibited to state governments except those granted to the federal government by the constitution belong to the state government or its people.” Therefore, it can be understood that the state government has the power to make its own decisions in other tax areas as long as it does not violate the federal government’s statutory principles of taxation. Japan, on the other hand, stipulates the relationship between local governments and the central government through the “Local Autonomy Law of Japan”. It also makes a general division between administrative power and financial power among governments. Another example is Germany, which is mainly composed of three levels of government, including federal, state and local (municipal) levels. Each state formulates its own constitution, and both the federal government and the state government shall perform their duties within their respective areas in accordance with the Basic Law of the Federal Republic of Germany (also known as the Federal Basic Law). Chapter 10 of the Federal Basic Law, the Financial System, specifies the limits of government expenditures at all levels, the distribution of tax legislative power, the composition of tax revenue, and the transfer payments made by the Federation to local governments.20 For example, article 106 provides detailed provisions on the distribution of income among governments at various levels. The federal government’s fiscal revenue mainly includes national monopoly operation income, customs duty, capital transaction tax, personal income tax, and corporate income surtax. The state government’s taxes include property tax, inheritance tax, beer tax, and gambling facilities tax. The main tax revenues of local governments come from real estate taxes, transaction taxes, consumption taxes and expenditure taxes. Local governments can set the tax rates of real estate taxes and transaction taxes within the scope of relevant laws.21

20

Kou, Tiejun. Legal Arrangements for the Division of Intergovernmental Financial power and Administrative power: Experiences of Britain, the United States, Japan and Germany and Their Enlightenment to China. Studies in Law and Business. No. 5, 2006. 21 “The Basic Law of the Federal Republic of Germany”, https://www.bundestag.de/blob/284870/ ce0d03414872b427e57fccb703634dcd/basic_law-data.pdf.

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The Allocation of Taxing Power Adapts to Their Respective National Conditions and Tax Legislative Power Tends to Be Centralized

According to Zhu Qiuxiang (2008), decentralization, centralization, a unitary system and federalism are merely tools of state governance in the eyes of politicians in terms of the allocation of financial power between the central and local governments. The allocation of taxing power in various countries is also in line with the needs of the times according to their own national conditions. As mentioned above, the common feature of unitary countries such as France, the United Kingdom, and Japan is that tax legislative power is highly concentrated in the hands of the central government or parliament. However, the tax administration is different. Power is more concentrated in the central government in Britain and France. For example, the tax administration is carried out by the tax bureau under the Ministry of Finance in France. Although Japan is also a unitary country, the degree of local autonomy is relatively high. The tax administration in Japan is distributed at the local level.

4.3.2.4

The Transfer Payment System is Statutory

First, most developed countries under the rule of law have clearly regulated the transfer payment system through the Constitution and laws. For example, Germany emphasized the principle of “consistent living conditions” in “The Basic Tax Law of Germany”, which stipulates that states with high economic development must provide certain subsidies to states with a low level of economic development. In addition, some relevant laws and regulations, such as the “Tax Allocation Act and the Federal and Interstate Fiscal Balance Act”, have made specific provisions for fiscal transfer payments. Second, the design of the transfer payment system embodies objectivity and certainty. For example, the amount of tax distribution between local governments in Japan is calculated according to certain standards, formulas and procedures. The formulation of this distribution system in itself can largely avoid the interference of human factors on financial transfer payments. However, the British central government has adopted a typical factor method for local transfer payments. According to the functions assumed by the governments at various levels, such as major cities, prefectures, counties and townships, the total funds required for government expenditures are calculated on the basis of a large amount of solid, complete and accurate information. Then, considering the differences in expenditures and situations of individual places, a specific model is designed to serve as the basis for local transfer payments.

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4.4 Basic Ideas of a Law-Based Tax-Sharing System 4.4.1 Regulating Intergovernmental Tax Distribution in Accordance with Law The form of law and institution determines that the power relationship between central and local governments is based on specific interests. In this relationship, power is the shell in which the actual conflict of interests involving the two levels of government resides. In this sense, a rational relationship between central and local governments has become the premise and foundation for the law-based tax sharing system. The political development of the relationship between the central and local governments in China has gone through two stages, the highly centralized system from 1949 to the period before the reform and opening-up and the period since the Third Plenary Session of the Eleventh Central Committee of the Communist Party in December 1978, which proposed that the overcentralization of authority should be fearlessly decentralized so that the local governments can have more autonomy. Nevertheless, local autonomy is still limited to a large extent, and the tax sharing system still needs to adhere to the principle of balancing centralization and decentralization on the premise of China’s national conditions so that the central and local governments’ power and their responsibility are in proportion and maintain relative stability after they are clearly defined by legal procedures.

4.4.1.1

Regulating Government Conduct by Law

Reform and the rule of law are contradictory affairs and processes in a certain sense. However, under the circumstance that deepening reform and enhancing the legal system are both prerequisites for realizing the Chinese dream, they should become concomitants and thus an indispensable part of the top-down design.22 In contemporary China, the most important issue that must be addressed in reforming tax-sharing budget management is how to regulate government behavior by law. In the full operation of the tax-sharing system, the role of the government as the main entity has yet to be effectively regulated by law, which strips the reform of stability, certainty and sustainability. On the one hand, the adjustment of the intergovernmental tax power relations under the existing tax-sharing system places too much emphasis on centralization and decentralization, which makes intergovernmental fiscal power relations unstable. The central government often changes its policies in the process of establishing centralization and decentralization due to changes in its own financial resources. Local governments lack legitimate rights, which is not conducive to stabilizing the expectations of governments at all levels and leads to short-term actions to seek benefits beyond the system. On the other hand, 22

Chen, Jinxi. The Relationship between the Rule of Law and Reform, and the Topdown design of Reform. Legal Science. No. 8, 2014.

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there are three models of management in social and economic affairs in China: the central management model, the local management model and the central and local comanagement model. Therefore, apart from the first two models clearly defining the power and responsibility of the central and the local governments, the shared scope is relatively extensive, and there is no clear demarcation line between the two. Management practices such as “mismatch”, “offside” and “wide open” happen across different levels of government. The administrative powers of government at all levels are frequently and informally adjusted, the local governments’ fiscal power is limited, and their financial resources are inadequate. All these factors contribute to increasing disparity between administrative and fiscal powers. In recent years, China’s government has paid more attention to ruling the country by law and to oversight and regulation by law. Governments at all levels should endeavor to streamline administration, delegate power and perform official duties in accordance with the law to avoid the “wide open” and “offside”. In a market economy, the government should do what it can to make up for the deficiencies of the market. Government functions should be transformed to bring the supplementary role of the market into full play. To avoid trapping the central and local governments in the negative cycle of “centralization” and “decentralization”, China should promote a positive cycle from the dependence on “rule by man” to that of “rule by law” in taxing power allocation. In regulating the basic fiscal relationship between central and local governments, it is fundamental to legally define their respective powers and mutual oversight. Balancing power with power and avoiding arbitrary and unstable administrative decentralization are important means to ensure better operation of taxing power allocation across central and local governments under the conditions of “fairness” and “efficiency”.

4.4.1.2

Defining the Intergovernmental Allocation of Administrative and Fiscal Powers by Law

Since the founding of the People’s Republic of China, China has been carrying out reform of the legal system, but the process is not enough to complete a sound and systematic legal system relating to the distribution of administrative and fiscal powers between government levels. In contrast, it had taken developed countries such as the United Kingdom and the United States for more than 300 years and 200 years, respectively, to formulate relatively sound laws and regulations on the parity of administrative and fiscal powers between governments since the basic establishment of the market economy. Japan’s legal reform, which began only after World War II, also took more than 50 years. Currently, China’s socialist market economy has not yet been completely established, and the short law-making process is not sufficient to make a rational legal arrangement of fiscal power well matched with administrative power between different government levels. The existing achievements of developed countries resulted from repeated trials and challenges, but it is impossible for China to invest a significant amount of time and opportunities in adjusting intergovernmental relationships when the law-making agenda is considered. Therefore, China needs

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to learn from the experience of successful countries and, in view of the national situation, complete the legal system matching fiscal power with administrative fiscal power while minimizing trial and error. To improve the system of matching intergovernmental fiscal power with administrative power, China should adhere to the following basic principles: the rule of law, keeping both the central and local governments fully motivated, moderate decentralization of power between governments, and parity of authority and responsibility. The distribution of administrative and fiscal powers should be based on the ruleof-law principle, with other principles used as reference points. The rule-of-law principle points to the fact that, after the founding of the People’s Republic of China, the adjustment of the relationship between the central and local governments was unsuccessful because it relied on policies rather than laws, and the means of adjustment inevitably bent more toward the rule of man. Therefore, it is necessary to clearly define the respective administrative powers and expenditure responsibilities of the central and local governments and to legally regulate and formalize them to ensure that the governments operate within the legal limits. In addition, the government should take active steps to build a legal system of various mutually supported laws upon which to improve governmental laws, rules, and regulations, which are necessary requirements in the practice of a hierarchical fiscal system in market economy countries. To construct a legal framework that matches administrative power with fiscal power, it is first and foremost necessary to constitutionally define the respective administrative power of the central and local governments at all levels. On this basis, the central government is in charge of the affairs of the whole country. The local government should manage affairs at the local level; the governments at all levels should clarify their own expenditure responsibilities relating to the overlapping parts and make rational divisions in different situations. In the market, the responsibilities of the central and local governments at all levels should be gradually made clear. In addition, on the basis of clearly defined administrative power and responsibility, the central government or the local governments authorized by the central government can exercise their power over matters that are not separately defined. Second, after clarifying the administrative powers of government at all levels, relevant laws need to be promulgated to rationally define intergovernmental fiscal power in terms of tax revenue, transfer payment and budget to ensure that local governments have fiscal power matched with their administrative power and to regulate government functions institutionally and financially. Eventually, a basic legal framework will be constructed that matches the administrative with fiscal powers across the central and local governments. Finally, on the basis of the above definitions, it is necessary to establish a sound and standardized arbitration system addressing disputes between the central and local governments. A permanent neutral arbitration agency should be established. The disputes between the central and local governments can be settled by this specialized institution through political coordination or by the judicial authority in a normative dispute resolving mechanism. Democratic procedures can be introduced into arbitration to build up a negotiation model of dispute settlement between the central and local governments.

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Regulating Intergovernmental Tax-Sharing Relationships by Law

In China’s existing legal system, the local government enjoys the status of an independent legal entity but lacks independent fiscal capacity. Although the central government has policies defining the degree and manner by which to control the local governments, operational targeting norms have yet to be found to solve the problems and contradictions encountered. The fundamental reason for this issue lies in the fact that China has not clearly defined and regulated the relationship between the central and local governments, including the relationship between revenue collection and expenditure in the constitution and fundamental laws. At present, the legislative level of the fiscal system in China is relatively low. Apart from several regulations in The Budget Law of the People’s Republic of China that have specified in detail fiscal issues, the only other available support for the reform of the tax-sharing system is The Decision of the State Council on the Tax-sharing Fiscal Management System, which, as an administrative decision, is inadequate in effect to drive reform. It is different in other market economy countries with improved rules of law. Germany and Japan have stipulated the relationship between the central and local governments in terms of fiscal revenue collection and expenditure in their constitutions. Britain and France also have specialized regulations concerning this relationship in their fundamental laws. Local governments often have their own interests. Therefore, it is inevitable that they have some preferences in the process of legislation and law enforcement, resulting in self-interested actions that cause damage to the public interest from time to time. In addition, local legislation has often been haphazard and unauthoritative, which eventually leads to poor results. Thus, when the tax-sharing system reform has been in effect for 20 years, it is imperative to heighten the legislative level and arrive at the constitutional regulation of the fiscal revenue collection and expenditure relationship between the central and local governments. The constitutional role of China’s National People’s Congress should be strengthened to legally summarize and define the tax-sharing public fiscal system, which can change the legislative status quo in the field of public finance. In practice, the rule of law can help to specify local governments’ power to obtain fiscal revenue by means of fee collection except taxes and its distribution, oversight, and use of income, as well as to give local governments appropriate fiscal autonomy. For example, it is advisable to take fiscal democracy as the basic criterion as well as to regard the local government as an entity of both power and obligation and give it certain legislative power over taxes and fees. Even in the construction and consolidation of a democratic country, the central government’s authority must not be strengthened at the cost of the local government’s fiscal power. This will not only fully motivate local finance but also reduce the burden of the central government by strengthening the independence and autonomy of the local authorities within their jurisdiction.

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4.4.2 Building a Tax System in the Form of Law Safeguarding and promoting human rights are the ultimate values pursued by the “Ruling the Country according to Law” campaign. The full play of government public functions is a necessity for the improvement and realization of human rights, and sufficient financial resources are the material basis for guaranteeing full utilization of government functions. The government needs legal financial power as a legitimate means of obtaining these financial resources. It can be noted that the key to solving the problem is to realize the reasonable allocation of financial power at all levels of government based on the principle of matching administrative power with financial power. Under the modern market economy system, taxes are the main source of government revenue. Therefore, the core of the problem lies in the rational and standardized allocation of tax power between the central government and the local governments through tax-sharing reform.

4.4.2.1

Legislation Shall Be Well-Weighed and Tax Legislative Power Shall Return to the People’s Congress

The statutory principle of tax means that “where there is a tax, there is a law, and no tax can be levied without legislation”. The “law” in the narrow sense represents the law enacted by the legislature. Based on the basic definition of taxes, the form of tax legislation can be considered from the perspectives of both democracy and science. From the democratic perspective, tax policy targets citizens, and the main principle of democracy is to keep citizens involved in actual policy-making so that they can fully express their will. From a scientific point of view, the mandatory nature of the law can give taxpayers a binding force, while higher tax laws also provide better protection to procedure formulation in terms of standard, transparency, and soundness. At the same time, statutory taxation shall exert a positive influence on tax authorities to strengthen tax collection and administration, perfect tax laws, and improve the rigidity of tax law. The statutory principle of taxes has been recognized by the masses today. It can exert a restrictive effect on tax legislation, provide a guideline for China’s tax policy and assist in formulating tax laws that better suit China’s national conditions. The government should adhere to statutory taxation. China stipulates that the National People’s Congress and its Standing Committee shall exercise the power of tax legislation, but in 1985, the National People’s Congress delegated the power to the State Council. During the transitional period, this practice promoted the improvement of the tax system to a certain extent and ensured the rapid development of the economy. Currently, with the continuous improvement of the rule of law in China, citizens’ awareness of the rule of law has been gradually raised. Taxpayers need to consider taxes to be “public property”. They are not only tied to fiscal revenues but are also closely related to the protection of citizens’ property rights. This idea further highlights the importance of requiring tax revenues to be regulated by law. At present, the number of legal norms is relatively small in China in terms of tax

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laws. There are currently 18 major tax types in the country. However, China has only three types of taxes that were made into law: personal income tax, corporate income tax, and vehicle and vessel tax. Most of the other taxes are based on administrative regulations rather than laws. It will help to protect citizens’ property, strengthen the status of the power organs of the National People’s Congress, and promote the administrative organs’ ability to govern according to law when the tax-related power is returned to the National People’s Congress at an appropriate time. In the long run, the return of tax legislative power to the National People’s Congress is a historical trend. It is in line with the essence of the Constitution and the Legislation Law. It is also the general trend that the National People’s Congress representatives continue to improve their legal knowledge and legal capacity. Due to the complicated history and practical difficulties, the return of tax legislative power to the National People’s Congress is a gradual process where two ways will be under consideration to abolish the “1985’s delegation decision”: direct repeal and indirect recall (raising the current provisional tax collecting regulations to law as soon as possible).23 The following three tasks must be accomplished at the same time. First, stability and continuity need to be maintained in tax policy reform. The newly established tax categories will no longer be implemented by the provisional tax regulations formulated by the State Council but must be approved legally by the National People’s Congress, while the validity of the current tax administrative regulations is still recognized before the tax laws are promulgated. The second task is to follow the basic strategy of “going from the easier to the more difficult step by step”, formulating sound flow charts according to specific conditions and objective laws, planning a detailed blueprint for the return of tax legislative power to the National People’s Congress, and enacting major taxes such as value-added tax and consumption tax as soon as possible. Third, in the legislative process, citizens’ opinions should be fully considered to embody the spirit of democracy, to understand the needs of citizens and to increase the transparency of tax legislation. On this basis, relevant tax experts and teams discuss how to draft sound, innovative, democratic and open tax laws and submit them to relevant departments of the National People’s Congress for reviews to advance the legislative process.

4.4.2.2

Improving the Tax Law System and Dividing the Tax Ownership Between the Central Government and Local Governments

In 1994, China carried out the reform of the tax-sharing system, which divided taxes into three categories (central taxes, local taxes, and taxes shared by central and local governments) and determined the division of tax ownership. However, the financial expenditure of local governments is far larger than fiscal revenue. The unreasonable division of taxes makes the local financial difficulties worse. The taxes are divided 23

Liu, Jianwen. Analysis of the Path of Returning Tax Legislative Power to the National People’s Congress. Huaxia Times, March 18, 2013.

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on the three principles of division proposed by Seligman, i.e., efficiency, suitability, adequacy while consideration is also given to other factors, such as tax base liquidity, redistributing function, regulating function, financial function, and collection and management efficiency, to achieve a comprehensive balance. Therefore, attention needs to be focused on the issue of distribution across the country in terms of the central taxes. The central government shall administer taxes such as customs duties and consumption taxes that are heavily affected by the economy, distributed across a wide range of tax sources, and highly fluid. This will help the central government’s macro-control, fully motivate the governments at all levels, and thus promote the flow of economic factors and the development of a market economy. Taxes such as the value-added tax that benefit the development of the market and the whole country should be shared by the central government and local governments. In addition, some taxes have a wide range of tax sources and a fixed tax base. For example, farmland occupation tax, land appreciation tax, property tax, deed tax, vehicle tonnage tax and other taxes are levied on some movable and immovable property. They should be considered local taxes because their tax base is not fluid, which can help the collection and administration of tax authorities. Concerning the taxes to be collected, this criterion can also be used to establish the ownership of their financial revenue. For example, real estate taxes are mainly levied on real estate, such as the residential buildings of urban residents. Since the tax base does not change easily, it is easy to collect. It is advisable that the tax is attributed to the local government. Another example is inheritance and gift taxes collected on both movable and immovable property and on both tangible property and intangible property. It’s easy for its tax base to shift. If the specific tax items are not consistent with the tax rates in different places, the shift of the tax base will be inevitable, which will cause tax sources to transfer. In addition, the purpose of levying inheritance and gift taxes is to readjust income distribution. If there is a significant difference in the tax burden across regions, the goal of redistribution of income cannot be sufficiently achieved. Therefore, based on the above considerations, inheritance and gift tax should be regarded as a central tax.24 Only in this way can governments at all levels have the corresponding financial power and financial resources to ensure that they can fulfill all of their obligations within their capabilities.

4.4.2.3

Strict Law Enforcement to Promote Internal Reform of Tax Authorities

After the implementation of the tax-sharing system, China established two tax agencies: the State Taxation Bureau and the Local Taxation Bureau, which answer the central government and local governments, respectively. This helped to strengthen tax collection and administration and promote the steady growth of fiscal revenues of the central and local governments. However, in the course of implementation, 24

Liu. Jianwen. The Way to a Strong Country: Breaking and Establishing the Law of Finance and Taxation. Beijing: Social Sciences Academic Press, 2013, pp. 182–185.

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the State Taxation Bureau and the Local Taxation Bureau had contradictions, such as undefined responsibilities, different law enforcements and overlapping powers, which led to loopholes in collection and management and affected the enthusiasm and efficiency of the two agencies. Since 2012, China has begun to abolish business taxes, changing them to value-added taxes. The business tax, originally the first local tax, has been levied by the State Tax Bureau and has been fully implemented nationwide since May 1, 2016. The function of the local tax needed to be readjusted, and it was even more urgent to reform the national and local tax collection and administration systems. Therefore, on October 13, 2015, the 17th meeting of The Central Leading Group for Deepening Overall Reform reviewed and adopted the “Reform Plan for Deepening the Reform of the National and Local Tax Collection Management Systems”, aimed at straightening out undefined responsibilities for collection and management, innovating the taxpaying service mechanism, changing the mode of collection and management, participating in in-depth international cooperation, and optimizing the taxation organization system and structure. Building a pattern of tax co-governance has become a program of action for the reform of the collection and management system of state and local taxes. Wang Jun, director of the State Administration of Taxation, pointed out that “since the reform of changing business tax to value-added tax, there has been an increase in the workload of the national tax departments and a decrease in the local tax departments. However, with the advancement of reforms of the environmental protection tax and personal income tax, the local tax department will gradually deal with an increasing workload of taxation”.25 Therefore, to strictly enforce the law, the State Administration of Taxation should proceed from its own problems and propose to implement a long-term reform mechanism toward a rule-of-law tax system. First, it is necessary to define the principal position of the State Administration of Taxation and the state and local tax authorities by revising The Law on Tax Collection and Management, to stipulate the power of the tax law enforcement body and to regulate the conduct of tax authorities in legal form. Second, on the basis of The Law on Tax Collection and Management, the internal reform of the tax authorities should be carried out to pursue law enforcement. On the one hand, according to the division of taxes, the national and local tax departments’ powers of law enforcement should be defined, the ownership of taxes should be put in place, and the powers are to be on parity with responsibilities. Keeping the idea of “serving the taxpayers” in mind, the State Administration of Taxation needs to make use of modern management and take care of its staff, providing a systematic training and human resources management system from vocational skills to core values. The evaluation system should be improved to enhance employees’ enthusiasm for work. Second, the publicity of tax information and policies should be pushed ahead, and a risk avoidance mechanism should be set up through a comprehensive network monitoring system. Efforts shall be made to promote the establishment of individual accounts and a convenient service system such as tax collection and management networks to reduce tax losses. On the other hand, in the work of local tax collection, 25

Li, Zheng. Complying with the Aspirations of the People, Serving the Overall Situation and Promoting the Modernization of Taxation. China Tax Journal, No. 12, 2015.

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China is facing many issues, such as “three major asymmetries” (information asymmetry, means asymmetry, ability asymmetry), “three excesses” (excessive responsibility, excessive power, excessive risk), “three weaknesses” (weak implementation, weak control, weak supervision), “three falsehoods” (false cost, false declaration and false management), “three vagueness” (vague data, vague tax resource, vague policy), “four failures” (failure in services, failure in benefit, failure in policies, failure in publicity) and others. To tackle these issues, China needs to take rule-oflaw taxation as the basis, taxpayers as the center, and the electronic tax bureau as the carrier to construct a modern system of taxpaying services, tax source monitoring, and tax auditing control. Consequently, seven transformations will be realized from user management to business management, from inefficient management to efficient management, from centralization to delegation, from traditional management to technological management, from decentralized management to centralized management, from paper file management to electronic file management, and from manual monitoring to electronic surveillance.26

4.4.3 Establishing a Legal System Supervising Budget Management The tax-sharing budget management system refers to the division of the revenues between the central and local governments mainly according to tax categories on the basis of a reasonable division of the powers of governments at all levels. The budgets between local governments at all levels should be relatively standardized, and a proper balance shall be achieved between the fiscal powers and expenditure responsibilities at different levels of governments. In addition, regarding the imbalance in financial resources of local governments at all levels, attention needs to be focused on appropriate adjustments through the country’s transfer payment system. Everyone’s food, clothing, shelter, and daily expenses are essentially related to the state budget. From this perspective, the Budget Law is the most important law concerning people’s livelihood. In essence, it should be emphasized that power should be used to balance power. That is, through legal channels, the core issue of budget law reform is to further strengthen supervision, to rely on various supervising bodies to restrict the administrative power of the government and to ensure an open and transparent budget.

4.4.3.1

Supervision by the People’s Congress

The National People’s Congress can better exercise the power of budget supervision and strengthen the examination and approval of the budget and final accounts to control the government’s fiscal revenue and expenditure. First, supervision of the 26

Zhou, Quan. Persisting in Problem Orientation and Deepening Tax Collection and Management Reform. China Tax Journal, No. 2, 2015.

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People’s Congress should be carried out throughout the entire process of budgeting. In the budget-making stage, the People’s Congress shall actively participate in the budgeting activities of the administrative organs to obtain relevant information; in the budget approval stage, a clear definition needs to be made concerning the scope of the budget approval power of the People’s Congress. The contents of budgetary review and approval rights should be enriched, and the implementation of budget cases should be supervised in real time. In the post-budget feedback stage, the People’s Congress should do an ample job of auditing the results of budget implementation, strengthen performance evaluation, and provide experience for the improvement of the next budget cycle. The second step is to make better rules of procedure and systems, promote openness proceedings, fully implement the principle of subordination of the minority to the majority, encourage speeches and debates in the proceedings, and enhance the understanding of the objectives of the proceedings on the part of People’s Congress delegates. In addition, the establishment and regulation of such a system will play an important role in maintaining the basic order of the market and lead to the smooth deliberation of procedures for various issues. Finally, the organization of government departments should be regulated, improved, and perfected, the proportion of professionals should be increased, and the training of staff should be enhanced to improve their professional ability. Only in this way can China provide professional and systematic assistance for the financial supervision of the National People’s Congress.

4.4.3.2

Supervision by the Financial Department

The financial department should give full play to its supervising functions, strengthen the supervision of the department, and improve the coordinating and supervising functions among various other departments. First, in terms of effective supervision and management of various functional departments, the Ministry of Finance needs to set up an independent monitoring agency to conduct supervision and inspection mainly of the rationality of the budget department, the timeliness of local tax collection and management, and the safety of financial expenditures. Second, it is indispensable to have an effective risk prevention and management mechanism. Each functional department classifies risks according to the characteristics of its own administration and establishes a management mechanism to identify and prevent risks beforehand, control and transfer risks in the process, and rectify and improve risk management afterwards according to the type of risks to exercise administrative functions while supervising itself. Third, it shall be stipulated in the form of law that all departments not only need to be responsible for their respective departments but also to be responsible to the Ministry of Finance to ensure that supervision and management can be carried out effectively. Finally, an incentive mechanism shall be set up to effectively motivate the supervising bodies. It is beneficial to the whole supervision and management mechanism to encourage those who have made significant contributions and are conscientiously responsible and dedicated. Only in this

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way can a self-supervised management mechanism, led by the leaders of the Ministry of Finance, be rolled out.

4.4.3.3

Supervision by the Society

From the economic perspective, finance is an economic action that considers the government as the main entity that amasses some citizens’ income to satisfy public needs for expenditures. Its purpose is to optimize resource allocation and stabilize both the economy and development. Therefore, to achieve “Transparent Public Finance”, China shall take measures to promote sound and democratic budget planning and to give citizens the right to know and supervise to manifest a people-centered political philosophy. Attention should be paid to ordinary people’s supervision of the financial system. Citizens can understand and supervise the main budget procedures, the rationality of the budget, and the management mechanism of the budget through various public channels, such as demonstration meetings, symposiums, and public votes. Among them, budget hearing is the basic way for public participation in budget supervision in foreign countries. For example, there is a more comprehensive social supervision mechanism in the United States. The congress and special committees can hold case hearings on revenue, expenditure, funding, national debt and budget balance, investment and management of budgets at various stages from budget formulation, deliberation, allocation to its implementation. In 1996, China promulgated the Administrative Punishment Law and formally established a legal hearing system, which is affirmed by the Law on Legislation. However, in terms of specific rules, the Law on Legislation aims to adjust laws, regulations and by-laws and does not define the power of the People’s Congress to participate in the examination and approval of the budget or in the adjustment of budget plans and the final accounts. Although China is increasingly aware of the importance of a democratic budget, there is still a significant gap between China and the United States and other developed countries with regard to social supervision. Therefore, it is necessary to improve the budget hearing system in terms of the scope, entities, procedure and effectiveness of the hearing by drawing lessons from the United States and other countries and combining them with China’s macroenvironment.

Chapter 5

Local Taxes: Issues and Solutions

5.1 Theoretical Analysis of Local Tax Reform Under the Rule of Law As an important part of the national rule-of-law campaign, the rule of law in taxation develops with the overall level of rule of law in a country. The essential elements of the rule of law in taxation include the following: the concept of laws and regulations in taxation must be fair and just; the formulation of tax laws and regulations must meet the requirements of good law; and the enforcement of tax laws and regulations must obey the rule of law-based taxation, which means that the implementation of tax laws and regulations must follow the principle of tax law. That is, taxpayers stipulated by tax laws and regulations shall pay taxes according to law, and the tax collector and administrator—the government shall levy and spend taxes according to law. With the gradual establishment of the strategy of rule of law in China in the 20th century, research on rule-of-law taxation also went deeper in both the taxation and legal fields. Meanwhile, in terms of its connotation and denotation, consensus was reached that “fairness and justice are the essential requirements in the rule-of-law tax which is realized through taxation according to law.” The local tax system plays a key role in ensuring the supply of local public goods and services, and it is an important component in both the tax system of a country and the revenue of a local government. The reform of China’s fiscal and taxation systems and the establishment of governance by rule-of-law determine the processes of local taxation toward the rule of law. At present, the campaign of building a rule-of-law China is in full swing, and the reform of the financial and tax systems is deepening. The construction processes of the two will also promote rule-of-law local taxes to a large extent.

© People’s Publishing House 2022 Q. Wang and W. Xi, Improving the Tax System amid the Rule-of-Law China, https://doi.org/10.1007/978-981-16-7033-6_5

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5.1.1 Connotations of Local Taxes and the Local Tax System Regarding the connotation of local taxes and the local tax system in China, there are still controversies in the theoretical research circle and tax departments, and no consensus has been reached. Reviewing the domestic and foreign research and practice of local taxes, most of them define the connotation and extension of local taxes and local tax systems from the perspective of the “three powers” of local taxes (that is, local tax legislation, local tax collection administration power, and local tax revenue ownership).

5.1.1.1

Connotation of Local Taxes

There are broad and narrow perspectives in defining the connotation of local taxes in tax theory and practice. In a broad sense, local taxes include all kinds of taxes that constitute the income of a local government, that is, no matter which level of government the legislative power and the power of collection administration belong to, as long as all or part of the revenue of a tax remits to the local government, then the tax is a local tax. In a narrow sense, local taxes only refer to taxes for which local governments conserve full legislative power. If defined from a narrow perspective, the number of “local taxes” in most countries (including China) will be very small according to domestic and foreign practices. In academic research, when we follow the narrow definition, we will inescapably face such problems as too few types of “local taxes” and too small a scale of income, which will lead to meaningless research. However, if we take the broad perspective, i.e. local taxes defined as taxes that are closely related to the local economy, of which the collection and administration power reserves to the local or central government, and all or part of the income goes to the local government, it can effectively resolve the research inconvenience arising from a narrow perspective of local taxes. Therefore, in this book, we regard local taxes as a general term for taxes used to meet the needs of a local government’s public expenditures and perform the functions of a local government’s economic and social management. According to relevant laws and regulations, tax laws and administrative regulations are formulated by the central or local legislature, tax revenues are collected and managed by the central local tax collection administration agencies, and all or part of the tax revenue is subject to the local government’s utilization. On the basis of the foregoing definition of local taxes and the classification of the final attribution of taxes, the local taxes in China can be further classified as pure local taxes (i.e. taxes completely belonging to a certain level of local government), and taxes shared by central and local governments (taxes jointly belonging to multilevel governments).

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5.1.1.2

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Connotations of the Local Tax System

The connotation of the local tax system is formed on the basis of the concept of local taxes. It is generally believed that the local tax system subsumes all taxes collected and managed by the tax collection administration agencies of the central or local government through the exercise of legislative power by the central or local government in a country’s fiscal system, and all or part of the tax revenue is utilized by the local government. Therefore, the local tax system is the result of a multilevel financial management system. Its legislation, collection, and tax ownership reflect not only the income distribution relationship between the central and local government but also the income distribution relationship among local governments. As an essential part of the national tax system, the local tax system is divided on the basis of the taxation power between the central and local governments as well as local governments at all levels. In addition, it is an orderly whole composed of various laws, regulations, and rules institutionalized by local taxes and safeguard clauses, with the aim of regulating regional economic development, optimizing the local development conditions, and ensuring the income of local governments at all levels. Learning from foreign countries’ experiences and taking into account the then situation of intergovernmental financial relations and the actual needs of the reform and opening up, China carried out the “tax sharing” reform in 1994. Under this reform, China implemented the model of “tax sharing, power sharing, collection sharing, and management sharing” in the tax system and developed the current local tax system by splitting the taxes already levied between the central and local governments. The local tax in this book mainly includes pure local taxes and central and local shared taxes.

5.1.2 The Principle of Local Tax Reform Under the Rule of Law Taxation is the embodiment of state power, and the coercive power of the state is a guarantee to take the economic interests of taxpayers unrequited. Due to its mandatory nature, the power to levy taxes is easily abused. In taxation practice, the legitimate rights and interests of both the collection department and taxpayers should be protected, and the principle of the rule of law should be adhered to. The principle of law-based taxation represents the application of the rule of law in the field of taxation and provides relevant standards for the exercise of tax collection rights. Under the rule of law, the principles of law-based local taxation mainly include the following aspects.

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5.1.2.1

5 Local Taxes: Issues and Solutions

The Principle of Law-Based Taxation

The principle of law-based taxation means that the national legislature is the only body that can formulate legal provisions and clarify the rights and obligations of each party in tax laws and the elements of the tax system. Under this principle, tax authorities must tax as per the tax law, and taxpayers must pay tax according to the tax law, which is also known as the statutory taxation principle. In tax collection and management, the tax authorities shall, in conformity with the relevant provisions of the substantive and procedural tax law, levy taxes on the taxpayers, who in turn shall also pay taxes to the relevant tax authorities in compliance with the law. Moreover, the formulation and revision of tax law provisions should also be statutory.

5.1.2.2

Reasonable Division and Mutual Check in Tax Legislative Power, Collection, and Judicial Power

In China’s taxing practice, tax legislative power belongs to state power organs and cannot be granted at will. The tax collection power of tax authorities shall be independently exercised in the spirit of tax laws and regulations, while the judicial power of taxation shall be exercised independently by the judicial organ in accordance with the provisions of tax laws. The tax legislature, the tax collection organ, and the judicial organ are independent from yet supervise each other, which is conducive to improving the efficiency of tax work and deterring power abuse.

5.1.2.3

Tax Administration According to Law

The principle of administration according to law constitutes a specific facet of the principle of law-based taxation, which is embodied in the fact that the administrative acts of tax authorities must strictly abide by the relevant laws and regulations. For example, tax authorities should not only abide by the relevant provisions of substantive law but also ensure the legality of the procedures. When exercising their discretion, they should be fair and impartial and should not misuse their power.

5.1.2.4

Fully Protecting the Legitimate Rights and Interests of Taxpayers

The law clearly stipulates the legitimate rights and interests of taxpayers, and the formation of a harmonious relationship between the collection department and taxpayers requires the joint efforts of both parties. At present, China has not done enough in tax payment services. In the administration of tax collection, attention should be paid to respecting and protecting the legitimate rights of taxpayers, such as hearings, appeals, reconsiderations, and litigations.

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5.2 The Changes and Current Situation of Local Taxation Toward Rule of Law in China 5.2.1 Changes in Local Taxation Toward Rule of Law Since the founding of New China in 1949, the practical process of local taxation toward the rule of law in China can be roughly divided into four stages: from initial exploration to tax lawlessness, from new exploration to “rectifying taxation by law”, from “rectifying taxation by law” to “tax ruled by law”, and from “tax ruled by law” to “rule-of-law tax”.

5.2.1.1

From 1949 to 1978: From Initial Exploration to Lawless Tax

Most Western developed countries, such as Britain, France, and the United States, have promoted the development of rule-of-law society (including rule-of-law taxation) through violent means such as revolution, whereas the development of law-based taxation in China is a process of continuous reforms and improvements. In the early days of the founding of the People’s Republic of China, China preliminarily explored tax legislation, which stipulated the division of tax revenue between the central and local governments, tax relief, etc., and achieved some remarkable results. In particular, New China’s “Basic Tax Law” (the “Basic General Principles of Tax” promulgated by the Government Administration Council in January 1950, the Implementation Standards of National Tax Policies, still sheds light on China’s current taxation practice. The legislation for local taxes has also begun to be explored, in which the issuance of Provisional Regulations on Deed Tax by the Government Administration Council in January 1950 is considered the inception of the process of local tax legislation. While the Interim Regulations on Deed Tax clearly prescribed the tax objects of deed tax (sale, pawn, endowment and exchange of land and houses), the people’s government at the provincial level could determine their own rate with the range specified in the Interim Regulations on Deed Tax. From the founding of New China to the reform and opening up, due to the implementation of China’s planned economy, intergovernmental financial relations placed more emphasis on “centralization”. The centralization-oriented fiscal system of the central and local governments, as well as the ownership of tax revenue, had been tuned frequently, but no comprehensive and stable local tax system was formed. Meanwhile, the local tax system was mainly composed of urban real estate tax, vehicle and vessel license and plate tax, two agricultural taxes (agricultural tax, animal husbandry tax), slaughter tax, deed tax, and transaction tax with local characteristics. During this period, China’s tax exploration encountered great setbacks. In particular, “the Great Cultural Revolution” destroyed the results of the early exploration

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of taxes by law. Under the shadow of a “lawless tax”, the claim of tax obsolescence and nontax paused the steps of China’s taxation toward the rule of law.1

5.2.1.2

From 1978 to 1992: From New Exploration to “Rectifying Taxation by Law”

After the Third Plenary Session of the 11th CPC Central Committee, China entered the new era of reform and opening up. After learning the lesson from “lawless tax” publicized and practiced in the period of the Great Cultural Revolution, the construction of a socialist democracy and legal system gradually began, and accordingly, China’s tax system ushered in the phase of rectifying taxation by law. During this period, China gradually formulated various tax laws and regulations, making exceptional achievements in law-based taxation. The State Council promulgated Interim Regulations of the People’s Republic of China on Urban Maintenance and Construction Tax, Interim Regulations of the People’s Republic of China on Property Tax, Interim Regulations of the People’s Republic of China on Farmland Occupation Tax,2 and Interim Regulations of the People’s Republic of China on Urban Land Use Tax 3 in 1985, 1986, 1987, and 1988, respectively, along with other local tax laws and regulations (see Table 5.1).

5.2.1.3

From 1992 to 1997: From Rectifying Taxation by Law to Administering Tax by Law

With the deepening of reform and opening up, China gradually entered the socialist market economy stage. Meanwhile, taxation was greatly accelerated toward the rule of law. In 1993, “improving the socialist legal system” was written into the third amendment of the Constitution. The implementation of the concept of “tax ruled by law” emphasizes that in tax practice, tax authorities and their staff should strictly abide by legal provisions and levy taxes according to law. In the process of tax collection, given that taxpayers pay their taxes according to law, tax authorities should fulfill their obligations, respect taxpayers’ rights, and protect taxpayers’ legitimate rights and interests. The State Council decided to replace the current local financial contracting system with the fiscal and taxation reform of “tax sharing” on January 1, 1994. The tax sharing reform was initiated in accordance with the guiding principles of “unified tax law, fair tax burden, a simplified tax system, and reasonable separation of powers”. 1

Liu, Jianwen. China’s Taxation Ruled by Law under WTO System. Beijing: Peking University Press, 2004, p. 24. 2 The regulations were replaced by Interim Regulations of the People’s Republic of China on Farmland Occupancy Tax, which came into force in 2008. 3 Revised in accordance with Decision of the State Council on Amending the Interim Regulations of the People’s Republic of China on Urban Land Use Tax on December 31, 2006.

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Table 5.1 Analysis of local tax laws and regulations from new exploration to rectifying taxation by law Year

Laws and regulations

Promulgator

Limits of local authority

1985

Interim Regulations of the People’s Republic of China on Urban Maintenance and Construction Tax

The State Council

People’s governments of provinces, autonomous regions, and municipalities directly under the central government shall be authorized to formulate detailed rules for implementation in accordance with these regulations

1986

Interim Regulations of the People’s Republic of China on Real Estate Tax

The State Council

Property tax is levied in cities, counties, towns, and industrial and mining areas. Residential housing is not included in it. The people’s government at the provincial level shall be authorized to determine the reduction or exemption of real estate tax on a regular basis, and at the same time, the provincial government shall be authorized to stipulate the time limit for payment and formulate detailed rules for implementation

1987

Interim Regulations of the People’s Republic of China on Farmland Occupation Tax

The State Council

The amount of tax applicable to each region shall be determined by the people’s government of the province, autonomous region, or municipality directly under the central government within the scope of the tax amount specified in Paragraph 5 of this article and in accordance with the local conditions

1988

Interim Regulations of the People’s Republic of China on Urban Land Use Tax

The State Council

Urban land use tax shall be levied on units and individuals that use land within the scope of cities, counties, towns, and industrial and mining areas. The provincial government shall be authorized to determine the applicable tax amount range of the areas under its jurisdiction within the prescribed tax amount range according to the conditions of municipal construction and economic prosperity; and the provincial government shall be authorized to formulate the implementation measures

Source According to the relevant legal provisions

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(Decision on Implementing the Tax-sharing Financial Management System (State Council [1993] No. 85). Among them, “unified tax law” refers to establishing a tax law uniformly applied to enterprises regardless of whether they are state-owned or private, domestic, or foreign. Fair tax burden refers to promoting fair competition among enterprises and eliminating tax liability differences caused by their ownership. A simplified tax system means further reduction of tax categories and optimization of the tax system structure. Reasonable separation of powers refers to the rational division of fiscal power and tax power between the central and local governments at all levels. In China’s 9th Five-Year Plan (1996–2000), at the level of national income distribution, it was proposed to “raise two proportions”.4 Regarding intergovernmental financial relations, it was proposed to improve the “tax sharing” financial management system, to reasonably divide the administrative powers and expenditure responsibilities between the central and local governments and to establish a standardized transfer payment system. With regard to constructing tax institutions, it was proposed to better the local tax system and to gradually levy new taxes such as interest income tax to improve the whole tax system; for tax collection and management, it was proposed to tax according to law and strictly control tax relief. China’s 10th Five-Year Plan (2001–2005) set forth to establish a stable, balanced, and strong national financial system, that is, to gradually establish a public financial framework in response to the requirements of the socialist market economy. With respect to national income allocation, it was proposed to ensure the stable growth of fiscal revenue and continue to increase the “two proportions”. Regarding intergovernmental financial relations, it was proposed to continue to reasonably define the scope of the administrative powers of the governments (especially between the central and local governments) and to improve the “tax sharing system” and the local tax system, as well as the transfer payment system and other financial redistribution policies and functions.

5.2.1.4

From 1997 to the Present: From Tax Ruled by Law to Rule-of-Law Tax

In 1999, “building a socialist country ruled by law” was ratified, as amendment to the Constitution as the first paragraph of Article 13 was clearly put forward in the 16th National Congress of the CPC (1997). Against this background, the strategy of building a country ruled by law gradually began to be carried out in the practice of tax activities, and “tax ruled by law” came into being. During this period, the status of taxpayers in the tax collection and payment relationship was significantly improved, the protection of the legitimate rights and interests of taxpayers received more attention, the tax service system was gradually established and enhanced, and the supervision and restriction mechanism of the tax system was gradually refined. 4

“To raise the two proportions” means to increase the proportion of fiscal revenue in GDP and the proportion of central fiscal revenue in national fiscal revenue—note by translators.

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In the communiqué of the Third Plenary Session of the 16th Central Committee of the CPC (2003), an important decision of law-based local taxation was put forward, stating that “under the premise of unified tax administration, local tax administration should be given appropriate power” (Article 20 of Decision on Several Issues Concerning Improving the Socialist Market Economy System). In China’s 11th Five-Year Plan (2006–2010), it was proposed that the implementation of fiscal and taxation systems should be conducive to promoting sound and technological progress, changing the growth mode and optimizing the economic structure. For intergovernmental financial relations, China should continue to advance the reform of fiscal and taxation systems, adjust and standardize intergovernmental financial relations from the central government to the grassroots government, and emphasize the establishment and improvement of fiscal and taxation systems that match the powers of the government. China’s 12th Five-Year Plan (2011–2015) proposed gradually improving the local tax system by giving provincial governments appropriate tax administration authority. However, these reforms have not touched the essence of the local tax law, such as the tax legislative power and the power to levy new taxes, but have only moderately expanded the jurisdiction of the provincial people’s congress and local governments in terms of tax calculation methods and tax relief within the scope of tax laws and regulations. On October 14, 2013, the Third Plenary Session of the 16th CPC Central Committee put forward the strategic plan of implementing the tax system reform step by step according to the principle of “simple tax system, broad tax base, low tax rate, and strict tax collection and management”, which gave direction for the new round of tax system reforms in China. The 17th, 18th and 19th national congresses of the CPC successively put forward the basic strategy for comprehensively implementing the rule of law and accelerating the construction of a socialist country ruled by law. “Comprehensively promote the rule of law, accelerate the construction of a socialist country ruled by law, and pay more attention to the important role of the rule of law in national governance and social management”. “Adhere to the rule of law in an all-round way... Build a socialist legal system with Chinese characteristics, build a socialist country ruled by law...” In order to advance the reform and promote the rule of law in an all-around manner, the Third Plenary Session of the 18th CPC Central Committee, the Fifth Plenary Session of the 18th CPC Central Committee, and the 19th CPC Central Committee pointed out that it was necessary to improve the rule-of-law for local taxation.

5.2.2 Achievements in Rule-of-Law Local Taxation 5.2.2.1

The Initial Establishment of a Rule-of-Law Local Taxation Framework Adapted to the Market Economy

A sound framework of tax law is the foundation. After the tax reform in 1994, China’s framework of the tax system was initially formed, mainly comprised of turnover tax

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and income tax and supplemented by other taxes. With the continuous refinement of China’s tax system and successive promulgation of tax laws and regulations with different levels of legal effects, China has basically achieved the goals set in the 1994 tax reform and gradually established a tax law framework suitable for the country’s economic and social development.

5.2.2.2

Tax Collection and Administration Conforming to the Spirit of the Rule of Law

The law-based tax collection and management mode represents the way to implement tax laws. After the establishment of the “tax sharing” fiscal system, China established a set of rather scientific, strict, standardized, and effective tax management methods, which mainly include tax registration, tax inspection and tax collection, territorial management tax collection and management mode, the crackdown on tax violations, and coordination among various taxes. With the establishment and improvement of tax collection and management in China, the current tax collection and management mode of “centralized collection and key inspection” has initially taken shape under the support of modern means of information. With the continuous revision and improvement of China’s tax collection administration law, the legal rights and obligations of both tax collectors and payers in tax collection and management have been further clarified and standardized. In terms of tax law enforcement, willful enforcement is greatly reduced, and enforcement behavior is increasingly standardized, which ensures the improvement of the quality of tax collection and management. At the tax inspection level, tax inspection has also been strengthened, and the deterrent effect of tax cases has gradually manifested itself. At the level of the quality assessment system of tax collection and management, the quality assessment system of tax collection and management has been basically established, and the assessment oriented by “rule-of-law tax” is gradually developed.

5.2.2.3

Initial Achievements of Supervision of Taxation Law Enforcement

The supervision of tax law enforcement guarantees the realization of rule-of-law taxation. As the main form of tax law enforcement supervision, tax law enforcement inspection has been vigorously advanced by the State Taxation Administration. Since 1995, tax law enforcement inspection and supervision have been carried out in succession throughout the country and have become the systematic daily work of tax law enforcement in China. At present, tax law enforcement inspection in China has achieved full coverage of the scope of tax work. Tax law enforcement inspection takes the form of the compliance inspection of regional laws, regulations, and tax-related documents, the compliance inspection of tax law enforcement processes, and the correction inspection of tax violations. Through the inspection of tax law

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enforcement, China has further standardized its tax law enforcement and improved the effectiveness of tax law enforcement supervision.

5.2.2.4

Significant Improvement of Social Environment for the Rule-of-Law Taxation

Comprehensive tax administration and a sound tax security mechanism are important measures for creating a legal social environment for taxation. Governments at all levels attach great support and importance to tax revenue, which is the main source of governments’ financial revenue, and have thus introduced local comprehensive tax control and tax guarantee mechanisms. At the same time, with the advancement of China’s rule of law, the problem of interfering in the operation of the tax system and tax law enforcement by governments at all levels and their staff is obviously alleviated. Furthermore, China has established a relatively complete tax-related information network and has basically achieved the sharing of common and shared tax-related information regarding public security, industry and commerce, banks, and other departments. The publicity of the rule-of-law for taxes is an important way to foster the social ambience of law-based taxation. At present, there is a continuous increase and deepening of the publicity of tax law and a gradual enhancement of citizens’ awareness of the protection of their rights in the construction of a country ruled by law. Citizens have begun to pay attention to the changes in social income distribution patterns brought about by the enactment and amendment of tax law while using legal means to protect their legitimate rights in tax payment. Now, with the progress of China’s social environment for rule-of-law taxation, the belief of tax by law is gaining popularity, and a fair, just, and open legal environment of taxation has been preliminarily formed.

5.2.3 Obstacles on the Way of Local Taxation Toward the Rule of Law Currently, in most Western countries’ local tax systems, law-based local taxation means emphasis on and abiding by the value of taxing according to law. That is, they acknowledged reasonable, standardized, and stable local tax power through the promulgation of laws and regulations regulating the relationship between the central and local governments at all levels. For example, Japan, which is also a unitary country like China, has laid down the foundation of local tax law governance on the basis of the high degree of local autonomy stipulated in Article 93-95 of the Constitution through a series of basic laws related to local taxation rights, such as Local Autonomy Law (1947), Local Government Finance Law (1948), Local Tax Law (1950), etc. As far as law-based local taxation in China is concerned, in terms

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of the current legal situation of local tax power and the practice of the “tax sharing” reform, China’s national tax power is mainly concentrated in the central government. Without the independence and autonomy of local tax power, a stable local tax system matching the local government at the same level cannot be formed at all levels of local government.

5.2.3.1

Problems in Local Taxation Toward Rule of Law

Legislative System: Insufficiency in the Central Authority and Unbalanced Power in Local Taxation From the perspective of tax legislation form, there is much room for improvement in the rationality of tax legislation form in China’s tax law system. Because China is still on its way to better the legal system, the procedure of tax legislation is usually as follows: People’s Congress Authorizing-State Council Formulating RegulationsAmending While Implementing-Regulations Maturing-People’s Congress PassingBecoming Law. The whole process, in which the legislative department authorizes the administrative department to make regulations, which then become law through practice, usually takes a long time. Under this tax legislation mode, only four proposed laws and regulations related to taxation in China have finally become laws, and most of the remaining laws and regulations related to taxation are in the stage of the State Council (or the Ministry of Finance, the State Taxation Administration) or are amended while they are implemented. The tax law structure thus generated weakens the leading role of state power in tax legislation, seriously menaces the authority of tax law, and affects the rigidity of the implementation of tax laws and regulations in China. In the journey of building a market economy in China, this kind of legislation did not conform to the basic principles of law-based tax required by a modern rule-of-law country, which incurred disadvantages such as castrated authority, weak stability, poor standardization, and so on. It was difficult to ensure that the market would play a decisive role in the allocation of resources, and the realization of a socialist democracy could not be effectively promoted. From the perspective of the allocation of tax legislative power, although China’s basic financial and tax-related systems can only be clearly stipulated by Article 8 of Law on Legislation through the formulation of laws, Article 9 of Law on Legislation stipulates that the State Council has the right to formulate administrative regulations in advance under the authorization of the National People’s Congress and its Standing Committee. This directly led to the Decision of the State Council on the Implementation of the Tax-Sharing Financial Management System becoming the foundation for tax sharing system reform in China, which obviously violated the above provisions of Law on Legislation. Although the Decision of the State Council on the Implementation of the Tax-Sharing Financial Management System has been revised several times since its promulgation, it has not been able to secure a relatively stable state regarding the division of central and local powers, expenditure responsibilities, and financial power. In addition, by sorting out the relevant tax laws

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and regulations in China, it is not difficult to find that neither the Constitution nor the Organic Law of Local People’s Congresses and Local People’s Governments at all Levels contain specific provisions on the local tax legislative power except some extremely abstract marginal clauses. The deficiency in the allocation of local tax legislative power resulted in China’s lack of the basis for the allocation of local tax legislative power for a long period of time, which further aggravated the mismatch between local tax power and administrative power and compromised the authority and standardization of the existing local taxation power system. With respect to the allocation of local tax legislative power, the legislative authority of local taxes was highly concentrated at the level of the central legislature, while the legislative authority of local taxes at and below the provincial level was seriously insufficient. Under such a legislative power allocation pattern, the severe shortage of local tax legislative authority at the level of local provincial and subprovincial legislatures made it strenuous for local governments to stabilize their tax revenue. Since the central legislature controls local tax legislation, the central government could adjust the ownership of existing local taxes and the proportion of local tax revenue sharing through the legislative power of local taxes it held and change the central-local revenue allocation pattern at will. The inadequacy of local tax legislative power and the unstable expectation of local tax revenue were also manifested in the fact that local governments would retain a large number of irregular and incomplete tax powers through very low-level documents and administrative actions. Motivated by seeking more fiscal income, local governments would even use their disguised tax power to collect various fees in the name of “tax” to obtain economic income beyond tax laws and regulations, destroy fair market competition, and increase the burden of taxpayers. In the absence of clear regulations by relevant departments of the state, local governments often abused the power of tax collection and administration and encroached on the economic interests of citizens. Charges, different from those incurred by tax laws and regulations, are generally introduced in the form of local regulations or administrative rules at a low level and with poor effectiveness. Such regulations and administrative rules, instead of levying tax by law, not only undermined the unity and authority of China’s tax laws but also seriously ran counter to the principle of rule-of-law.

Legal Structure: Unreasonable Structure of the Tax Law System The structure of a country’s tax law should consist of basic law, substantive law, procedural law, etc. Currently, China’s tax law system lacks a basic tax law, which mainly consists of substantive laws (some of which are not strictly substantive laws), such as tax laws, tax regulations, tax rules, and tax normative documents. Therefore, the lack of basic tax law in China’s tax law system makes the most basic and important issues, such as the definition, purpose, basic principles, elements, legislative power, and enforcement power of tax law, not legally recognized. However, with regard to tax procedure law at present, China has only issued the “Tax Collection and Management Law of the People’s Republic of China,” which includes a general taxation procedural

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law and some specific implementation and management methods (such as various invoice management regulations). Other laws have yet to be issued, such as the tax organization, the tax agency, the taxpayers’ bill of rights, the tax crimes and penalties, the tax administrative procedure, and so on.

Legal Content: Deficiencies and Contradictions in Tax Laws and Regulations The existing tax laws and regulations are inadequate in their content, and contradictions are very prominent. In phrasing and interpreting tax laws and regulations, unclear expressions and improper interpretations are manifested in many ambiguous concepts, such as “justified reason” and “accidental income”, which could easily lead to conceptual misunderstanding and unfounded law enforcement. Regarding the inconsistency and conflict in the contents of tax laws and regulations, for example, “This law is applicable to the collection and management of all kinds of taxes collected by tax authorities according to law” (Article 2 of the new Tax Collection Administration Law) actually contradicts “Specific measures for the collection and administration of farmland occupation tax, deed tax, agricultural tax, and animal husbandry tax shall be separately formulated by the State Council” (Article 90 of the new Tax Collection Administration Law)5 and Agricultural Tax Regulations of the People’s Republic of China (formulated by the Standing Committee of the National People’s Congress). Inconsistency for the same content of tax laws and regulations also exists across different laws, such as the variability of the time limit for tax evasion, resistance to tax payment, and tax fraud (the Criminal Law for tax-related crimes stipulates that the statutory time limit for investigation is 10 or 20 years, while the new Tax Collection Administration Law stipulates that tax collection shall be carried out indefinitely). The deficiencies and contradictions in the abovementioned tax laws and regulations not only exert a serious impact on the unification of tax law but also make tax law enforcement departments and taxpayers not know which to turn to and increase the risk of “rent setting” and “rent-seeking” in tax law enforcement.

5.2.3.2

Barriers to Local Tax Categories

Some scholars believe that the basic content of local tax law should be determined by the setting of local taxes. Now, under the background of “replacing business tax with value-added tax” in an all-round way and the absence of main tax categories of local governments, the problems arising from and gradually accumulating in the taxation practices have brought obstacles to the reconstruction and adjustment of the local tax law system. These problems include not only the division of local tax

5

Tax Collection Administration Law of the People’s Republic of China. Beijing: China Commercial Publishing House, 2001, p. 1, p. 24.

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categories but also the setting of local tax categories, as well as the structure of the local tax system. (i)

Defects in the Division of Central and Local Taxes

After the Tax Sharing reform in 1994, China divided local taxes according to the Decision on Implementing the Tax-Sharing Financial Management System issued by the State Council. With the division of administrative power and financial power between the central government and the local government, the effect of “devolution of administrative power and collection of financial power” is becoming increasingly obvious, while the division of local taxes has gained the focus of attention. The key problem of the local tax division in China is that it is vague and rigid, and the boundaries between central taxes, local taxes, and shared taxes are blurring. This will easily breed public misconceptions regarding the division of tax power between the central and local governments, leading to the continuous marginalization of some local taxes, which will eventually be regarded as shared taxes and thus damage the economic interests of local governments. The current tax sharing between the central and local governments in China mainly takes the form of tax category sharing and proportion sharing, among which the adjustment of sharing proportions and scope has not yet been institutionalized. The central government is naturally in an advantageous position compared with local governments, and the fuzzy demarcation line of tax revenue empowers the central government to take away the local governments’ tax revenues and consequently put local governments at a disadvantage. (ii)

The Design of Local Taxes to Be Optimized

The following are the main viewpoints on the basis for local tax design in China. For the sake of tax collection and management efficiency, local tax categories should be selected from local sources, which is conducive to tax collection and management. To provide public service functions, local taxes should be set up in a stable, reliable, and relatively independent manner, which is conducive to the formation of a sound and standardized local income. As China’s tax legislative power is highly concentrated under the central government and the “tax sharing” reform is oriented by “raising the two proportions”, the aim is to strengthen the macro-control capability of the central government. Therefore, there is a lack of reasonable and prudent consideration of the setting of local tax categories in China. The ill-designed local tax categories represent a legacy of China’s tax sharing reform and a result of the financial system reform. In China’s current tax system, there are eight kinds of local taxes from which the local governments enjoy full income and two kinds of taxes wherein the central government and local governments share income.6 The main problems are as follows. Although there are many types of taxes from which local governments can take all 6

Local governments enjoy eight kinds of income taxes, including resource tax, urban land use tax, property tax, land value-added tax, farmland occupancy tax, deed tax, vehicle and vessel tax, and tobacco tax; the central government and local governments share two kinds of income taxes, including stamp tax and urban maintenance and construction tax.

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the income, the income is meager, while the collection cost of these small taxes is high. Most of the shared tax categories mainly hinge on value-added tax and turnover tax, which conceptually are not truly independent tax, carry a risk of an unstable tax base and tax rate, and may bring greater uncertainty to the local tax revenue in China. (iii)

The Structure of the Local Tax System to Be Improved

The imperfect structure of the local tax system has always attracted the attention of domestic scholars, who mainly focus on the setting of the main types of taxes in the local tax system, the setting of the non-main types of taxes in the local tax system, the tax basis and items of local taxes, the setting of local tax rates, and the standard of the division of local tax revenue. Scholars generally believe that local governments should keep a long-term stable source of financial revenue, and to achieve this goal, it is necessary to set up the main types of taxes of local governments and form a relatively stable local tax system. Theoretically, the main types of taxes in the local tax system should be characterized by abundant, highly stable and localized tax sources. To avoid vicious competition between local governments, the tax base and tax items should be further scientifically mapped out, and the structure of the local tax system should be optimized.

5.2.3.3 (i)

Problems in Tax Jurisdiction

Weak Rigidity of Tax Enforcement and Preservation

The Law of the People’s Republic of China on the Administration of Tax Collection stipulates that our tax authorities have the power of tax preservation and enforcement. The power of tax preservation and enforcement fully embodies the rigidity of tax law enforcement. However, in the practice of tax collection and management, tax authorities will encounter many obstacles in implementing tax preservation and enforcement. For example, financial departments, especially commercial banks, delay or even resist the enforcement of compulsory measures proposed by tax authorities for their own benefit, such as suspending taxpayers’ payments and withholding taxes, resulting in failure in tax preservation and enforcement. For another example, the seizure and sealing up of goods by the tax authorities are limited by the actual work involved, especially the seizure and sealing up of unsalable products and production equipment, making it difficult to carry out tax preservation and enforcement operations. (ii)

Outdated Tax Judicial System

According to China’s relevant laws and regulations, when the taxpayer’s tax amount reaches the standard of a criminal case, the tax department shall transfer it to the public security department for jurisdiction. At present, China’s judicial security system for tax-related cases has the following problems. There is no basis for the establishment of a tax police and tax court, whose legal status is not clear. Most of the public security cadres handling tax cases are part-time, and their manpower and working

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hours cannot be guaranteed. Moreover, they are not knowledgeable of tax laws and regulations and auditing skills. Taxation cadres handling tax-related cases have a need for legal knowledge in public security and work experience. The relationship between tax authorities and public security and law courts and other departments in handling tax-related cases calls for further coordination. The working system and procedures for tax-related cases need to be further improved, and tax legal documents need to be further regulated. Furthermore, there still exists much room for improvement in institutions, personnel, and judicial means in the handling of tax-related cases by judicial organs. To effectively sanction and deter tax crimes and give full play to the mandatory nature of taxation, China’s judicial tax reform should quicken its pace to cater to the requirements of the market economy as soon as possible and be in line with international practices on the basis of improving the judicial tax safeguard system.

5.3 Lessons from Law-Based Local Taxation in Typical Countries 5.3.1 Foreign Local Taxation Systems 5.3.1.1

Local Taxation System as an Important Foundation of Fiscal Decentralization (Fiscal Federalism)

Fiscal decentralization (fiscal federalism) refers to a kind of financial management system in which the central government and local governments at all levels establish relatively independent central tax and local tax systems based on a clear division of administrative powers and expenditure responsibilities, and the governments at all levels levy and manage taxes separately, thereby forming a relatively stable central financial revenue and local financial revenue. As a financial management system widely adopted by market economy countries today, fiscal decentralization mainly divides the administrative powers and expenditure responsibilities of the central government and local governments and matches their respective tax revenue accordingly. The local tax system is an important part of fiscal decentralization (fiscal federalism). Local tax law institutionalizes and legalizes local tax revenue, with the purpose of clarifying the rights and obligations of local governments at all levels and taxpayers in specific local tax categories. From a legal point of view, local tax laws can also be classified into basic law, substantive law, and procedural law. As far as local tax legislation is concerned, the principle of law-based taxation is generally regarded as the foundation for local tax laws in various countries around the world, especially in Western developed countries where the rule of law is relatively sound, and their local tax law systems are also framed and perfected on this basis.

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Regarding local tax law enforcement, most countries, by taking into consideration their own national conditions, follow the principle of rule-of-law tax to build up local tax collection and management systems and ensure the professionalism of their staff and a strong internal control system in the setting up of tax authorities. The management of local tax sources improves the quality and efficiency of tax collection and management and reduces tax costs through tax informatization and the strengthening of the management of key tax sources. Regarding the local tax environment, they better the tax credit system and guide taxpayers to pay taxes in good faith to improve tax compliance. Therefore, in the process of establishing a scientific local tax system, China should focus on the establishment of the main tax categories of the local government, secure the reasonable tax revenue of the local government, and ensure the scientific and normative structure of the local tax system.

5.3.1.2

Foreign Local Tax Systems Affected by the National Administration

In the mid-19th century, fiscal decentralization (fiscal federalism) began to appear in some European countries. Through continuous development and improvement in the United States, Japan, France, Australia, and other countries, it has gradually grown into a relatively perfect and full-fledged system. The development of a foreign local tax system is closely connected with the emergence of the tax sharing system. Though accompanied by fiscal decentralization on the surface, the local tax system in essence is determined by the distribution of tax power between the central and local government and between local governments at all levels. The administrative system of a country usually exerts enormous influence on such power distribution, which is further displayed in the corresponding local tax system. Due to differing economic development levels and political environments, the financial management systems of tax power distribution diverge as well. From the perspective of power allocation, the legislative authority of local taxation can be conceptualized as the power of local governments at or below the provincial level to collect local taxes and promulgate local taxes in the form of local laws through authorities at the same level. This is a concept opposite to the legislative authority of central taxation. The current legislative authority of local taxation in different countries can be summarized into three modes. The first is that local governments enjoy a full legislative authority of local taxation in federal countries such as the United States and Canada. The second is that local governments do not have the legislative authority of local taxation, such as in South Korea. The third is that local governments have partial legislative authority of local taxation, such as in Japan. This book takes the United States and Japan as examples for analysis. The United States is a typical federal country, and each of its state governments keeps their own legislative authority of local taxation. As long as the local tax legislation does not conflict with the Constitution, this law will have legal effects at the local level. Moreover, the legislative authority of local taxation owned by the state governments is warranted by the legal principle of “not violating the Constitution is legal” established by the

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U.S. judicial review system in 1893. Japan is one of the representatives of the Asian unitary states. Its local governments possess part of the legislative authority of local taxation granted by the central government, mainly including the power to levy new taxes under the tax system stipulated by the tax law and the power to determine the actual tax rate within a certain range with reference to the standard tax rate. In Japan, the authority and scope of tax legislation of local governments are usually identified in the form of Local Autonomy Law and Local Tax Law, and it is stipulated that the tax legislation of local governments shall not conflict with the tax laws of the central government.

5.3.1.3

Local Tax Systems in Federal States

The governance structure of federal countries is hierarchical, and in typical federal countries (such as the United States, Germany, etc.), the power to formulate the corresponding local tax system is given to the legislative bodies at all levels. In the United States and Germany, political power is mainly sliced into three parts: federal, state, and local. Each level of government has its own clearly defined authorities, expenditure responsibilities and matching financial power, and local governments at all levels generally keep an independent tax legislative power and management power, correspondently forming federal taxes at the level of the federal government, state taxes at the level of state governments, and local taxes at the level of local governments. (i)

Tax Legislative Power and Tax Administrative Power by Local Governments

In the United States, from the central to the local (the federal, state and local governments), each government can independently exercise the tax legislative power and management power within their jurisdiction within the scope of the Constitution. That is, local governments conserve full legislative authority of local taxation and management power. Therefore, the characteristics of the American tax system are that the federal tax system (tariffs, property tax, inheritance tax, social insurance tax) is relatively unified, while the tax systems of various states and local governments (with tax legislative power and management power of almost all taxes except tariffs, property tax, inheritance tax, and the social insurance tax system) are quite different. In Germany, the Basic Law stipulates that the federal and state governments shall have power to legislate with regard to the exclusive tax of the state and local governments, but the local governments below the state have no tax legislative power. They are only empowered to collect and manage taxes and have limited autonomy in determining local tax rates and tax reductions and exemptions. (ii)

Relatively Independent Local Tax Systems Owned by Local Governments at All Levels

In the United States, the federal, state, and local governments all have clear administrative powers, expenditure responsibilities, and matching financial rights. Local

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governments at all levels generally have independent tax legislative power and management power. The United States has separate federal, state, and local governments with taxes imposed at each of these levels. The main tax categories are shared by the three levels of government, and revenue is partitioned by tax rate sharing. Governments at all levels also conserve their own main taxes, forming a comprehensive tax system from the central government to local governments at all levels. Meanwhile, congruent with the relatively independent local tax system, each level of government, from the central to the local, incorporates a set of self-sufficient and complete tax collection and management organizations with specific differences in their collection and management modes. (iii)

Relatively Clear and Independent Tax Powers and Main Taxes among Local Governments

In Germany, each government at the federal, state, and local levels maintains a complete tax system and establishes its main types of taxes. For example, personal income tax, corporate income tax, and social insurance tax are the main tax categories of the federal government; sales tax and total income tax are the main tax categories of the state government; and property tax is the main tax category of the local government.

5.3.1.4

Local Tax Systems of Unitary Countries or Regions

Compared with federal states, the local government power of unitary states is relatively limited and highly dependent on the central government. The relationship between the central and local government is reflected in the tax legislative power, which is shown as follows. Tax legislative power is highly concentrated in the central government, while local governments only have the right to adjust tax rates and reduce tax revenue for certain local tax categories under relevant provisions of tax laws. As a typical unitary country, the United Kingdom implements a centralized financial system under which the central and local tax management systems are separated. The main characteristics are as follows: (i)

High Centralization of Tax Legislative Power

In Britain, the central government enjoys a complete legislative power of taxation, including tax items, tax rate adjustment, and tax reduction and exemption. No power is granted to the local governments at all levels to set up and levy local tax categories. (ii)

Local Tax Revenue Accounting for a Small Proportion in the Total National Tax Revenue

The overall scale of local tax revenue is smaller in most unitary states than in federal states. In a unitary country, the proportion of local tax revenue in the total national tax revenue accounts for less than 15% in Britain, approximately 10% in France, and approximately 20% in South Korea.

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5.3.2 A Comparison of Local Tax Power Systems in Foreign Countries Judging from the practices of local tax administration systems in various countries, the division of a local government’s tax administration authority, subject to the government system, state system, economic level, intergovernmental relations, and even social customs in different countries, significantly differs from each other. The local tax power systems in the whole world can be roughly generalized into three types: centralized, moderately centralized, and decentralized.

5.3.2.1

Centralized Tax Administration

The legislative power and collection and administration power of local taxes both belong to the centralized tax management system of the central (federal) government. Local governments only have the power to adjust the tax rate of certain local tax categories and to partially reduce or exempt tax revenue on the premise of not violating the unified regulations of the central government. Typical cases include Britain, Thailand, France, etc. In France, tax power is mainly concentrated in the central government, including tax legislative power and tax collection and administration power. In 1982, the French government passed the Law of Decentralization, which made major adjustments to the relationship between the central and local governments, such as decentralizing local tax categories such as stamp duty, expanding the scope of local government tax autonomy, and giving local governments certain tax powers. After the revision of the French Constitution in 2003, the power to enact regulations was granted along with the recognition of territorial units.7 The constitutional amendment continues to expand the autonomous administration power of local governments and clarifies the constitutional basis for local governments to conserve tax legislative power.8 Likewise, the British local government, ruled by a centralized state, has limited power in local tax administration compared with France and only conserves the power to determine local tax reduction and exemption. In recent years, the tax return amount 7

In France’s public law, the geographical space for local decentralized groups to realize their administrative role is called a “territorial unit (Collectivitéterritoriale)”, which currently includes three levels, namely, regions, (la région), provinces (le département), and towns (la commune). In essence, “the state is also a kind of territorial unit”, and a territorial unit does not have administrative subordination like an administrative region.—Cited from Wang, Jianxue. The Basic Concepts and Reference of France’s Domestic Public Law Territorial View. Xiamen University Law Review, No. 2, 2006. 8 Paragraph 3 of Article 72 of the revised French Constitution stipulates: “According to the conditions prescribed by law, these territorial units are managed independently by the elected parliament, and the territorial units have the power to make regulations in order to exercise their functions and powers...Territorial units enjoy income freely available to them under the conditions prescribed by law...For each type of territorial unit, tax revenue and other self-owned income represent a decisive part of their total income”.

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from the central government has increased minimally, and the local government’s income has shrunk, failing to meet the needs of the local government’s public services. To obtain more financial funds, the local governments keep raising their levies, the increase of which even exceeds that of commodity prices. To fend off the adverse effects of excessive growth of local tax revenue on long-term economic development, the British central government has to impose an annual growth limit on local tax revenue. The practices of the abovementioned countries demonstrate that the centralized local tax system is conducive to strengthening the macrocontrol ability of the central government and to securing long-term stable economic growth. Therefore, most developing countries adopt a centralized local tax system, wherein China is one of them.

5.3.2.2

Moderately Centralized Tax Administration

In a moderately centralized tax administration system (also known as a relatively centralized tax administration system), the central government holds tax legislative power, while the local government has a certain degree of tax collection and administration authority. In practice, the local government wields merely a small portion of local tax management authority, the majority of which accrues to the central government. A typical case is Japan. In Japan, local taxes must be discussed and approved by Congress, and specific tax laws and regulations formulated by the local government shall be submitted to the local congress for discussion and consent before implementation. Nevertheless, localities still have the power to amend the local tax law only in strict accordance with the legal framework and shoulder responsibilities for the collection and management of local taxes by law. The moderately centralized tax management system has the following characteristics: (i)

Relatively Centralized Tax Power

In Japan’s centralized tax system, Congress exercises legislative power over local taxes. Even if the local government administers local tax categories independently, it must be sanctioned by Congress and bound by relevant laws. Japan’s Local Tax Law sets forth the tax categories levied by local governments and the tax rates of ordinary taxes other than statutory tax categories. Tax can only be charged after being discussed and approved by local councils and submitted to the central government for approval. (ii)

Unique Income Adjustment System

Japan’s emphasis on a centralized local tax system makes tax revenue more concentrated in the central government, which has resulted in a gap in local fiscal revenue and expenditures. Therefore, Japan establishes the transfer payment mode between the central government and lower governments to meet the needs of local expenditures, thus making up for the fiscal gap in local governments. The transfer payment mode between the central and local governments mainly includes state allocation tax,

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state transfer tax, national treasury expenditure, etc. A look at the overall distribution of Japan’s tax revenue shows that the central government accounts for 65% and the local governments account for 35%. However, the transfer payment changes it to 25% accrued to the central government versus 75% accrued to the local governments.

Double Principal Taxes System The taxes in Japan are divided into three levels, namely, national taxes, prefectural taxes and municipal taxes, according to the attribution of tax revenue to the central, prefectural, and municipal governments. Each level of government takes two taxes as their main taxes. In line with the principle of division of administrative powers and benefits, Japan’s intergovernmental tax power division takes into consideration the tax balance of governments at all levels, among which Congress has control over the division of central tax and local tax. Under such a division mode and its operation, a national tax system (with personal income tax and corporate income tax as the main taxes), a prefectural tax system (with resident tax and business tax as the main taxes), and a city-town-village tax system (with resident tax and fixed assets tax as the main taxes) have been formed. In view of the realities of developing countries with large populations, large areas and multiple ethnic groups, the moderately centralized tax management system represented by Japan is more suitable for these developing countries.

5.3.2.3

Decentralized Local Tax

In a decentralized local tax system, local governments take control of the major administrative authority over local taxes and the larger portion of power in local tax legislation and collection and management. Germany, the United States, Australia, and other typical federal countries fall into this type. For example, the United States has developed a local tax system corresponding to its level of government. Under the supervision and restriction of superior laws, the federal, state, and local governments have established their own tax systems in terms of legislation, tax collection and administration, although the tax powers of the state and local governments are still under the influence of the central government. For another example, the local governments in Germany conserve the rights of local tax revenue and taxation. Regarding the income rights of local taxes, the sharing tax distribution between the federal and local governments is subject to alternation only with the consent of the local governments. With respect to local tax collection, the local tax rate can be determined by the local government within the tax rate range prescribed by the federal government. The local tax administration power is allotted to the state and local governments, of which the State Finance Bureau coordinated by the Federal Administration of Taxation takes in charge.

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5.3.3 A Comparison of Local Tax Lawmaking in Foreign Countries 5.3.3.1 (i)

Tax Legislation

The Popularity of Tax Ruled by Law

The principle of tax by law (also known as the statutory taxation principle or lawbased taxation principle) means that tax collection or the adjustment of tax elements must be carried out in accordance with the law. In a country that values the principle of taxation by law, the legal basis of taxation must be observed by any tax action. Tax legislation, law enforcement, and other actions can only be performed under the framework of legal authorization. That is, without ratification from the central and local legislatures, the central and local governments shall not arbitrarily levy new taxes, adjust tax elements of existing tax categories, or implement tax law enforcement. The connotation of rule-of-law tax mainly includes the following four aspects: (i)

(ii)

(iii)

9

Tax elements ruled by law. This means that all tax elements must be approved by the state legislature and promulgated in legal form. Tax elements are not limited to tax categories, tax rates, collection procedures, etc. The notion of tax elements ruled by law is highly weighted in both the common law system and the civil law system. Many countries have made explicit provisions in the Constitution and the Basic Tax Law. For example, “All Bills for raising Revenue shall originate in the House of Representatives” (Article 1 of the Constitution of the United States), “Taxation must be regulated by law” (Article 34 of the Constitution of France), “No new taxes shall be imposed or existing ones modified except by law or under such conditions as law may prescribe.” (Article 84 of the Constitution of Japan), etc.9 Definiteness of tax elements. This means that in laws or authorized substantive laws and procedural laws and regulations, tax elements and tax collection procedures should be clearly defined to prevent tax administration from abusing tax discretion and to clarify the corrective authorities and legal safeguard procedures and contents regarding the damage to taxpayers’ rights and interests caused by unclear tax elements. The legitimacy of taxation. It refers to the premise that tax authorities must strictly abide by laws and regulations in tax law enforcement, and tax authorities only have the power to levy taxes according to law in the process of tax collection. That is, tax authorities have no right to not collect taxes or to collect “excessive taxes”. Moreover, tax authorities cannot carry out tax deductions and exemptions or delay collection in violation of tax laws, nor

Zhang, Tongqing. The Characteristics and Comparison of the Tax Systems of the United States, Japan and France. International Taxation in China. No. 5, 2000.

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(iv)

(II)

213

can they conduct illegal transactions with taxpayers on the content of tax obligations and collection time limits or abuse their power to seek personal gain and damage the economic interests of the country. The legal guarantee of taxation procedure. This means that tax collection and tax payment must conform to the tax collection and payment procedures. In cases of tax disputes between tax collectors and payers, they shall be solved by legal authorities through legal procedures. The emphasis on law comprises the core of the idea of rule-of-law tax. In legislation, law-based taxation must go through strict legislative procedures. In tax law interpretation, the state legislature or judicial organs and other departments are required to authorize interpretation. In tax law enforcement, tax authorities are obligated to collect taxes rigorously in accordance with the prescribed procedures and requirements of laws and regulations. Tax Legislative Power Mainly Wielded by the State

The rule-of-law tax indicates “no legislation, no taxation” and requires tax laws to be impartial, complete, solemn, and practical. Tax legislation serves as the basic premise of the whole process of tax activities. As tax law relates to the economic transfer of the income of citizens, enterprises, and other market entities to governments at all levels, governments at all levels compensate for the cost of providing public goods by making use of their own tax revenues. This transfer process involves the economic interests of the state and its citizens. The spending of tax revenues by the government affects the operation of the national economy. At the same time, due to the inherent mandatory, fixed, free, and other characteristics of taxes, most countries put the tax legal system into the basic legal framework of the country and correspondingly allocate the tax legislative power to the national legislature. In the United States, for example, the Constitution stipulates that the power to enact national tax laws is vested in the Congress, and the power to enact local tax laws within the framework of federal tax laws is vested in state legislatures. (III)

Tax Legislation According to Given Procedures

In countries that follow the idea of tax by law, tax legislative procedures and other legal legislative procedures are promulgated by the head of state after being approved by the legislature. Take the United States as an example. The Constitution stipulates that all bills involving the increase of fiscal revenue, including tax laws, shall be submitted by members of Congress and passed through a series of legal procedures before becoming laws. (IV)

Distinct Composition of Tax Laws

The rule-of-law tax requires tax law to be complete, i.e., tax law is composed of a well-structured tax law system. Again, taking the United States as an example, the federal government’s tax law consists of three parts: the Internal Revenue Code, the interpretation of the Internal Revenue Code by the Ministry of Finance, and judicial precedents of tax cases. The Internal Revenue Code is formally passed by Congress

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and signed by the President, which is a legal issue. The interpretation of the Internal Revenue Code is given by the Ministry of Finance, which falls within the scope of China’s departmental rules. The judicial precedents of tax cases are similar to judicial interpretation in China, which encompasses judicial precedents of tax cases tried by laws at all levels. Taking the Russian Federation as an example, the tax laws of the federal government consist of basic and special parts. The basic part of the tax code belongs to the scope of the basic tax law. Its main contents include the basic tax principles, the rights and obligations of tax collection, tax categories, tax collection procedures, tax calculation methods, and other basic provisions. The special part of the tax code belongs to the scope of substantive tax law, and it mainly covers relevant provisions of various taxes in the process of continuous improvement. (V)

The Tax Code: A Symbol of Law-Based Taxation

A sign of a country equipped with sound laws is to compile tax laws into codes to highlight the legal status of tax laws, which is also the tradition of a country following the principle of law-based taxation. Most European countries have set up tax codes with their own characteristics. The Internal Revenue Code of the United States, revised continuously after its compilation in 1939, has become one of the most well-conceived tax laws around the world. Among international organizations, the Organization of American States (OAS) and the International Development Bank Tax Administration (IDBTA) jointly formulated and promulgated the Latin American Tax Code Model in 1968, which gave a strong impetus to the development of tax codes in American countries. Although the tax codes of certain countries are compiled from various tax laws, this independent compilation form of tax codes can significantly improve the legal authority of tax laws and the unity of their provisions.

5.3.3.2 (i)

Tax Law Enforcement

Improvement of Tax Collection and Administration under Law-Based Taxation

In practice, tax law is subject to continuous revision and improvement, and a more standardized tax collection and administration system and procedures are established. In most developed countries, the relevant institutions of each link of tax collection and administration procedures are becoming increasingly mature, and tax collection and administration mechanisms are becoming increasingly sounder. Some developed countries have implemented a tax collection and management mechanism with distinct characteristics and remarkable effectiveness. For example, the taxpayers’ lifelong identification number system is built up in Canada. For another example, in the administration of personal income tax collection, individual tax declarations and withholding tax systems are under implementation in the United States. The implementation of these tax collection and administration mechanisms has laid a good foundation for securing taxpayer compliance and tax authorities’ tax source control.

5.3 Lessons from Law-Based Local Taxation in Typical Countries

(ii)

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Comprehensive Application of Advanced Technology in Tax Collection and Administration

With the development of informatization, especially the development of “Internet plus” in recent years, various countries have been motivated to apply advanced computer networks and technical means to the field of tax collection and administration. The digitalization of various fields of tax collection and administration has been notably enhanced, stimulating the collection and administration to be more scientific and effective. Take the United States and Canada for example. At present, the information system of tax collection and administration in the United States consists of a national computer center and 10 service center network systems, networking banks, customs, border defense, and other systems, molding a strong tax security system. Canada has achieved remarkable results in the promotion and application of electronic tax declarations. Taxpayers can easily, quickly, and accurately transmit tax declaration-related information to the federal tax office through e-mail, effectively reducing the cost of tax declaration. (iii)

“Strict Control and Severe Punishment” for Violations of Tax Law

Another important feature of the principle of law-based taxation is the strict enforcement of tax laws. Some countries that value the idea of tax by law have developed highly democratic and professional tax auditing and related auditing mechanisms through the establishment of specialized tax auditing agencies supplemented by socialized accounting and tax agencies. Take OECD as an example. The auditors of Japan’s Audit Department account for more than 1/3 of the tax personnel of the Internal Revenue Service. The tax penalty regulations of Britain, Italy, Sweden, and France are thoroughgoing in terms of tax liability and punishment for companies and individuals. The United States sets up a penalty ratio of 5–100% for tax violations such as overdue declaration by corporate taxpayers, refusal to audit by tax personnel, and the investigation of tax evasion. There are also penalties targeted for the number of violations. For the tax-related illegal acts of companies and responsible individuals, Germany, Italy, and Sweden impose two penalties on individuals acting on behalf of companies in addition to the fines charged on companies or partnership organizations.

5.3.3.3

Independent and Sound Tax Judiciary

Countries that follow the principle of law-based taxation attach great importance to the independence and perfection of tax judicature, in particular safeguarding taxpayers’ rights of appeal and administrative reconsideration. For example, Taxpayer Bill of Rights in the U.S. fully protects taxpayers’ rights to conduct administrative reconsideration and civil litigation against government employees involved in tax activities. If a taxpayer is not satisfied with the decision made by the reconsideration office, he may appeal to the court, and the burden of proof in court proceedings shall also be borne by the Internal Revenue Service. The U.S. courts have the power

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to interpret the legal force of tax law provisions. That is, the court’s ruling takes more legal force. The ruling made by the court on disputed provisions can overturn the legal interpretation of tax law provisions, which is inconsistent with the interpretation by the Ministry of Finance and the Internal Revenue Service.

5.4 Suggestions for Rule-of-Law Local Taxation in China 5.4.1 The Goal and Framework of Rule-of-Law Local Taxation in China 5.4.1.1

The Goal

Due to the varying natural conditions and resources, economic development in different parts of China is very uneven. Tax sources and revenues contingent on the level of economic development also differ regionally. To give full play to the financial advantages of various regions and the role of finance and taxation policy in macroeconomic regulation and control, China should build a moderately decentralized local tax legislation and tax administration system. The tax legislative power and tax administrative power of local governments are mainly subject to the macrocontrol ability of the central government, the self-restraint of local governments, and the influence of legislation and tax management on the macroeconomy and neighboring areas. In China, pertaining to the three foregoing restraining factors, the macrocontrol of the central government needs to be improved, the self-restraint of the local government remains weak, and the tax competition among the local governments is fierce. Therefore, in this context, the division of tax legislative power and tax administrative power in China should adhere to the principle of “unity of big power, decentralization of small power, emphasis on supervision, and gradual and orderly progress”, and priority shall be given to properly handling the relationship between the moderate centralization and decentralization of tax legislative power and tax administrative power. Upholding the basic principle that “tax power is centralized in the central government, supplemented by local tax power, and the central and the local government are separately responsible for tax administration at different levels”, the goal of lawbased local taxation in China should be that the legislative power and the power to stop levying taxes are vested in the central government while the local government’s tax power is concentrated in the provincial government, giving the local government certain powers of adjustment and interpretation.

5.4 Suggestions for Rule-of-Law Local Taxation in China

5.4.1.2 (i)

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The Framework

Division of Taxation Power Under the Law

Compared with the established goal of rule-of-law local taxation in China, the central government should centralize local tax legislative power and tax management power, i.e., The central government should formulate basic tax laws, tax authority laws, comprehensive tax collection and payment procedures, and other basic tax laws. The legislative power, interpretation power, and collection power of central taxes and the legislative power and interpretation power of sharing taxes should also belong to the central government; the collection power of local taxes can be solely attributed to the central government or shared by the central and local governments. The legislative power of the local tax system should still be vested in the central government, while the local government should be endowed with the power of tax collection. The power of tax interpretation and adjustment involved in the local tax system can be split into the three manners listed in Table 5.2. (ii)

Sound Division of Tax Law Enforcement Power (Collection and Administration) Under the Law

Tax authorities carry out tax collection and management activities under a specific tax legal framework within the tax collection and administration system. Their main duty is to levy taxes by law and ensure that the full amount of taxes will enter the state treasury. Under the Western fiscal decentralization (fiscal federalism) administration system, the central and local governments at all levels exercise the power of tax collection and management on the taxes that constitute their respective incomes. Whether the central tax or the local tax, they are all put into respective treasuries to form the financial source of governments at all levels, that is, to implement a rather thoroughly decentralized tax collection and administration. Countries characterized by fiscal decentralization (fiscal federalism) all set up two sets of tax authorities, the central and the local, to split the tax collection and administration authority by referring to the principle of income attribution in the tax system, and the central and local tax authorities separately collect and administrate taxes in their own way. Although China founded two tax collection agencies, national tax and local tax, at the initial stage of the implementation of the “tax sharing” fiscal system, the power of collection between national tax and local tax, especially the power of collecting shared taxes between the central and local governments, such as enterprise income tax, has not been completely decentralized. With the full implementation of “replacing business tax with value-added tax”, the tax collection and administration power more obviously accrues to the state tax authorities, which not only easily engenders a conflict of the tax benefits distribution between the state tax and the local tax but also causes problems in collecting and administrating shared taxes, such as the failure of timely storage of tax and the lowered in collecting and administrating local taxes managed by the state tax. These contradictions and problems are not conducive to boosting efficiency and enthusiasm in collecting and administrating national or local taxes.

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Table 5.2 Allocation of tax legislative and administrative power in the local tax system Characteristics of local tax categories

Local tax categories

Local tax categories that Consumption tax have a greater impact on after reform the national economy and have a more fluid tax base.

Local tax categories with fixed tax base and distinct regional characteristics

Urban land use tax, real estate tax, land value-added tax, resource tax, environmental protection tax, deed tax, etc.

Tax interpretation power The authority in and adjustments charge of tax interpretation and adjustment Tax collection, suspension, adding or removing tax items, determining the floating range of tax rate, tax reduction, exemption and increase

National People’s Congress

Determining the applicable local tax rate in the region within the tax rate fluctuation range set by the central government

People’s Congress at Provincial Level

Basic tax laws and regulations

National People’s Congress

The power to adjust tax policies, such as measures for implementation, tax items, and the adjustment of tax rates within the unified range and scope stipulated by the central government

People’s Congress at Provincial Level

Tax reduction and exemption and collection management under the restraints defined by the central government The power to levy tax and suspend tax, filing of collection schemes

People’s Congress at Provincial Level

The power to formulate tax policies

Therefore, to promote the coordination between the national tax and local tax in the collection and management and improve its efficiency and law enforcement, China should further straighten out the tax enforcement authorities of various local tax categories, integrate the digital resources of the two, establish a joint tax system, and strengthen the cooperation between the national and local tax agencies.

5.4 Suggestions for Rule-of-Law Local Taxation in China

(iii)

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Division of Tax Judicial Power Under the Law

The implementation of tax legislation and law enforcement in the process of local taxation toward the rule of law relies on the reasonable division of local tax jurisdiction, which safeguards the authority of local tax law and ensures fairness and justice in local tax legislation and implementation. At present, China’s tax jurisdiction, especially the administration, investigation, detention, and other powers of criminal tax cases, is scattered between the central and local governments, among the public security, procuratorate, courts, judicial, and other departments of the same level of government. Different powers are not successfully integrated, which deters the implementation efficiency of tax jurisdiction under the rule of local tax law. In this book, we believe that, in the short term, based on integrating jurisdiction, investigation, detention, and other powers of criminal tax cases, and through the establishment of a joint conference system of provincial and lower levels of government, a stable carrier should be formed to solve the problem of cross-departmental coordination of criminal tax cases in an orderly manner and ensure the proper operation of tax power. In the long run, it is necessary to operate a unified, sound, and standardized tax judicial security system (composed of tax general inspection, tax inspection, tax trial, and other institutions), independent of the national and local tax system, by placing priority on the vertical leadership of the central government and breaking through the confines of local administrative divisions to effectively guarantee the implementation of tax jurisdiction under the local tax law.

5.4.2 Suggestions for Tax Revenue Division Under the Law 5.4.2.1

Mode of Tax Revenue Division mode

The practice of tax revenue division in foreign countries shows that it is mainly manifested in two modes. The first is the mode of “shared tax package”, in which shared tax plays the leading role with the local tax system as a supplement. Therein, after local governments at all levels take their corresponding slices of the “shared tax package” in proportion, their revenue from tax sharing often exceeds the revenue from the main types of local taxes. Take the fiscal revenue of German local government in 2005 as an example. Eighty percent of the tax revenue of the state government came from the shared tax. The second is the mode of “local tax as the main type and shared tax as the auxiliary”, in which local tax is the prime concern. Compared with the foregoing mode, local tax income in this mode mainly comes from local fixed taxes. Although local governments also enjoy the shared revenue between the central and local, the shared amount only accounts for a relatively small portion of the total local tax income. There are also cases, such as in France, wherein the local government’s tax revenues are completely obtained through the local tax system.

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As far as China is concerned, when the fiscal system of tax sharing was established in 1994, a tax system including the main types of local taxes of local governments (business tax, income tax) and the central and local sharing tax (value-added tax) was formed. With the implementation of income tax sharing in 2002, business taxes gradually constituted the main type of local tax. By 2011, China’s value-added tax (a shared tax between central and local governments) and business tax (local tax) together accounted for more than 47% of the total local tax revenue. With the nationwide implementation of “replacing business tax with value-added tax”, this tax reform measure further reduces the proportion of the main types of local taxes in local government tax income, while the percentage of sharing tax revenue has greatly increased. In 2013, shared tax revenue accounted for over 67.85% of the local government’s taxable income. The current situation of China’s local tax revenue and the establishment of China’s main types of local taxes stand in need of the cultivation and improvement of existing local tax categories, which makes the “shared tax package” mode a more fit choice for China. Hence, it is necessary to establish a “shared tax package” mode and form a diversified income pattern of “shared tax as the main and local tax as the supplement” for local financial resources. With the development and maturity of local taxes, the ratio of sharing tax in local tax revenue will be gradually contracted, the proportion of the main types of local taxes will be expanded, and the pattern of “equal contribution from local tax and shared tax” will finally take shape.

5.4.2.2

Suggestions for the Main Local Tax Category

Based on the above analysis, for the development of the main types of local taxes under law-based local taxation in China, the practical choice is to transition from a “shared tax package” to a “local tax as the main tax, shared tax as the auxiliary”. Therefore, China currently should start to cultivate the main categories of local taxes to ensure that local governments have a certain scale and stable tax revenue. In general, the main local taxes should meet the following requirements. First, they should be able to guarantee the needs of local tax revenue. The objects of local taxation should have a wide tax base, rich tax sources, and potential for growth. Second, they should be able to meet the needs of local governments to regulate regional economic development, and the objects of local taxation should involve the income distribution and industrial structure of the region. Finally, they should be able to meet the demand of local tax collection and administration, and the local tax system should be transparent and convenient for collection and management. Therefore, the design of the main local taxes under the rule of law must conform to the reality of China’s local economic development and the existing tax structure, and the process of determining the main types of local taxes should adopt a phased path with dynamic adjustment. According to the idea of “weak munici-

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palities and villages” in government reform, the governments in China will evolve into three hierarchies: central government, province (municipalities directly under the central government, autonomous region), and county (city, district). Under this three-layer pyramid, finance will also shift from the existing five levels to the three levels comprising central government, province, and county. Therefore, to set up the main local taxes toward the rule of law, we should first determine the main local taxes at the provincial level and then those at the county level. (i)

Main Tax at the Provincial Level: Reforming the Current Consumption Tax

In the near future, a consumption tax can be employed as the provincial choice for the main local tax. Reference is made to the practice of the United States and Germany taking consumption tax (or sales tax) as the main tax category of the state government (whose administrative level is equivalent to the provincial government in China) and to the experience of the British local vehicle consumption tax and the German automobile tax allocated to the state government. This book suggests that vehicle purchase tax and consumption tax, which were originally central taxes, should be ascribed to the shared tax. Presently, the tax system of vehicle purchase tax and consumption tax in China is relatively well developed, and the tax revenue accrued has already reached a satisfactory amount. Regarding the nature of the consumption tax itself, although it belongs to the central tax, its indirect-tax nature determines that the burden of the consumption tax is ultimately borne by enterprises and residents at the place of consumption. In addition, because consumption tax revenue will be returned from the central government to the local government, which is of Chinese characteristics, a consumption tax is not a pure central tax at the very beginning of its establishment. Especially after the reform of the refined oil tax, most of it needs to be returned to the local government to compensate for their road maintenance expenditures. As far as the nature of the vehicle purchase tax itself is concerned, it is a one-off tax for property purchases. It can be integrated into the current consumption tax system to form a local tax system with consumption tax as the main category, making it the main type of local tax. At the same time, according to international practices, the central tax should retain the special consumption tax imposed on tobacco and other special commodities and some monopolized state commodities. Accordingly, the design of the new consumption tax system illustrated above will improve the scope and links of consumption tax collection and propose appropriate adjustment of consumption tax rates. First, China needs to further broaden the scope of new consumption tax items to include luxury goods (such as private planes, yachts, high-end furniture, etc. ), calligraphy and painting collections, rare works of art, and other emerging consumer products. Second, China needs to implement the differential tax rate of consumption tax, allowing all localities to determine their own

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consumption tax rates within the range of the tax rates set by the central government. Third, China needs to transfer the tax collection link from the production link to the consumption link. By adjusting the consumption tax collection links and tax rates of newly increased tax items such as high energy consumption, high pollution products, and some high-end consumer goods, the tax base of consumption tax will be enlarged accordingly, and the income of consumption tax will be increased. Meanwhile, to make the distribution of consumption tax revenue more uniform among regions and to ensure a firm and continuous growth of local consumption tax revenue, the consumption tax collection link can be moved forward from the current production link of taxable consumer goods to the retail link of taxable consumer goods. The adjustment of consumption tax collection will help the local government create a good market environment, promote local consumption, and contribute to the modification and transformation of the regional economic structure. After the consumption tax becomes the main type of local tax at the provincial level, the provincial government will acquire a more stable source of income. The central government can also duly reduce the local sharing of shared taxes and lessen its burden of local transfer payments. According to China’s tax revenue data, approximately 700 billion yuan could become provincial government revenue in 2015.10 (ii)

Main Tax at the County and City Levels: Levying Real Estate Tax

The development of the main type of local tax in counties and cities will lay a solid financial foundation for the good governance of lower-level governments in China. Learning from the successful experience of foreign local governments in establishing main taxes and considering the development of China’s real estate market, in this book, we hold that the new local tax system at the county and city levels should set up real estate taxes as the main tax category. A look at the main taxes of foreign local governments indicates that real estate tax is a common choice, which reflects the positive relationship between the supply level of public goods of local governments and the appreciation of local property. The sources of local government revenue also show that establishing a real estate tax as a main tax can yield a stable and broad tax base for local governments. In 2015, China’s real estate tax revenue was 205.09 billion Yuan, accounting for 1.64% of the country’s total tax revenue.11 However, with the addition of land value-added tax, urban land use tax, and deed tax, the sum of real estate tax revenue takes up 8.45% of the total national tax income. Regarding

10

The vehicle purchase tax for 2015 was 279.256 billion Yuan, the consumption tax for 2015 was 105.412 billion Yuan, deducting the tobacco consumption tax for 2015, which was about 500 billion Yuan (The data comes from China Tax Statistics Yearbook). 11 The data comes from China Economic Network Database.

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the efficiency of tax collection and management of real estate taxes, county- and citylevel local governments are more familiar with the objects of tax collection. They in particular hold more advantages regarding information on real estate ownership and real estate valuation. Moreover, county- and city-level local governments have significant cost advantages in collecting the tax. In recent years, real estate taxes and other property taxes have remained in the early stages of legislation. This book suggests that in the short term, China should initiate the reform on the existing real estate tax mainly to utilize its financial revenue function. In the long run, a real estate tax system should be established, incorporating urban land use tax, farmland occupation tax, land value-added tax, and related taxes into the real estate tax system. (iii)

Reforming Other Local Tax Categories

In concordance with the reform of consumption tax and real estate tax, the reform of resource tax should be further advanced. Based on the completion of the existing ad valorem levy reform of resource tax, the scope of taxation should be gradually extended to cover water resources, forest resources, and pasture resources that are commonly used globally to facilitate the protection and rational utilization of these scarce resources in China. Through the introduction of environmental protection taxes, after the reform, environmental taxes and consumption taxes will be coordinated and complementary in function to raise the environmental awareness of enterprises and individuals and enhance their motivation for environmental protection. Summarizing the aforementioned analysis, this book believes that the structure of the future local tax system can be illustrated in Table 5.3.

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Table 5.3 The future structure of the local tax system Tax category

Attribute

Sharing ratio

More details

Value-added tax

Shared tax

6:4 between the central government and the local government

If the income accrues to the provincial government, each autonomous region or municipality directly under the central government or provincial government shall decide the proportion to be shared with the county (city)

Consumption tax

Shared tax

Revenue from tobacco consumption tax goes to the central government and other revenue to the local government

Vehicle purchase tax shall be incorporated into consumption tax. If the income accrues to the provincial government, each autonomous region or municipality directly under the central government or provincial government shall decide the proportion to be shared with the county (city)

Enterprise income tax

Shared tax

Even split between the If the income accrues central government and to the provincial the local government government, each autonomous region or municipality directly under the central government or provincial government shall decide the proportion to be shared with the county (city)

Individual income tax

Shared tax

Even split between the If the income accrues central government and to the provincial the local government government, each autonomous region or municipality directly under the central government or provincial government shall decide the proportion to be shared with the county (city) (continued)

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Table 5.3 (continued) Tax category

Attribute

Real estate tax

Local exclusive tax All income goes to the county (city) government

Sharing ratio

More details

Resource tax

Shared tax

Revenue from offshore Income from the local oil resources tax goes to area accrues to the the central government, resource area while revenue from other resource taxes to the local government

Stamp duty

Shared tax

Revenue from stamp duty on securities transactions goes to the central government, while other revenue to the local government

In the short term, the existing real estate tax needs to be reformed. In the long run, real estate tax will be combined with farmland occupation tax, urban land use tax, land value-added tax, and related taxes to form a new real estate tax

Income from the local area accrues to the county (city) government

Urban maintenance and Local exclusive tax Income goes to the construction tax county government Deed tax

Local exclusive tax Income goes to the county government

Tobacco tax

Local exclusive tax Income goes to the county government

Environmental protection tax

Local exclusive tax Income goes to the provincial government

The provincial government decides the sharing ratio

Chapter 6

Tax Collection and Administration: Issues and Solutions

6.1 Review on the Reform of Tax Collection and Administration in China 6.1.1 The Tax Collection and Administration System and Its Changes Institution is a frequently used concept in economics. However, different disciplines or theoretical schools, or even different scholars, hold distinct theoretical explanations and views on its connotation and denotation. Institutional economics defines institutions as all kinds of rules and constraints that restrict and regulate individual behavior (Yuan Qingming 2012).1 The significance of institutions lies in that they are an effective way to regulate the economic behavior of the doer as well as an important path to increase the predictability and controllability of the behavior. At the same time, because of the predictability of economic behavior, reliance interest becomes a consensus of the market, and transaction costs will be greatly reduced. The essence of taxation in economics is a way of real right transfer. The state takes advantage of its dominant position to transform the wealth created, owned, and controlled by economic individuals into a state-owned and state-controlled dominant position through certain means and paths. The state’s dominant position does not necessarily mean that it can achieve this goal, which must rely on a set of practical and recognized methods, namely, the tax system. Therefore, the research scope of institutional economics naturally includes a tax collection and administration system. In the analysis of economic problems, supply and demand analysis is employed as the basic tool of neoclassical economics. Likewise, it can be applied to new institutional economics in the analysis of institutional change. With the development and progress of society, institutions evolve with a general trend of adapting to social and

1

Yuan, Qingming. New Institutional Economics. Shanghai: Fudan University Press, 2012.

© People’s Publishing House 2022 Q. Wang and W. Xi, Improving the Tax System amid the Rule-of-Law China, https://doi.org/10.1007/978-981-16-7033-6_6

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economic needs. That is, the old, inefficient, and costly system is replaced by a newer, more efficient and lower-cost system. This process virtually reflects the common pursuit that each party of the economy, such as a country and an individual, desires to control more wealth with less cost. This concept forces every entity involved in taxation to adjust and coordinate their relationship to promote institutional evolution and renewal. The system of tax collection and administration represents a type of public good in which its consumers mainly include the country, governments at all levels, tax collection and administration departments, and taxpayers. The demand curve also displays the characteristics of public goods. The supply of institutional change differs from that of general commodities. The latter focuses on the problem of supply quantity, while the former deals with the nature and quality of the supply system rather than supply quantity. This also means that the supply entities of institutional change cannot be limited to the participants of equal relations in economic activities. Instead, there must be a strong body, such as the government, to exercise power on behalf of the state and act as the maker and promoter of the rules of the game. Certainly, in a specific historical period and a specific social environment, some social class or social organization, or even some individual, could become the entity of the supply of institutional transformation. However, in the formation of the concept of state, tax collection and management can only be implemented by the government on behalf of the country, and its changes are enforced by the state. There are two states of supply and demand in the change of tax collection and administration system: equilibrium and non-equilibrium. Hereby equilibrium is in the sense of behavior, a short and fragile “balance of power” achieved by the continuous game between tax collector and taxpayer in that system of collection and administration. This relationship undergoes constant change and development. The collector and payer take participation with contradictory and divergent purposes and valences in nature, leading to antagonism and inequality between each other, which makes nonequilibrium the normal state and equilibrium the marked form. The nonequilibrium of the tax collection and management system is mainly manifested in insufficient supply. In the course of its development and formation, it is often inevitable that one or several institutional supplies are not available in a perfect and timely manner. Needless to say, the lack of a support system does not necessarily plunge the whole system into malfunction, but it is undeniable that in this case, the operation of the whole system will become more difficult and sluggish. No system can “guarantee to cure all diseases” and remain unchanged. In the face of new economic and social contingencies, the method of change should be adjusted accordingly. The law of diminishing marginal efficiency is applicable to any system. Blindly sticking to the rules and trying to confront social development with the existing institutions, any system is doomed to a vicious cycle of marginal efficiency reduction, unable to extricate itself. As a result, the system will go invalid or even out of control. The theoretical deduction of neoclassical economics indicates that when the marginal efficiency of tax collection and administration system change moves close to zero, the system efficiency is the highest. This is the most favorable occasion to push new institutions to take root, which can effectively avoid system trapping.

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Looking back on the history of China’s tax system, due to the deep-rooted centralized system of big government, the changes and developments of the tax system have also shown the characteristic of emphasizing the government’s top-down leading role mostly promoted by state administrative forces. From the perspective of institutional supply, the government is the only reliable source in the promulgation and implementation of tax collection and administration. Its enforcement must be strongly promoted by the government, whose role is unreplaceable by any other force. In recent decades, China has made remarkable achievements in its tax collection and management system development, which highlights the significant increase in the tax collection rate and administration efficiency. Take value-added tax (VAT) as an example. The collection rate of VAT in China rose from 44.60% in 1997 to 86.26% in 2006 (State Taxation Administration 2008).2 A large number of documents show that the efficiency of tax collection and management in China has improved year by year after the tax sharing reform, with an average annual increase of 36% from 1997 to 2007 (Deqian Yang 2010).3 Progress in tax collection and management efficiency has made an important contribution to tax growth (Dexiang Wang et al. 2009; Deqian Yang 2012).4 Undeniably, the current system of tax collection and administration in China is not void of problems. To circumvent institutional traps, China should change its model of institutional change in a timely manner. According to the theory of institutional economics, institutional constraints include three dimensions: formal constraints, informal constraints, and implementation mechanisms. Among them, the formal constraints involve the laws, regulations, and rules on taxation and other aspects formulated by the state or the body of administration. Informal constraints refer to the common people’s general view and understanding of taxation, which must be considered in combination with social culture, education, publicity, etc. The implementation mechanism means specific system provisions to ensure that taxation can be carried out normally and achieve its purpose. In terms of formal constraints, China’s tax laws and regulations still need improvement. At present, there are only departmental rules and regulations to guide tax collection and management, and the level of legislation is not high. The stability, rationality, and operability of the tax collection and administration system need to be further refined and strengthened. With respect to informal constraints, the value of trustworthiness in paying taxes has not turned into a social consensus. China is still in the primary stage of development, with a feeble integrity system. Due to historical and cultural limitations, many people still confuse tax collection with the “royal grain tax” and 2

State Taxation Administration. Golden Tax Project VAT Collection and Management Information System. China Awards for Science and Technology, No. 10, 2008. 3 Yang, Deqian. Dynamic Evaluation of Tax Collection Efficiency in China: 1997–2007—Analytic Method Based on Malmquist Index, Contemporary Finance and Economics, No. 8, 2010. 4 Wang, Dexiang and Li Jianjun. Efficiency of tax collection and management in China and Its Influencing Factors–Empirical Research Based on Stochastic Frontier Analysis (SFA) Technology. Economic Research on Quantitative Economy and Technology, No. 4, 2009. Yang, Deqian. Analysis of the Temporal and Spatial Characteristics of the Transformation of China’s Tax Growth model, Tax Administration Research, No. 11, 2012.

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mistakenly believe that they provide services for the country and ignore the publicness of taxation. Any system is ultimately implemented by people. Therefore, how to balance the interests of tax authorities and tax personnel representing the country with national interests, as well as how to better perform their functions, is a critical issue to be urgently solved. The prevalence of local protectionism and improper support of enterprises by local governments have led to serious tax losses. At the same time, there are also a few tax officials who use their power to seek rent, which causes the loss of tax income and damages national interests.

6.1.2 The Reform of China’s Tax Collection and Administration System The reforming process of China’s tax collection and administration system can be roughly divided into the following three phases.

6.1.2.1

The Planned Economy Period

In the early days of the founding of New China, research on the theory of socialist taxation in China had just begun, with a focus on tax policy and tax system construction during the period of national economic recovery. Taking the “Implementation Standards of National Tax Policies” promulgated by the State Council in 1950 as guidance, the tax system was unified, and 14 tax categories were formulated. In terms of tax collection and administration, the government mainly relied on the people at that time and followed the mass line. Collection methods such as “democratic appraisal”, “audit collection”, and “regular quota” were adopted to carry out management by industry and region. Different collection and administration methods were implemented in different circulation links, such as “source control” in production, “inspection with goods” in circulation, “invoice control” in sales, and “strict supervision” in distribution. These methods effectively infused financial support for the country’s socialist transformation at that time. Against the background of the completion of the socialist transformation of the ownership of means of production and the gradual recovery of the national economy, China’s social and economic structure also underwent fundamental changes. When New China was just founded, the economic structure in which various economic components coexisted gradually shifted into a relatively single social and economic structure dominated by a state-owned and collective economy with a small number of individual economies as auxiliaries. Under this context, tax collection and administration changed as well, adopting a tax collection model in which tax personnel were directly assigned by the basic tax authorities to be responsible for all levy matters of the unit in charge. “One special administrator is responsible for the fixed management of a household” and “one tax employee enters one factory and all taxes are managed in a unified

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way” (Bin Yang 2006).5 This model can be called the unified model of collection and administration. Also named the “nanny-style” tax collection model, the model played a positive role in securing financial resources for the smooth completion of the socialist transformation. However, it failed to improve taxpayers’ tax awareness and even led to the distortion of the relationship between rights and obligations in tax collection, thus ultimately affecting taxation efficiency. By the middle and late 1950s, under the influence of the Soviet Union’s “nontax theory”, the necessity of state-owned economic taxation and socialist taxation was denied, and the status of taxation was weakened.

6.1.2.2

From the Reform and Opening up to Tax-Sharing Reform

After the Third Plenary Session of the 11th CPC Central Committee, the socialist planned commodity economic system began to be gradually established, and the national economic structure went through tremendous changes, that is, moving from a relatively single economic structure of public ownership in the past to an economic landscape with public ownership as the main body and various economic components coexisting, and the status of taxation gradually restored. In 1983 and 1984, China carried out the reform of “tax for profit” for two consecutive years, namely, a two-step reform of “tax for profit”. The industrial and commercial tax system was reformed. The larger the “cake” of tax income, the higher the proportion of tax income in the national financial revenue. In the meantime, the focus of tax collection and administration switched from state-owned and collective economies to multiple economic components. The unified model of collection and administration shifted to the separation model of tax collection and administration. Starting from the two-step tax for profit reform in 1983 and 1984, the model of “separation of collection and administration from inspection” or “separation of collection, administration, and inspection” was implemented, which removed tax collection and inspection work from the hands of special administrators, thus forming a relatively separate collection and administration model of tax collection, tax administration, and tax inspection. In line with this, tax authorities below the provincial level set up several departments, sections, and offices of tax collection, tax administration, and tax inspection. The establishment of this “twofold separation” or “threefold separation” collection model effectively propelled tax collection and management towards specialization of labor and played a genuinely positive role in tackling the problem of excessive concentration of power, preventing abuse of one’s power for personal gains, strictly controlling tax evasion, and improving taxation performance. Marked by Interim Regulations of the PRC on Tax Collection and Administration promulgated by the State Council in April 1986, the unification and legalization of China’s tax system was initially realized, and separate laws were enacted for tax collection and administration. The Law of the People’s Republic of China on Tax Collection and Administration, passed at the 27th meeting 5

Yang, Bin. Principles for Selecting tax collection and management model. Tax Administration Research, No. 3, 2006.

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of the Standing Committee of the Seventh National People’s Congress in September 1992, was the first law in China to regulate the rights and obligations of tax collection and payment. So was it a basic law for tax collection and administration authorities to follow. The law came into effect on January 1, 1993.

6.1.2.3

Tax Collection and Administration Reform After Tax-Sharing

After the 14th National Congress of the Communist Party of China, to meet the requirements of the target model of China’s socialist market economy system, the original fiscal system and tax administration system were greatly reformed. In 1994, China initiated the tax-sharing reform, in line with which the tax collection and administration agencies were also adjusted, and the State Taxation Administration and the Local Taxation Bureau were established. Meanwhile, a comprehensive and large-scale overhaul was carried out in the taxation structure with a new tax system under implementation. To ensure a smooth transition to the new tax system, the trinity model of tax “declaration, agency, and inspection” was set up to adapt to the reform of tax sharing. This model, based upon a reasonable division of tax administration authority, ensured the income of the central government, defined the income levels of the central and the local government, straightened out the distribution relationship, played the role of tax macro-control, and effectively ensured fair competition in taxation. In terms of tax collection and management, the State Taxation Administration in 1996 launched a tax collection approach articulated in 30 Chinese characters, which was “based on tax declaration and optimized services, relying on computer network, centralized collection and key inspection”. The “30-character” taxation model inaugurated a new type of collection and payment relationship, strengthened the principal status of taxpayers, reduced the cost of tax collection to a considerable extent, substantially improved the quality and efficiency of tax collection and management, and effectively uplifted the social ambience of administrating tax under law. However, this tax collection model did not highlight the importance of tax source administration. In the process of promoting and enforcing the new model, problems of “neglecting administration and diluting responsibility” emerged in various places. Therefore, in 2003, the State Taxation Administration added four characters to the abovementioned “30-character” model: “strengthening administration”, emphasizing the prominent role of administration, which thus formed the “34-character” model, i.e. “based on tax declaration and optimized services, relying on computer networks, centralized collection, key inspection, and strengthened management”. By 2009, the concept of risk management was introduced into tax collection and administration, and the use of data was highly prioritized. This is the current tax collection and administration model in China. The development and application of computer and network technology brings great convenience and support to tax collection and administration and introduces a new field of work. The corresponding tax collection and management system is also constantly innovating and improving with the optimization of the collection and

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administration model. At present, under the background of “collection”, “administration” and “inspection”, based on the upgrade of services and computer networks, all parts of the country have set up tax service departments, management departments (sub-bureaus, offices), and inspection departments. Different departments are relatively independent in handling related business, but they both cooperate with and restrain each other in their work. In terms of tax declaration and treatment of taxrelated matters, efficient and fast methods of handling taxes have been tapped, such as online declaration, mail declaration, appointment declaration, and tax declaration through bank outlets. For tax collection and management, administration agencies set up as per economic regions or districts have effectively strengthened the routine supervision and management of taxpayers and tax sources and played a positive role in enhancing the responsibility of tax personnel. From the aspect of tax inspection, professional inspection and first-class inspection have been implemented by building reasonable inspection agencies and reinforcing inspection forces, which has effectively fulfilled the role of tax work as a whole. After more than half a century, specifically undergoing over 30 years of reforms and practices since the reform and opening up, the tax collection and administration system in China has been established. It is compatible with the socialist market economic system and conforms to general international principles and practices. Equipped with more advanced technical means than before, it has embarked on the track of tax administration according to law. However, the development of economic globalization has confronted the current tax collection and management model in China with a series of challenges, such as low administrative efficiency, limited tax assessment function, lack of “key inspection”, difficulty in accurately grasping tax source information, lack of means to manage large multinational and trans-regional enterprise groups, and low quality and efficiency of tax collection and management. Although some intermittent reforms have been carried out within tax authorities, fundamental problems cannot be solved. The current tax collection and administration model must be transformed and upgraded to strive for new development.

6.2 Issues in Building Rule-of-Law Collection and Management in China 6.2.1 Tax Administration by Law to be Improved 6.2.1.1

Rule of Man Over Rule of Law

In China’s taxation, many tax administrative organs are using power beyond their own authority, abusing power, and punishing taxpayers hastily. When individuals exercise their power, they have no law or discipline, and taxation based on “Renqing” or “Guanxi”, both of which refer to interpersonal relationships with Chinese

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characteristics, is not uncommon. For example, some break tax laws randomly, such as changing the tax basis, tax rate, and penalties explicitly stipulated in the law. Some cannot wield their power properly and take advantage of their own authority to carry out punishment willfully, and so on. Generally, in the process of tax law enforcement, the phenomenon of “rule by man” is quite common in China.

6.2.1.2

Substantive Law Over Procedural Law

At present, tax officials have a clear understanding of tax categories, but their understanding of the relevant rights and obligations of both tax collectors and payers stipulated in the Law of the People’s Republic of China on the Administration of Tax Collection needs to be improved. They have a basic understanding of the power of administrative punishment, tax protection and tax enforcement but not the specific implementation procedures. Violations of procedural law in law enforcement take place frequently. The enactment of the Administrative Penalties Law further adds to tax officials’ concerns. Many tax administrative cadres have this or that concern about law enforcement, worrying about administrative litigation and reconsideration, which makes it difficult to embody the rigidity of tax law.

6.2.1.3

Arbitrary Assumptions Over Law Enforcement Procedures

There is a common practice among tax administrative personnel in grassroots areas; that is, in taxation routines, they cannot strictly follow tax law enforcement procedures but rather tend to comply with their own experiences and habits. The tax law enforcement procedures are blatantly ignored, on top of which, no details are offered about the basis and reason for a specific administrative behavior that should have been informed to the other party. The decision on the handling of tax issues should have been written according to tax law enforcement procedures but is replaced by a tax examination report or a letter of payment of fines out of convenience concern or personal habit. For some relevant materials, the registration for future reference work fails to meet procedural requirements, and even in some cases tax payments precede fines. When taxpayers violate tax rules and regulations, according to the law, tax preservation measures should have been taken, but only the deposit is seized. This kind of practice seriously damages the justice of law enforcement.

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6.2.1.4

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Tax Plan Management Going Against the Spirit of Law-Based Tax

The duties of administrative organs are often multidimensional, multitasked, and not easy to quantify (Tiroe 1994).6 Tax authorities are no exception. The tasks of tax authorities are not only to levy taxes according to relevant laws but also to actively provide services for taxpayers and try to improve their compliance (Deqian Yang 2006).7 Among these tasks, some are easy to measure, while others are not. The governance of tax authorities mainly revolves around solving the problems between superior and subordinate tax authorities, especially the problems of information asymmetry, supervision, and the incentive mechanisms between vertical authorities. Bound by various constraints, superior tax authorities must choose a contract with a lower transaction cost to stimulate subordinate tax authorities to work hard. The current situation makes it a very difficult problem for superior tax authorities to assess the taxation administration quality of subordinate tax authorities. Therefore, it is a realistic choice for superior tax authorities not to carry out high-cost assessments or to reduce such assessments. Sluggish assessment is an opt-out for subordinate tax authorities, but such practice will result in the absence of an effective guarantee of tax collection. Therefore, China has adopted a tax plan-based model to govern tax authorities, the root purpose of which is as follows: (i) It is much easier to measure the completion of the tax plan than the tax authorities’ compliance to law. (ii) The tax plan represents a kind of high-incentive contract that can encourage tax authorities at all levels to do everything possible to accomplish the tax plan to avoid being vetoed in their performance appraisal. However, this kind of contract can easily lead to the distortion of tax authorities’ effort allocation, focusing on measurable tasks while ignoring other tasks that are equally important but not easy to measure (Holmstrom et al. 1991; Li’an Zhou 2008).8 The distortion will bring about at least the following negative effects: (i) The efforts of tax authorities in tax service are obviously insufficient. (ii) The tax authorities adopt the ways of “levying undue tax”, “storing wealth among the people” and “storing wealth among the enterprises” to adjust the progress of tax warehousing, which obviously violates the spirit of tax law.

6.2.1.5

The Evaluation of Taxation Quality and Efficiency to be Further Standardized

In taxation practice, the State Taxation Administration issued the Assessment of Tax Collection and Administration Quality (GSF [2003] No. 50). The main assessment 6

Tirole, Jean, The International Organization of Government. Oxford Economic Paper, 1994. pp. 1– 29. 7 Yang, Deqian, et al. Transaction Cost and Contract Selection between Superior and Subordinate Tax Authorities. Tax and Economy, No. 3, 2006. 8 Holmstrom, B. & Milgrom, P. Multi-task Principal Agent Analysis. Journal of Law, Economics and Organization, No. 7, 1991. Zhang, Jun & Zhou, Li’an. Competition for Growth. Shanghai: Gezhi Press, 2008.

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indicators proposed in the document include registration rate, declaration rate, warehousing rate, surcharge rate of overdue fines, increase and decrease rate of overdue tax payment, penalty rates, and so on. The quality will be graded as “excellent”, “good”, “average”, or “less than satisfactory” accordingly. The foregoing indicators can directly reflect the quality and efficiency of tax collection and management, which nonetheless differs significantly in various regions. Hence, the statistics and evaluation of indicators are highly subjective and need to be further standardized and improved. There are many problems in the assessment method introduced above, detailed as follows: (i) The overall design of assessment indicators fails to keep pace with the times. Some indexes are relatively backward, and it is difficult to comprehensively and accurately capture the reality of tax collection and management. (ii) A confusion of obligations arises between taxpayers and tax officials. For example, the “declaration rate” is used to assess tax authorities and their staff, but actually, it is taxpayers that are mainly responsible for the “declaration rate”. (iii) There is a lack of self-evaluation of tax authorities, as well as extensive supervision of the public and the news media. (iv) The quality evaluation of tax collection and administration is not standardized in form, which engenders considerable willfulness in actual implementation, thus directly tarnishing the fairness and justice of evaluation results (Wenbo Wang 2014).9 Therefore, to objectively appraise the performance of tax collection and administration and the compliance of taxpayers with tax law, it is necessary to establish a system that is easy to operate and quantify. In addition, the system should include tax compliance and satisfaction of taxpayers, tax loss rates and tax collection costs.

6.2.2 Paying Taxes According to Law to be Reinforced and Awareness of Paying Taxes to be Improved In tax payments, fulfilling tax obligations will reduce the absolute amount of disposable income of taxpayers, which is obviously contrary to the goal of maximizing the interests of taxpayers. Taxation directly curtails the economic interests of taxpayers. As a direct social appropriation of taxpayers’ interests, it will not change substantially because of the rationality and fairness of the tax system. Regardless of how unreasonable this view is for the government, it is a fact for taxpayers. Naturally, in carrying out tax payment obligations, there is less active fulfillment and more passive performance, and there are fewer active taxpayers and more nonpayers and tax evaders. Out of opportunism, the benefits of tax evasion are certain. However, the loss caused by tax evasion is uncertain; that is, the losses of paying back taxes, accepting fines, and declining reputation are uncertain. Therefore, if other factors are given and the loss of intangible wealth caused by tax evasion is small, under 9

Wang, Wenbo. Reflections on the Construction of Modern Tax Collection and Management Quality Evaluation System, Tax and Economic Research, No. 2, 2014.

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the influence of luck psychology, some taxpayers, especially those with high-risk preference, tend to evade taxes. In terms of their willingness, they prefer to pay less or even no taxes. Always linked with political power, taxation in China is defined as the country’s participation in the distribution and redistribution of social surplus products compulsorily and freely by virtue of political power. The government levies taxes mainly for the purpose of meeting its financial needs to play its roles and meeting the needs of the public. Whether taxation is implemented to obtain fiscal revenue or achieve the goal of fair income distribution and regulating macroeconomics, it is ultimately for the government to provide public services and compensate for market failure. Taxation is an indispensable income for the government but a necessary expenditure for taxpayers. In a sense, government and taxpayers have formed a relatively stable relationship, upon the maintenance of which both parties are seeking to magnify their own interests. Therefore, taxpayers, out of concern of their own benefit, pay taxes in accordance with the law is a rational choice, while tax authorities choose to tax according to law for the sake of all taxpayers. Furthermore, paying taxes according to law and levying taxes according to law is where the interests of both the government and taxpayers converge, and the theoretical basis for taxpayers to pay taxes according to law resides. In reality, the government actively performs its economic and social functions, and citizens are willing to accept various public products and services provided by the government. However, there is a misunderstanding of tax theory, and as a result, taxpayers lack the awareness of actively exercising their tax rights as well as fulfilling their obligations, while the government lacks due respect for taxpayers’ rights in the course of tax collection. In the publicity of tax work in China, emphasis has always been placed on the obligations of taxpayers, focusing on how citizens should pay taxes in a timely and correct manner, as well as the adverse consequences of not paying taxes or paying taxes passively. In contrast, the publicity on the exercise of the rights and powers enjoyed by taxpayers is apparently insufficient. On the one hand, China’s taxpayers are unconscious of exercising these due tax rights. On the other hand, due to the absence of taxpayer supervision over tax authorities, administrative enforcement under the law is relatively weak. It further undermines the rights and status of taxpayers, which is not conducive to fostering citizens’ awareness of tax payment according to law. The essential pursuit of socialist taxation is to “take from the people and use for the people”. Citizens have the obligation to pay taxes according to law, but at the same time, they have the right to know the government’s tax revenue and expenditures and be able to monitor them. The government is obliged to report the income and expenditures of taxation to taxpayers and to use taxes scientifically and reasonably, which is also a necessary means to develop citizens’ tax awareness. However, at present, China’s financial budget is not open and transparent enough, so it is not easy for taxpayers to know where their taxes are going and what public goods and services they have received from the government. When taxpayers fail to clearly feel the benefits from public goods or services, they cannot truly understand the nature of taxation, and thus, their awareness of paying taxes is compromised.

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6.2.3 Protection of Taxpayers’ Rights and Interests to be Regulated Taxpayers enjoy obligations and rights, so they have rights in tax collection and management. For a long time, China has overemphasized taxpayer obligations and failed to do a good job in the protection and relief of taxpayer rights. In the relationship between tax authorities and taxpayers, taxpayers have always been in a disadvantageous position. Taxpayers’ rights are easily infringed upon because of legislative defects and improper law enforcement. “There is no right without a remedy”. Only through effective remedy can the damages to taxpayers be compensated, and the rights of taxpayers be ensured. Compared with developed countries, China’s current tax relief system has many deficiencies, which are manifested in the following aspects.

6.2.3.1

The Dependence of Tax Administrative Review Agency

The purpose of tax administrative reconsideration is to scientifically judge the rationality and legitimacy of administrative actions, which should abide by the basic principles of objectivity and justice. The authority dealing with tax administrative disputes should be fully independent, that is, completely independent of both parties, and the referee should not be either party. At present, the administrative organ dealing with tax administrative reconsideration in China is the higher-level tax organ of the respondent who makes the specific administrative act. In other words, the tax organ as one of the reconsideration parties and the agency in charge of reviewing the tax administrative act are related with each other as subordinate and superior, and they are intertwined with each other in terms of personnel, funds, etc., so it is difficult to ensure an impartial and just reconsideration decision.

6.2.3.2

Professionalism of Judges at All Levels to be Improved in Increasingly Complex Tax-Related Cases

Currently, most judges in China are engaged in civil and criminal courts. At the same time, their knowledge structure is mainly established upon civil and commercial law and criminal law, with a lack of research on tax law. To manage the increasing cases of financial and intellectual property, in recent years, some local courts have set up financial courts and intellectual property courts, which focus on improving judges’ professional knowledge of these areas, but still there is insufficient attention paid to tax-related cases. Presently, few judges who are engaged in judicial work have specialized in tax law research, which leads to a shortage of judges with taxation expertise.

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6.2.3.3

239

Administrative “Pre-reconsideration” and “Pre-tax Clearance” not Protective Toward the Taxpayers’ Rights

According to the regulations, if a taxpayer has any objection to a tax action, he or she shall first propose the tax administrative reconsideration to tax authorities and seek judicial relief only after obtaining a dissatisfying reconsideration outcome, i.e., the so-called “pre-reconsideration” procedure. Prior to being granted administrative relief, the taxpayer is required to pay off taxes, which means that administrative reconsideration can only be put forward after tax payment or providing a tax guarantee according to the decision of tax authorities, i.e., the so-called “pretax clearance” procedure. This set of rules has brought a certain cost burden to taxpayers in terms of economic effects. Starting the tax relief procedure means that taxpayers need to pay taxes in advance, thus bringing some opportunity cost. The taxpayer’s benefit of tax relief has to be greater than the loss caused by delivering tax payments. Otherwise, the taxpayer may just give up the relief and choose to give the payment. To a certain extent, the procedure of “pretax clearance” shuts out taxpayers who cannot pay taxes and bear tax relief losses, depriving them of their due tax relief rights and thus resulting in the unequal footing of taxpayers and tax authorities in the dispute settlement mechanism. The “pre-reconsideration” procedure further exacerbates this inequality. The procedure of administrative reconsideration, which requires tax clearance as a precondition, to a certain degree breeds the absolute advantage of tax authorities in the settlement mechanism of tax disputes. To ensure the maximization of their own interests, tax authorities may exploit their overriding advantage to extend the time of dispute resolution, thus increasing the costs of taxpayers seeking tax relief and forcing them to give up their right.

6.2.4 Legal Environment of Taxation to be Improved 6.2.4.1

(i)

The Ability of Tax Collection and Administration to be Improved

Tax collection and administration inadaptable to the tax reform

At present, the important direction of deepening tax system reform in China is to gradually increase the proportion of direct taxes and improve the local tax system. Among the current sources of tax revenue, more than 90% derive from enterprises, and less than 10% derive from individuals. The tax source supervision system and collection administration are mainly established around enterprise taxpayers. With the deepening of the tax system overhaul, the proportion of direct taxes in the tax structure will definitely increase, as will the proportion of natural persons paying taxes. In this context, managing the tax sources of natural persons is a practical issue. Tax system design is subject to the abilities of tax collection and management. A well-designed tax system, in theory, will not achieve good results if not matched with

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the actual abilities of tax collection and administration, which is evinced by many previous tax system reforms in China. As Shangxi Liu (2016) pointed out, the ability of tax collection and management is an important embodiment of the capacity for national governance. If the ability of tax collection and management is not strong, the goal of relevant tax policies will be difficult to achieve, the tax law and system will be difficult to implement, and consequently, national governance will fail.10 However, the current tax collection and administration system in China does not accommodate the goal of tax administration modernization. For example, in terms of the social environment of tax collection and management, the general public has been engaged in the discussion of the legal rationality of taxation and the degree of tax burden, and an increasing number of relevant questions have been raised. In terms of the legal environment of tax collection and management, although the rule of law has been cherished as the basic strategy in China, the independence of tax law enforcement is still facing many challenges. Local governments and other departments often intervene in tax law enforcement. In terms of the collaborative environment of tax collection and management, comprehensive taxation among various departments has not made substantial progress, and information acquisition and sharing are still difficulties in the construction of third-party tax-related information (Daoshu Wang 2012).11 (ii)

Inefficient tax organizations

There are many problems within the tax department. In brief, the main problems existing in the tax organization structure include the following two aspects. On the one hand, the internal incentive is inadequate. At present, China’s tax organization is fashioned into a vertical management structure embodied in a “departmental hierarchy” structure, which has generated some unreasonable phenomena. The first is armchair bureaucracy. Tax departments usually adopt the form of sending documents to supervisors and subordinates, which not only wastes many resources but also results in administrative inefficiency. The second is departmentalism (Guangming Li 2004).12 As a typical “departmental hierarchy structure”, the current tax organization in China is characterized by the fact that there are many functional departments and intermediate links within it. Under the guidance of “doing well the work of the department”, departmentalism is unavoidable, and internal friction within the unit is quite common. The third is inefficiency. The organizational system of the “departmental hierarchy structure” induces departmentalism, and it is difficult to address related problems due to the large number of departments and links. The time consumed is conceivable, which makes its efficiency very low. The fourth is bureaucratism. This is mainly related to the overstaffed organization, which tends to 10

Liu, Shangxi. Tax Collection and Management Are Related to National Governance. China Finance and Economics News, NO. 2, 2016. 11 Wang, Daoshu. Research on Sustainable Tax Growth in China. Finance and Trade Economy, No. 5, 2012. 12 Li, Guangming. Reflections on the Establishment of a Modern Tax Collection and Management System. Study and Practice, No. 7, 2004.

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breed bureaucratism and poorly skilled management personnel with low adaptability. On the other hand, the external supervision mechanism is also weak. The top-down tax organization management and bottom-up tax organization reports form a closed system without external supervision and control, which is mainly manifested in the following aspects: the use of discretion by tax officials is not transparent or standardized so that taxpayers only know the discretion result but do not know why. Regarding the relief mechanism, due to the nonstandard and opaque discretion of the tax administrative authority, there is a vertical management relationship between the superior and subordinate institutions of the tax system. In the case of nontransparent legal provisions, it is difficult for taxpayers to obtain administrative and judicial relief of discretion. Within the tax system, the judicial system, the people’s congress system, and the external social supervision system are not perfect, so the application of tax administrative discretion is insufficient, leading to poor tax administrative performance. At present, China has set up two sets of independent and parallel tax agencies: national taxes and local taxes. Since 2015, when China enacted cooperation regulations between the national and the local tax, they have actively brought their respective advantages into full play, established mechanisms, integrated resources, promoted information sharing and cooperation in collection and administration, and achieved preliminary results. However, there are still some problems in the actual work, as follows. First, tax personnel’s awareness of sincere cooperation is not strong. They did not appreciate the importance and significance of the cooperation between the national and the local tax. Inconsistent workloads also lead to different mentalities. For example, the national tax is entrusted to collect local taxes and undertakes extra workloads, resulting in a repulsive mentality. Second, the taxation process and model between the national and the local tax differ from each other, so it is necessary to improve the collection and management system to meet the requirements of cooperation. Third, the cooperation in some units is not substantive and not deep. The focus of cooperation is not prominent, and the form of cooperation is stressed more than the content. Finally, no unified tax service platform is set up between the national tax and the local tax. Due to the differences in the management system and tax software between the two sides, it is difficult for them to achieve information integration, which diminishes the expected effect of cooperation.

6.2.4.2

Tax Resources Management to be Improved

There are serious problems in tax source management in China, which cover the following aspects. (i)

Unreasonable Division of Responsibilities and Out-dated Ideas of Management

According to the principle of an “important minority”, in theory, higher-level tax authorities control more resources and are more capable of managing key tax sources. Thus, the management of key tax sources should be performed by higher-level tax

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authorities. In contrast, most of the tax source management in China is now carried out by lower-level tax authorities. Many tax authorities above the prefecture and city levels set up working organizations according to tax categories, so the tax authorities focus on analyzing the classification management of each single tax category of enterprises, while the analysis of the interrelation and influence among various tax categories turns out insufficient. This method divides the managed objects artificially, which makes it more difficult to determine the common tax risk of the industry. (ii)

Methodologically Unspecialized Tax Resources Management

The tax administrator system, characterized by “dividing into zones and unified management of all taxes”, prevails for tax source management in all regions of China at present. Although it alleviates the problem of “dilution of responsibility”, extensive management and unclear tax sources still exist due to the lack of supervision mechanisms. (iii)

Unreasonable Resources Allocation

Most tax administrators are engaged in the management of tax sources, which only account for a small part of the tax income, while only a small number of tax administrators are engaged in the management of key tax sources. Moreover, too many problems take place in the tax administration routine, and unclear responsibilities in taxation overlap; the quality of personnel engaged in professional management is uneven. In addition, third-party information is hard to collect. Multidepartmental cooperation is important for tax information sharing in international practice. Thirdparty information involves many government departments, such as industry and commerce, finance, housing management, and social individuals and organizations, such as suppliers, customers, and tax agencies. Generally, all parties are reluctant to provide information voluntarily out of concern of their own interests, so it is difficult to meet the needs of tax resource management by pooling the information via third parties.

6.2.4.3

Tax System to be Optimized

The major problems in the current Chinese tax system are as follows. (i)

Confusing and Complicated Tax Policies

China currently collects 17 categories of taxes, each of which has its corresponding substantive tax law and relevant additional regulations. In addition, there are various tax policies matching substantive tax laws, such as a series of regulations on management, evaluation and inspection, making the whole tax law system very complicated. In addition, situated in a transition period of economic development, China often updates some tax regulatory documents to optimize and modify existing policies. Such rapid policy updates, more often than not, make timely implementation of new tax policies impossible.

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(ii)

243

Inefficiency of Policy Implementation Resulting from Ambiguous Policy Expressions

First, the language expression is unclear. Some policy provisions are ambiguous in their expression and lack preciseness in their wording, which easily leads to differences in understanding. Second, the policy itself is not clear enough. This also gives taxpayers some space for tax planning, and the consequence will be the loss of national tax revenue, and it is against the principle of tax fairness; it may also generate differences in policy understanding and the diversity of implementation, making the policy inconsistent with the actual situation. (iii)

Difficult Enforcement of Tax Laws Resulting from Disconnected Tax Policies

At present, China’s tax categories are complex, and there is a problem of poor connection between tax policies. That is, multiple policies for the same matter may exist simultaneously, with certain distinct nuances between them. This also adds to the indefiniteness of the application of tax law and lowers the efficiency of tax collection and administration.

6.3 International Experiences and Suggestions in Tax Collection and Administration 6.3.1 International Experiences in Tax Collection and Administration 6.3.1.1

Tax Collection and Administration in the United States

In line with its government agencies, the tax collection and administration model in the United States is characterized by the federal, state, and local three-level government tax system. Each level of government independently exercises its own tax legislative power and collection power. The United States has a well-conceived taxsharing system country and a federal and local power-sharing country (Zhuqing Lan 2013).13 The federal, state, and local governments each have their own tax administration agencies, with a clear division of labor, but not in a hierarchical relationship. Tax authorities need to be set up according to the types of taxpayers. In September 1998, the United States Congress passed the Internal Revenue Service Restructuring and Reform Act of 1998, which is the largest tax reform in the history of the United States. The U.S. Congress overhauled the previous practice of setting up tax collection and administration business organizations according to taxation management 13

Lan, Zhuqing. Research on the Tax Division between the Central and Local Governments in China. PhD dissertation, Shanxi University of Finance and Economics, 2013.

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functions and tax categories. According to the nature of taxpayers’ social sector, business scale, and personal income tax source, the Internal Revenue Service (IRS) reorganized the tax collection and management agencies to provide equal services for the same type of taxpayers and allocate the vast majority of its business to the four major operating divisions. Its main functions include the following aspects. First, the IRS provides high-quality tax service. The concept of national taxation plays a key role in tax collection and administration of the tax department. The United States has always adhered to “customer management” and fully protected the rights and interests of taxpayers. That is, taxpayers are treated as customers and are active in taxation legal relations. This management philosophy emphasizes the protection of taxpayers’ legitimate rights and interests, and a special agency has been set up outside the ordinary tax department to offer taxpayers tax services. On the basis of establishing a comprehensive tax service system and delivering advanced tax service technology, giving full play to social forces, including intermediary agencies, should be considered, a scientific and effective tax service assessment and evaluation mechanism should be established, and a balance between tax service and tax law enforcement should be strived for. To raise taxpayers’ awareness of paying taxes, various forms should be employed to give them guidance. Second, the IRS improves citizens’ awareness of tax payments. To help taxpayers access tax procedures and tax policies, the Internal Revenue Service provides convenience to taxpayers through various channels. They compile tax publicity materials in a timely manner, print them into a volume, make them into a CD-ROM, or publish them on the website. To raise taxpayers’ awareness of paying taxes and allow all Americans to learn and understand the American tax system from high school, IRS formulated publicity and education materials targeted for students. Third, the IRS protects the legitimate rights and interests of taxpayers. The Internal Revenue Service of the United States takes a number of measures to safeguard the legitimate rights and interests of taxpayers: (1) establishing a fast mediation procedure to quickly coordinate and resolve tax disputes for taxpayers; (2) setting up a rights protection organization as a channel for taxpayers to resolve problems that are otherwise difficult to deal with; and (3) establishing a special appeal service agency to handle appealed cases. Through these measures, the taxpayer can inquire about his declaration, tax amount, and tax refund through a home visit, Internet access, telephone, or letter and obtain relevant tax-related information. In addition, IRS gives taxpayers relevant data on tax payments such as copies of declaration forms and duplicate materials submitted within five years in case they may be of use.14 Fourth, the IRS sets up operating divisions according to taxpayer types. The organizational structure of the US IRS is shown in Fig. 6.1. The largest part of the IRS is the service and enforcement department. According to the nature of the social sector, business scale, and personal income tax source of taxpayers, four primary operating divisions are delineated: Small Business/Self-Employed (SB/SE) Division, Large 14

Kang, Yandong. Research on the Ability of Comprehensive Tax Collection and Management from the Perspective of Informatization. PhD. dissertation, Fujian Normal University, 2008.

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Fig. 6.1 Internal revenue service organization chart

Business and International (LB&I) Division, Tax Exempt and Government Entities (TE/GE) Division, Wage and Investment (W&I) Division. These four divisions cover almost all taxpayers in the United States. In terms of management, these four divisions have their own offices or working groups in each region of the United States to manage tax-related affairs of various types of taxpayers under their jurisdiction, such as declaration and payments. In addition, the management of organization, staffing, personnel, and funds within the four divisions is in a top-down manner. Fifth, the IRS attaches much importance to the digital management of tax resources. The United States has quickened the pace of information-based tax collection and administration, built up an independent and powerful tax information system, accelerated the integration of technology and business, and made use of data to carry out research on taxpayers’ compliance with tax law. A typical information-intensive tax agency has been established to effectively ensure the authenticity of taxpayers’ tax-related information. In the course of tax administration digitalization, the United States has resorted to up-to-date scientific and technological means to further optimize the efficiency of information system implementation and reduce social costs. Furthermore, it has made a scientific and well-conceived plan for the construction of tax informatization. Sixth, the IRS strengthens tax inspection. Tax collection and administration in the United States implements specialized auditing. Thanks to the continuous progress in

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and convenience of modern technical means, taxpayers can file their own tax declaration electronically. Therefore, tax auditing becomes the major task of tax agencies. According to relevant statistics, more than 50% of all tax department employees are engaged in this work. Tax audits exert a deterrent effect on taxpayers, which makes taxpayers have to declare their taxes voluntarily. In addition, in tandem with the rise and continuous development of the new public management movement in the United States, the U.S. tax authority also places great importance on the evaluation of tax collection and management quality and formulates a series of comprehensive theories and procedures for it. The federal government has even set up a national tax collection and management quality and efficiency evaluation committee, whose goal is to “improve efficiency and reduce costs”. It has established a performance evaluation system including six indicators: inputs, outputs, costs, efficiency, impact, outcome, and productivity (Qinglian Zhang et al. 2009).15 Each state has set distinct evaluation indicators and standards to accommodate their actual situation. The IRS treats taxpayers as customers while positioning itself as a private enterprise that prioritizes the needs of taxpayers. Each state has established a performance balance evaluation system that gauges the performance of tax collection and management institutions and personnel, the satisfaction of tax personnel and taxpayers, and the achievement of departments to make a comprehensive assessment of IRS divisions and offices and their tax personnel at all levels.

6.3.1.2

Tax Collection and Administration in Japan

First, let us take a look at the tax collection and administration organization in Japan. The tax system adopted in Japan is a combination of the central and local tax. All legislative powers, including tax legislation, are vested in the Japanese congress. In terms of central and local power, the central government wields absolute tax administration power, while local governments are granted only a small amount of power in local tax reductions, exemption and interpretation. Japan has two parallel tax systems, the national tax system and the local tax system, which are independent of each other. The national tax system is composed of the National Tax Agency, Tax Bureau, and Tax Office in vertical administration. Each of the three assume its own responsibilities. The NTA plans and draws up programs to implement tax administration, standardizes the way to interpret tax laws, and directs and supervises the Taxation Bureaus and Tax Offices. Tax Bureaus are set up according to economic divisions, and its organization corresponds to that of the National Tax Agency and is under its guidance and supervision. Tax offices are the most basic organization of national tax collection and management. It comprises many departments: Coordination Division, Revenue Management and Processing Group, Corporation Taxation Group, Individual Taxation Group, Property Taxation Group, etc.

15

Zhang, Qinglian, Yu Chuangang, Yu Changli. Research on the Performance Evaluation of Local Financial Expenditures in China—Based on Factor Analysis. Henan Social Sciences, No. 6, 2009.

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Japan has a sound legal system for tax collection and administration. Over years of taxation practice, Japan has continuously improved its tax law system and established a modern taxation system, which is an important link in taxation modernization. First, Japan’s constitution identifies the rule of law principle for tax management, which is an important link in tax modernization. Second, a relatively independent, sound, and standardized substantive legal system has been formed. Act on General Rules for National Taxes is the basic procedural law of Japan’s tax administration, which mainly regulates the general procedures of domestic tax management. Japan’s major substantive tax laws include the National Tax Collection Act, Prohibition of National Tax Violation Act, Corporation Tax Act, Inheritance Tax Act, Goods Tax Act, and Consumption Tax Act.16 Special institutions and legal procedures are established to protect the legitimate rights and interests of taxpayers. To fully safeguard taxpayers’ rights and interest and better resolve disputes between national tax authorities and taxpayers, Japan has set up a referee agency directly under the NTA in charge of tax collection and management. Japan has also set up 12 National Tax Tribunals to make decisions on taxpayers’ requests for reconsideration regarding dissatisfaction with the administrative acts of tax authorities. National tax tribunals are independent to a great extent to ensure that tax affairs are handled in the spirit of fairness and justice. If a taxpayer holds any objection to the tax office’s correction of his or her tax return, he or she shall file a request for reinvestigation with the district office director. If the determination is still unsatisfactory, he or she may appeal to the National Tax Tribunals. For taxpayers who maintain a good tax record, that is, blue return taxpayers, an appeal can be directly lodged to the National Tax Tribunals. Such clear legal procedures can fundamentally resolve the concern that taxpayers’ rights and interests are not protected and help establish a relatively complete system of tax services aimed at safeguarding the rights and interests of taxpayers. Japan resorts to information technology to improve citizens’ tax awareness. To improve taxpayers’ awareness of tax payments, Japanese tax authorities make use of various modern media nationwide to strengthen publicity and consultation. The publicity of tax laws and regulations is highly valued in Japan. The week from November 11 to 17 is annually set in particular as the “Think About Tax” Week. With the development of the media industry, the Internet, television, and other media are used to publish the latest tax-related information to taxpayers and to publicize and interpret national tax policies. In addition, the tax authorities, by taking the taxpayer viewpoint, make proactive efforts to provide high-quality tax services. In the meantime, in line with the belief in facilitating and serving taxpayers, Japan always adheres to the principle of highly centralized and on-demand distribution in the establishment of tax authorities at all levels, further improving citizens’ awareness of taxpayment.

16

Wu, Lin. Research on China’s Tax Enforcement System. PhD dissertation, Southwest University, 2013.

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Japan refines the quality evaluation indices of tax collection administration to improve its performance. The NTA conducts an assessment of tax collection administration mainly in four aspects: professional performance, professional ability, the personality of tax staff, and their adaptation to the tax environment. Among them, professional performance refers to the efficiency and leadership of tax personnel in their daily work, as well as their attitude towards taxpayers. Professional ability is divided into several dimensions of different natures, including the capacity of execution, judgment, comprehension, etc. Staff personality is measured from their characteristics reflected in their daily work. The degree of adaptation to the environment is evaluated through their role positioning in tax work. At the same time, the NTA also actively communicates with tax staff during the process of formulating the assessment and jointly negotiates to determine the assessment indicators. It also publicizes assessment reports to the public through media and accepts supervision and opinions from all walks of life. Tax inspection is jointly performed by four functional subdivisions of tax collection administration. The main responsibilities of the investigation department are to correct false declarations made by taxpayers and to generally conduct routine investigations on legal persons of large-scale enterprises. The collection department is mainly accountable to investigate large amounts of overdue taxes. The data investigation department mainly takes charge of difficult, complicated, and undefined cases. The inspection department mainly reviews tax evasion cases with large amounts and serious impacts.

6.3.1.3

Tax Collection and Management in Canada

The Canada Revenue Agency (CRA) is responsible for Canada’s tax collection and management. The CRA is a large organization affiliated with the Ministry of Finance. It has two branches, the Customs Agency and the Revenue Agency. Among them, the Customs Agency is mainly responsible for the collection of customs duties on import and export goods and the import and export affairs of the country, while the Revenue Agency takes care of all federal tax issues except customs duties. The CRA sets up three levels of institutions, namely, the Ministry of National Revenue, regional taxation bureau, and community tax centers. The first level is the tax department, which is composed of various functional departments. Its responsibilities are mainly to master and handle the overall affairs, including promoting the progress of relevant plans and programs, formulating relevant policies, and coordinating various tasks. The second level is the regional taxation bureau, in charge of the actual work of tax collection. The third level is mainly responsible for collecting corporate income tax for each province and handling tax affairs related to the federal government. The three levels of taxation agencies in Canada have clear rights and responsibilities and a clear division of labor, forming a relatively complete tax collection and management system. The tax collection and administration in Canada excels in science and technology, mainly reflected in the following aspects. First, tax declaration placed great focus on

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informatization. Taxpayers can go to a tax office to file a tax declaration or send it by mail or electronically. For individuals and large companies, mail declaration is adopted. Developed communication facilitates mail declaration. For some personal income taxes, it is more common to use licensed software to make an electronic declaration. Regarding report review and data processing, Canada’s tax collection, statement review, and processing of tax-related information are all implemented with information management. Seven domestic tax collection processing centers are mainly responsible for the work. During the annual declaration period, each tax collection administration processing center manually processes the data rejected by computers due to filing errors on the declaration forms. Based on the comparison of the individual income tax return declared by the taxpayer, the employee registration form filled out by the employer, and the investment declaration form filled out by the financial management department, the correctness or falseness of the taxpayer’s declaration of personal income tax is identified. Once a problem is found, the tax department will issue a tax audit notice to the taxpayer, and the taxpayer must pay the tax and interest according to the latest notice received. Canada puts emphasis on serving taxpayers. One of the purposes of the CRA is to provide services for taxpayers and to establish a good tax environment with smooth communication, high-quality services, and responsible implementation. To some extent, this measure enhances domestic taxpayers’ compliance with tax law and is conducive to establishing a harmonious tax collection relationship. “Integrity, professionalism, respect, and collaboration” are the values cherished by CRA. According to data from 2009–2010, the CRA took the initiative to deliver 99.7% of child benefits, family allowance, and other income to taxpayers in a timely manner and handled 99.2% of GST/HST tax refund applications in a timely manner (Xian Zha 2013).17 The practice of putting taxpayers not only establishes a high-quality government image but also brings great convenience to taxpayers, which is conducive to raising taxpayers’ awareness of paying taxes, keeping taxpayers pay taxes in good faith, and forming a harmonious dyad of collection and payment. Canada emphasizes the convenience of tax audits and administrative reconsideration. Auditors account for a large proportion of Canadian tax personnel. The focus of audits is on large companies, while for small companies with low turnover and natural person taxpayers, audits are only a few.

17

Zha, Xian. The Reference of Canadian Tax Collection and Management to China. PhD dissertation, Southwest University of Finance and Economics, 2013.

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6.3.2 Implications 6.3.2.1

Sound Tax Legislation, Enhanced Publicity of Tax Laws and Openness to Citizens’ Supervision

Most Western developed countries generally adopt the tax legislation mode of “constitution + basic tax law + separate tax law”, among which basic tax law plays a leading role in the tax legal system. For example, the Act on General Rules for National Taxes in Japan and The Fiscal Code of Germany both set down on the general rules for various separate tax laws. In addition, Western developed countries attach great importance to the connection and matching of relevant legal systems in their tax legislation. For example, the United States and Germany implement a unified taxpayer identification number in the form of laws, stipulating that relevant economic departments must provide the tax information of the taxpayer to which the tax departments can have access through the network. Meanwhile, the division of tax regimes among governments at all levels is also very clear to ensure that local governments have certain autonomy in tax revenue, activate the vitality of local tax collection and management, and give local finance greater initiative. To do a good job in scientific tax legislation, China needs to supplement it with more publicity for tax law and set aside a prominent space in the media for tax news. The latest tax laws and regulations as well as tax policies should be published via media promptly so that citizens are knowledgeable of up-to-date tax information. It also enables the tax department to obtain opinions from various sectors of society and obtain just-intime feedback so that tax laws and regulations and related tax policies can be better carried out. Furthermore, the tax department should establish its own special website to communicate information to society aptly so that taxpayers will be able to know relevant tax information and keep up their tax payment update. The tax department should accept reports and oversight from all walks of life.

6.3.2.2

Taxpayer-Centered Service with Taxpayers’ Legitimate Rights Fully Protected by Law

In the tax collection administration laws of many developed countries, tax authorities are often named with the word “service” and the taxpayer the “client”, which highlights the concept of service-oriented tax collection and payment. Tax departments in developed countries highly value the service attitude and quality of taxpayers. By providing high-quality services, they can gain three major benefits: improving the rate of tax compliance, reducing the cost of tax collection, and developing a harmonious relationship between collection and payment. Administration is considered a kind of service in which taxpayers are “clients”. Thus, collectors and taxpayers are partners of win–win cooperation. The legitimate rights and interests of taxpayers are fully considered and protected, who are also guided to pay taxes in conscious compliance with law and to improve their tax awareness via tax authorities’ excellent service and

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management. China’s tax departments should also transform their functions, further upgrade their tax services, raise their consciousness of serving taxpayers, perform a good job of tax services, and integrate tax management with tax services. Developed countries generally attach great importance to safeguarding the legitimate rights and interests of taxpayers in the form of laws. For disputes between taxpayers and tax authorities, the United States has set up fast and effective mediation procedures and a rights protection agency. Japan has established a highly independent and specialized referee organ. Japanese taxpayers with good tax records are even given privileges and can directly submit a request for appeal to the National Tax Tribunal. Likewise, the United States has specially set up an appeal service agency to provide a more convenient platform for taxpayers’ tax litigation. The tax department keeps a record of taxpayers’ books and accounts for up to five years, which offers a better tax information service for them. The legal rights and interests of taxpayers supported and protected by law have been fully guaranteed.

6.3.2.3

Low-Cost Tax Agencies and High Quality and Efficiency of Tax Collection Administration Resulted from a Variety of Detailed Evaluation Indicators

Tax institutions in developed countries are relatively simple, and the work they deal with is closely related to tax affairs. They will not waste many human resources, material resources, or financial resources to deal with the internal administration of departments or social activities irrelevant to tax. Each tax department should define its own responsibilities, determine clear tax management objectives, and improve the quality of tax staff. At the same time, the principle of the establishment of tax institutions is to improve tax revenue and facilitate taxpayers, and the efficiency of tax collection and management is characterized by a less hierarchical and more flattening structure (Yujun Lun 2013).18 Although the national conditions of each country differ greatly and the strength and time of tax reform are also significantly different, on the whole, it is the common pursuit of tax authorities of all countries to obtain a payable tax at the lowest cost. Many developed countries have successfully reduced tax costs, improved working efficiency, reduced internal friction, and consolidated the effect of tax management through the reorganization and reform of tax institutions, which makes the relationship between tax collectors and taxpayers more harmonious. At present, Western developed countries require tax departments to implement cost budgets and check computations to strictly control expenditures and reduce costs; they make great efforts to stimulate tax personnel by implementing performance salaries and performance rewards. For taxpayers, the service concept is highlighted, and the satisfaction of taxpayers is adopted as a key index to frame a performance evaluation system of tax services. The comprehensive assessment of tax collection and management has developed from the single pursuit of tax revenue growth to 18

Lun, yujun. Preliminary Study on the Reform of Foreign Tax Organizations, Tax and Economic Research. No. 6, 2013.

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the full pursuit of tax revenue, law enforcement fairness, cost input, service quality, work attitude, tax collection ability, and social responsibility. (Bin Yang 2013).19 The continuous reform of the tax collection administration system and model in Western countries and the continuous improvement of tax collection administration methods and means effectively improve the overall level of taxation and the quality of tax service, greatly enhancing the bond between collection and payment.

6.3.2.4

Using Modern Information Technology as Guarantee and Support

In the era of “Internet + taxation”, accelerating the informatization process is undoubtedly the top priority of the modern tax collection administration model. All aspects of collection and management work obviously show a common feature, that is, the extensive application of computer and network technology. Generally, the construction of tax informatization mainly covers three aspects: the informatization of tax management, the informatization of tax business, and the informatization of tax support means. Among them, the first is the most critical part, the second is an important part, the third is the specific means of informatization, and the three are interrelated. In China, by improving the computer network hardware environment, developing a software environment suitable for business needs, and integrating the national tax business, tax costs will be greatly reduced, the efficiency of tax collection administration will be significantly improved, the tax service level will be significantly raised, and tax fairness will be best reflected. The development of everything is inseparable from talent. Highly qualified and competent tax experts are the cornerstone of e-tax. China must pay attention to the training of all kinds of digital talent, increase the proportion of digital talent, and cultivate digital talent continuously. Many countries in the world have fully proven the importance of e-taxes in collection, management, and practice.

6.3.2.5

Promoting Sound and Refined Management of Tax Resources

Practice has proven that the classified management of tax sources can effectively promote the scientific and refined administration of tax sources. First, it classifies the tax sources at different levels. On the basis of distinguishing key tax sources, general tax sources, and scattered tax sources, it sets up the management organization according to the differentiated tax sources, intensifies the management of key tax sources, implements the classified and hierarchical management of the other tax sources, and develops a new way of monitoring tax sources in the way of tax credit rating and assessment. For example, in the United States, the IRS has set up a large enterprise management organization to be responsible for the corporate income tax 19

Yang, Bin. Research on Performance Evaluation System of Tax Collection and Management of Yongzhou Local Taxation Bureau. PhD dissertation, Hunan University, 2013.

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management and tax-related issues of large enterprises nationwide. It constantly improves the evaluation index system, improves the efficiency of the evaluation work of tax departments, and makes tax source management more refined. Second, China’s tax departments should establish a unified tax registration code system across the country and promote it nationwide so that natural persons and corporate legal persons have unique tax registration codes. The scope of use and management requirements of the code should be clearly defined, relating it to the production and operation activities of enterprises and individuals, social credit, etc. At the same time, the information sharing system of the national tax system and relevant departments should be gradually improved to establish a tax management information network to expand the spectrum of tax source supervision and realize information sharing and system control. In fact, tax code systems prevail in foreign countries. Developed countries have basically established a unified taxpayer registration number, which stipulates that a taxpayer can only take one tax code for a lifetime and must handle all tax-related matters under that code to facilitate tax authorities to cross check various information of the taxpayer and oversee him to pay taxes according to laws and regulations. For example, in the United States, France and Italy, computer systems register each taxpayer with a unified code that is linked to or consistent with his social security number. Without a tax code, one cannot open an account in the bank. Neither will he or she enjoy social insurance. Transaction contract without a code is invalid as well. The tax code and its relevant files make it convenient for tax authorities to keep track of the general situation of national tax sources.

6.3.2.6

Classified Inspection

In terms of inspection, first, it is recommended to classify audit candidates using risk assessment as guidance and to determine inspection frequency and cycles according to different audit candidates. For example, in Germany, tax inspection is classified according to the scale of enterprise, in which small and micro enterprises are randomly sampled for inspection, the inspection cycle of medium-sized enterprises is once every three years, while that of large enterprises in key industries is usually once every year. After the candidate is selected, inspection steps are to identify and evaluate the suspicious points, determine or evaluate the risk level of the case, allocate corresponding personnel and choose audit methods according to the risk level, and achieve the optimal allocation of audit resources (see Fig. 6.2). Second, inspectors should also be classified for management. With the goal of building a team of experts, importance should be attached to the training of inspectors’ professional skills, the accumulation of audit experience, and the cultivation of digital talent. The U.S. IRS has studied and summarized the audit training manuals of major tax-related industries in the national economy for the reference of inspectors, which is worth learning from. Third, hierarchical and classified inspection management cannot work without the buttress of information technology. Practice has proven that informatization is the key factor in breaking through the bottleneck of classified inspection. Whether it is a case selection or inspection, it is necessary to rely on advanced software and

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Fig. 6.2 Risk management-oriented tax inspection model

information technology to conduct in-depth analysis and application of internal and external data, which is the best way to boost the quality and effectiveness of inspection. Finally, China should strengthen the cooperation of departments and give full play to the positive interactions of tax analysis, tax source monitoring, tax audits, and tax assessments.

6.4 Policy Suggestions for Improving China’s Tax Collection and Administration System 6.4.1 Improving Tax Law, Optimizing Administration and Service, and Strengthening Rule-of-Law Tax 6.4.1.1

(i)

Promoting the Idea of Law-Based Taxation and Improving the Tax Law System

Implementing the Rule-of-Law Taxation

The principle of rule-of-law taxation indicates that the relevant rights and obligations of tax agents, as well as various components and core elements of tax law, must be clearly defined by law. In other words, the rights and obligations of tax agents are prescribed in lucid stipulations. Without a legal basis, any taxation or tax relief is not allowed (Shouwen Zhang 2015).20 To further implement the principle of law-based taxation, China needs to start from the following aspects. First, China should stipulate the principle of law-based taxation in the Constitution, specify the tax legislative power of different levels according to the requirements of the fiscal 20

Zhang, Shouwen. Changes of Tax System and modernization of Tax Legal System. Social Sciences in China, No. 2, 2015.

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management system of taxsharing, and fully prioritize the requirements of protecting taxpayers’ rights in the Constitution. Second, the tax legislative authority should be further delineated. The tax legislative system led by administrative department should be changed into that led by the People’s Congress, the status of tax law should be upgraded, the principle of tax by law implemented, and the process of law-based taxation promoted. Third, tax law enforcement should be supervised comprehensively and rigorously. Strictly regulating law enforcement is an important guarantee to uphold the principle of tax law. To ensure that tax authorities strictly enforce the law and prevent the abuse of tax administrative power, it is necessary to guide them to standardize law enforcement by inspecting their tax law enforcement behavior and enhancing the tax administrative relief system. Finally, comprehensive and effective supervision of judicial tax activities should be developed, and the transparency of tax justice should be improved to realize the fairness and efficiency of tax justice. (ii)

Improving the Tax Substantive Laws

To perfect the tax substantive laws, China needs to make a reasonable balance between reforming the old system and innovating the new system. Therefore, there are two ways to improve the tax substantive legal system in China: to improve and perfect the existing tax substantive law and to make new tax laws according to the needs. For the revision of existing laws, the most urgent thing is to better the valueadded tax legal system, wind up institutional construction after “replacing business tax with value-added tax”, and make a smooth transition. On the other hand, it is necessary to accelerate the pace of real estate tax legislation and improve the personal income tax system and consumption tax system. What is needed for enacting new laws is to speed up the promulgation of the implementation rules of Environmental Protection Tax Law, put the legislative items of inheritance tax and gift tax on agenda as soon as possible, and change social security payment to social security tax at the earliest time. At the same time, in the process of tax legislation, the principle of coordination between tax structure and tax collection and management must be fully respected so that the design of the tax system should adapt to the tax administration ability of tax authorities. (iii)

Improving Tax Collection Administration Laws

A scientific taxation system is built upon a sound taxation legal system. First, a basic law is needed to run through the whole process of tax work, that is, the basic tax law or the general rules of tax law. However, China has not yet completed the legislation of the basic tax law for various reasons. The tax collection and administration law, as the tax procedural law in China’s tax law system, clarifies the rights and obligations of taxpayers and tax authorities in the process of tax collection and plays a role similar to the basic tax law. Therefore, in the improvement of the tax collection administration law, China needs to treat it as a procedural law with the function of a basic law and further amend it with the basic-tax-law content. Specifically, it includes the basic principles of tax law, changes in tax payment obligations, rights of taxpayers, etc. Second, the law for tax collection and administration needs to be upgraded from the

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management and technical type to the service and rights-based type. The current law stresses the management and control of taxpayers and depends on collection and management technology without the consideration of taxpayers’ rights (Jianwen Liu 2014).21 However, as a procedural law regulating the rights and obligations of taxpayers and tax authorities, it should not only focus on the authorization of tax authorities without limitations but also place more emphasis on the standardized exercise of power by tax authorities and check power through procedures.

6.4.1.2

Sound Understanding and Use of Tax Plan Management to Promote In-Depth Tax Administration Under Law

There is a certain degree of incompatibility between the tax plan management model and administrating tax under law. In actual work, the government’s excessive assessment of the completion of the tax plan has hindered the realization of the goal of administrating taxes under law to a certain extent, and the tax plan management model of tax authorities has had difficulty meeting the requirements arising from new situations. Therefore, to promote the development of tax administration under law, China has to input efforts to various aspects, such as the update of ideas and optimization of the system mechanism. (i)

(ii)

(iii)

21

Governments at all levels and tax authorities should gradually establish the idea of administrating taxes under law instead of blindly pursuing an increase in tax revenue. Conditions should be gradually created to reduce dependence on the tax plan. The notion of rule of law in tax work should be gradually strengthened at all levels of government and tax authority. Tax activities should follow the law inherent in economic development and the objective change of tax sources. The budget at the same level should be made according to the actual situation, avoiding taking the sheer growth of tax revenue as the goal and one vote veto on the completion of the tax plan, avoiding the phenomenon of the tax plan being raised without restriction and levying “excessive tax”, and avoiding the interference of the tax plan on daily tax collection and management to better achieve tax administration under law. Tax authorities should always take “tax collection principles” as the working criterion and promote administrating taxes by law through daily tax collection. In practical work, tax authorities should levy taxes in accordance with law, not collect “excessive taxes”, but all due taxes. Moreover, China should deliver solid performance in the education and publicity of tax policies and raise the awareness of all parties to administer taxes according to law. Tax authorities should gradually improve and perfect the assessment method of tax work, focusing on the quality of tax collection administration rather than on the completion of the tax plan when making assessments.

Liu, Jianwen. General Experience of Tax Collection and Management System and China’s problems and on the Revision of Tax Collection and Management Law. Administrative Law Review, No. 1, 2014.

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(iv)

(v)

257

Tax authorities should optimize the methods of tax plan management and gradually improve tax forecasting. Tax authorities should change their ideas, measure the number of tax plans and the main factors that affect the increase and decrease of income according to actual conditions, work together and coordinate with each other, and jointly do a good job in measuring the tax plans. Tax authorities should conduct analysis of the tax data. Based on the concept of revenue management, China should find a long-term mechanism for tax analysis, following the working ideas of economy interconnected with taxation.

6.4.1.3

Making a Quality Evaluation System to Improve the Quality of Tax Collection and Administration

To build an efficient quality evaluation system, China needs, first, to have a clear positioning of the role of tax collection and administration, define the development goals of tax authorities, and design a comprehensive quality evaluation index system of tax collection and management, which is focused, objective, scientific, and practical. Against the background of the market economy, the values of tax collection administration in China should be to provide public goods efficiently, to straighten out the relationship between tax authorities and taxpayers, to improve compliance with tax law and to ensure tax revenue under the goal of economic development. Its main purpose should be to meet the needs of the whole society and the ability of tax authorities to manage “tax compliance behavior”. Therefore, to build a quality evaluation portfolio that can accommodate the ongoing complexity of China’s tax collection and management system, China needs to design it from the following aspects. (i)

Turning assessment into evaluation

Assessment refers to comparing past behaviors with established standards. Generally, it is linked with interests, and the assessment results are relatively rigid. Evaluation focuses on the overall judgment of objectives, which is a composite analysis process integrating calculation, observation, and analysis. Generally, evaluation does not set up a fixed standard, and what is evaluated may not be quantifiable, and the results can be used relatively more comprehensively and flexibly. (ii)

Evaluating tax collection and administration completely

In the actual evaluation, indicators such as tax compliance, taxpayer satisfaction, tax loss rates, and the cost of tax collection and payment can be integrated into the quality evaluation system of tax collection and management as an organic and coordinated whole. Compliance with tax law and taxpayer satisfaction complement and promote each other, through which both the internal and external aspects of the quality of tax collection and administration of tax authorities can be embodied. The objective and practical effect of tax collection administration can be reflected by

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the rate of tax loss. The cost of tax collection and payment is a deadweight loss for both sides arising in the taxation process. The four indicators represent analyses on tax collection administration from different angles and are a scientific and objective yardstick for tax authorities to improve tax collection and management. (iii)

The key to performance evaluation should be efficiency and procedural standardization in tax collection administration

The efficiency and quality of tax administrative organs and the innovation of the system are both problems that need to be faced in the course of establishing a new collection and management model. It is necessary to evaluate the core and business as well as the efficiency and workflow in the process of tax collection administration to compare with the indicators of tax authorities at the same level, as a synchronic comparison. The evaluative results of different years can be juxtaposed for a diachronic comparison. At the same time, the tax administrative organs’ overall collection and management ability should be checked periodically, which can be of scientific and objective reference value for the continuous improvement of its quality and efficiency, boost the work efficiency and simplify the work procedures of tax administrative organs. (iv)

Establishing a diversified method to simplify the evaluation work

For how to accurately measure tax compliance, China needs to design, with a scientific mindset, a set of index frameworks about compliance with tax law. Taxpayer satisfaction can be investigated by survey data collected through questionnaires, networks, interviews with relevant personnel or third-party organizations. A variety of calculation methods can be applied to measure the tax loss rate. Sampling statistics can be employed to calculate the amount of labor, money and property consumed in the taxation process to obtain objective cost data for tax collection and payment.

6.4.1.4

(i)

Adopting the Idea of Tax Service to Modernize Taxation Governance

Changing the idea from “management” to “governance”

At the Third Plenary Session of the 18th CPC Central Committee, finance was identified as the mainstay and an important pillar of national governance. Therefore, the modernization of tax governance is a crucial node to realize the modernization of the national governance system and capacity. Though diverging from management, governance contains the connotation of management. At the same time, governance is a combination of good governance, rule of law, and co-governance. Governance itself emphasizes more the dynamic synergy and interaction among the government, society, and the masses and values the rule of law, transparency, responsibility, efficiency, and response (Leibao Zhang 2015).22 In the process of tax collection and 22

Zhang, Leibao. Modernization of Taxation Governance: From Reality to Realization. Taxation Research, No. 10, 2015.

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administration, governance is mainly reflected in the equal engagement between tax collectors and taxpayers. In the past, taxpayers were always regarded as objects under management and were presumed to have a tendency of tax noncompliance. Therefore, under the new concept of governance, the equal relationship between tax authorities and taxpayers should be manifested in tax collection and administration, taxpayers should be positioned as the object of “service” rather than the object of “management”, the rights of taxpayers deserve full respect and the concept of service needs update. In this way, a new pattern of tax collection and administration integrating good governance, rule of law, and co-governance will be shaped. (ii)

Promoting the Modernization of Tax Service with Informatization

The construction of digitalized tax services, an important prerequisite for tax collection administration, needs to constantly optimize and improve the status quo tax. In the process of tax-related information construction, the principles of efficiency and practicality should be taken into consideration to advance tax service informatization from “passive response” to “active response”. For the planning of tax-related information construction, China should pay attention to the top-level design of tax information and break the situation of uncoordinated and fragmented efforts in different regions. In addition, in the application of information-based data, the information sharing mechanism should be established with constant improvement between tax authorities and other tax-related institutions so that tax authorities and other taxrelated institutions can exchange information and share resources. The information interaction system and data transfer mechanism should be brought into use to foster the sharing of tax-related information. (iii)

Making Full Use of Various Service Resources and Actively Advancing Modernization

The diversity and hierarchy of taxpayer needs determines that when providing tax services to taxpayers, they must be classified and treated differently in response to their demands. First, a basic platform based on tax service offices should be established. Second, the existing hotline tax service at 12366 should be improved and integrated, and a unified and standardized telephone consultation system across the country should be built to provide the latest and most authoritative tax-related information for taxpayers. Third, a taxation-based information website should be created. Tax authorities should work hard to build a virtual service platform with the same functions as the physical tax office. Specific business such as tax declaration and invoice certification should be handled online, as well as functions such as tax policy and regulation publicity, complaints, and reports. In the process of software development, attention should be paid to the integration of internal and external software and system maintenance to ensure system stability and reliability. Finally, the construction of a distinctive platform that focuses on social services should be sped up. Tax intermediary service is part of tax-related social services. Therefore, optimizing and upgrading tax intermediary services are the key to improving social services.

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(iv)

Establishing a Modernized Supervision and Evaluation Mechanism of Tax Service

To realize the continuous and efficient promotion of tax services, it is necessary to build a supervision and evaluation mechanism with the participation of all parties. Effective supervision can truly reflect the quality of tax services provided by tax authorities and then help tax authorities improve their tax services in a timely manner. Efficient and scientific assessment indicators of tax services integrate various items when combining qualitative and quantitative assessments and clarify standard requirements in terms of quality and quantity to establish a scientific and easily implemented tax service evaluation index system. At the same time, the irreplaceable role of social supervision should be underscored in upgrading the level of tax service. The rewards and punishments of tax staff should be intensified to increase their participation and raise their sense of responsibility.

6.4.2 Raising Citizens’ Awareness of Paying Taxes According to Law 6.4.2.1

More Tax Publicity to Build Citizens’ Awareness of Tax

To improve tax collection and administration, China should not only strictly implement relevant tax laws and regulations and take compulsory measures against the illegal acts of taxpayers but also actively engage in giving correct guidance to citizens, further strengthen the publicity and education of tax laws, and drive taxpayers to develop tax morale. Importance should be attached to the publicity of tax laws and regulations for citizens. In addition, the role of the media in social communication should be given full play, the basic laws and concepts of taxation should be spread, and the new tax policies issued by the relevant departments of China should be carefully interpreted. It takes a long time to raise public awareness of taxes, which requires the joint efforts of the whole society, including tax departments, social media, and academia.

6.4.2.2

Tightening the Penalty System in Tax to Increase the Cost of Taxpayers’ Illegal Activities

First, the punishment mechanism in the tax collection and administration system should be improved, and the economic cost of taxpayers’ violations should be increased. The detailed rules of tax punishment should be modified and adjusted from the perspective of law, and efforts to punish tax evasion, tax dodging, and tax resistance should be intensified. At present, common problems such as ambiguous punishments, low punishment standards, and willful punishments should be resolved.

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At the same time, the law enforcement behavior of tax departments should be regulated, and law enforcement efforts should be strengthened. The administrative acts of replacing punishment with compensation and replacing punishment with fines should be strictly reduced and controlled, and the “rule of man” component of the tax department in dealing with tax violations should be effectively eliminated. Second, a credit rating system of taxpayers should be implemented to increase the social cost of taxpayers’ illegal activities. For example, if a taxpayer violates tax laws and regulations, it should be recorded in his social credit system so that the illegal taxpayer not only pays the economic cost but also has his social credit reduced. Finally, the efficiency and quality of tax inspection should be improved. At present, the tax inspection work of tax authorities in China is in disorder. Low-quality tax inspections damage the authority and deterrence of tax inspection and further breed the illegal acts of taxpayers. In tax inspection, the illegal acts of taxpayers should be severely punished. In addition, tax authorities should reduce the number of onthe-spot inspections and increase penalties for taxpayers suspected of violating tax regulations. Doing a good job in tax inspection will exert a great deterrent effect on taxpayers.

6.4.2.3

Improving the Quality of Taxation Staff and Enhancing Their Awareness of Service

First, the overall quality of the staff of tax authorities should be improved. Tax authorities should exercise their power to collect taxes from taxpayers on behalf of the nation. Therefore, they shall levy taxes by law, administer by law, and actively build a clean government to achieve the full collection of taxes. They should also improve taxation transparency and strictly abide by laws and regulations. The principle of fairness should be adhered to, and a firm resolution to put an end to the unfair phenomenon of using power for personal gain and damaging national interests should be kept. Moreover, tax authorities have obligations to resolutely crack down corruption and severely punish tax personnel who override tax laws and regulations. Second, tax authorities should actively establish a good service system to provide taxpayers with high-quality tax services. They are duty bound to improve their work style and service awareness and respond to taxpayers’ consultations in a patient way. They are responsible for performing well in their duties, providing tax services for taxpayers concerning tax policy and consultation. Through the sincere conduct of taxation and management by tax authorities, a favorable social atmosphere for taxpayers to pay taxes in good faith can be created, promoting the progress of tax collection administration.

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Promoting the Disclosure of Government Budgets and the Transparency of Tax Revenue and Expenditures

After making a draft budget, the government should announce it to the public and publicize the contents and details of the draft through the media. In addition, a budget hearing system should be established to give the public an opportunity to express their opinions on the draft budget; opinions from all walks of life should be widely solicited, and feasible opinions should be adopted to modify the draft budget. After the budget passes examination and approval, it should be delivered to the public and subject to the supervision of society in its implementation. The government should promote the democratization of the decision-making system, ensure the master position of taxpayers, make tax expenditure more transparent, and regularly transmit expenditure information to taxpayers. The government can increase the taxpayer’s willingness to pay through the abovementioned methods.

6.4.3 Improving Tax Relief System to Protect Taxpayers Rights 6.4.3.1

Enhancing the Independence of the Review Agency

The situation wherein the tax authorities at higher levels are conducting tax administrative reconsideration in a unified way should be changed, and a nonlocal reconsideration system or an independent third-party reconsideration system should be increased. Because the higher and lower tax authorities are very closely linked in their business, personnel, and other aspects, this relationship will produce a substantial negative impact on the impartiality of the reconsideration activities. Nepotism has a very significant influence on all walks of life, but it is more extensive in administrative organs with low mobility and strong stability. Because of the intertwined effect of various kinds of interest relationships and human relationships, in most of the tax administrative reconsideration decisions, the higher administrative organ will not refute the lower tax organ’s ruling of the administrative action, unless it is significantly illegal, inappropriate or irrational. The system of the local taxation bureau is in vertical management below the provincial level, and its tax administrative reconsideration decisions are easily subject to interference by local administrative organs. Tax administration is so particular and specialized that the “spectrum” is wide between legal and illegal and reasonable and unreasonable actions. It is difficult for nonprofessionals to judge their rationality and legitimacy accurately and quickly. Two different but legally specific decisions made on the same tax dispute are likely to have completely different impacts on taxpayers. Therefore, to ensure the openness and fairness of tax administrative reconsideration, the independence of the tax administrative reconsideration institution needs to be improved. The so-called

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nonlocal reconsideration refers to the submission of a disputed case to the tax authorities of other provinces for handling to avoid the influence of local administrative organs on the reconsideration of the case. The so-called third-party reconsideration refers to inviting the personnel of an independent third-party organization, such as the tax association or a tax agent firm, to conduct an objective and fair review of administrative reconsideration on taxation cases.

6.4.3.2

Setting up Specialized Tax Courts in the Current People’s Court System at All Levels

Based on the existing people’s court system, a professional tax court should be set up according to the actual situation of economic and social development. This is not only more in line with the specific situation of China’s judicial practice but also gives better play to the role of professional court judges to achieve the goal of administrating tax under law, better safeguarding the rights of taxpayers, and promoting the tax relief rights of taxpayers.

6.4.3.3

Canceling the “Preclearance” Rule and the “Prereconsideration” Rule

First, the “preclearance” rule should be cancelled. To prevent taxpayers from resorting to tax relief procedures to delay payment of taxes, tax authorities can still deal with the tax decisions made in accordance with the principle of nonstop enforcement in the administrative reconsideration law or the administrative procedure law after the taxpayer puts forward the administrative reconsideration or administrative litigation. The tax authorities can enforce compulsory tax collections on the taxpayer to secure the national due tax benefits. Second, the “pre-reconsideration” rule should be canceled, and the free choice of the tax dispute settlement model should be realized. In the case of tax disputes, taxpayers can choose between tax administrative reconsideration and tax administrative litigation in their own interests to reverse the overwhelming advantage of tax authorities on the settlement mechanism of tax disputes.

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6.4.4 Improving Tax Collection Administration, the Tax System, and the Legal Environment 6.4.4.1

Transforming Tax Collection Administration to Adapt to the Goal of the Tax System Reform

To adapt to the direction and goal of the reform of the modern tax system, China’s current tax collection and administration system must also be converted to a modern one. The basic reform direction is mainly reflected as follows. First, the past tax collection and management system is mainly applicable to the indirect tax system represented by value-added tax, while the modern tax system requires the proportion of direct tax to be raised. Therefore, the tax collection and management system should be transformed into a mechanism that accommodates the dual tax mechanism of indirect tax and direct tax. Second, the mechanism of tax collection and management should be transformed from taxpayers who are mainly enterprises as legal persons to taxpayers who are mainly legal persons and natural persons. Therefore, it should take into account both corporate enterprises and natural persons. Third, the tax collection and management mechanism that matches modern taxation should be transformed from the main collection of transaction taxes, i.e., cash flow tax, to the main collection of holding tax, i.e. flow tax and stock tax (Peiyong Gao 2015).23 The construction of the collection and management system for natural persons and third-party tax-related information reports are key difficulties in the three transformations mentioned above. The former is a long-standing “Achilles’ heel” in taxation. China needs to face up to this reality. According to the characteristics of direct taxpayers and their requirements for tax collection administration, China has to reform the existing tax collection and management mechanism. Specifically, it requires a real transformation in the legal framework, system design, talent team, and other aspects. The construction of the latter is to improve work efficiency, which depends on the acquisition and sharing of information. The behavior of tax-related entities must be regulated from all aspects to form a balanced development situation between enterprises as legal persons and natural persons and to promote orderly tax collection and management in accordance with the law.

6.4.4.2

Optimizing Tax Service Structure

In view of the problems existing in China’s tax organization structure, it needs to be optimized from the following two aspects.

23

Gao, Peiyong. Trend and Tendency of China’s Recent Reform of Taxation System. International Taxation, No. 1, 2015.

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Building tax agencies with flat and vertical management

At present, an extravagant vertical structure and excessive complexity are major problems confronting tax organizations in China. Therefore, flattening related organizations has become the main direction (Deping Wang 2009).24 Then, what is the ideal flat tax organization model? According to foreign experiences and China’s actual situation, this book believes that China can try to build a three-level linear management organization model, that is, the national tax organization is integrated into the State Taxation Administration, Provincial Taxation Bureau, and County (District) Taxation Bureau, to realize the goal of “substantiation of provincial institutions and county-level organization integration” and then change the low efficiency of tax collection and administration caused by the hierarchy of tax organizations. (ii)

Continuing to deepen the joint operation of national taxation and local taxation

Under the current situation wherein all aspects are immature, the state tax and local tax can, observing their own characteristics, accomplish solid performance in coordination and cooperation from three aspects: improving the system, enriching the content, and building the platform (Qing Han 2013).25 First, without a perfect cooperation system as a guarantee, it is inevitable that in the process of cooperation, there will be conflicts between the cooperation needs and the work plans of the other party. Therefore, both sides should carefully discuss the contents and approaches of cooperation, negotiate the level and means of cooperation, and jointly formulate relevant systems and methods according to their respective work. Second, it is necessary to improve the level of joint tax management, joint management of tax registration, joint management of individual taxpayers, joint management of enterprise income tax, joint implementation of tax inspection, and tax assessment. Finally, the tax information sharing system needs to be enhanced, the interconnection of national and local tax networks to be realized, a unified national and local tax information management plan to be formulated, and the management platform and collection administration software of both sides to be unified.

6.4.4.3

Optimizing Tax Resources Management

To optimize the management of tax sources and boost the efficiency of tax collection and management, the following work needs to be done. (i)

Reorganizing the Agencies according to the Requirements of Specialization

A comprehensive collection service platform shall be established on the basis of the tax service office. Since tax collection is the easiest to standardize and assess in tax 24

Wang, Deping. Reflections on Deepening the Reform of Tax Institutions. Taxation Research. No. 1, 2009. 25 Han, Qing. Thoughts on the Reform of Tax Collection and Management model in China. Taxation Research, No. 9, 2013.

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collection and administration processes, it can be handed over to a third party (such as a bank) for professional management. In response to flat development requirements, the tax source management organization should no longer be set up in line with the administrative divisions. The primary-level branches set up according to region should be abolished, or they should be transformed into tax source management institutions, and the training of professional talent should be strengthened. (ii)

Running Risk Management through Tax Resources Management

There are risks in management, and tax risks exist in the whole process of tax source management. This requires risk management as the direction for the system design and actual management process for tax source management. (iii)

Combining Specialized Tax Assessment, Tax Audit, and Tax Inspection

It is necessary to improve the independence of tax assessment, tax audit, and tax inspection and truly exert their role, along with upgrading their technical level to ensure quality. Professional tax assessment, tax audits, and tax inspections should be combined with tax source management. China needs to strengthen the collection and in-depth mining of tax-related information, strengthen the application and quality management of data, do a good job in data management and analysis, and provide a strong guarantee for the professional management of tax sources. (v)

Improving the Management of Key Tax Resources and Promoting the Socialization of Tax Management

Due to the limited management resources of tax departments, it is unrealistic to implement a comprehensive supervision and management of tax sources for all production and business activities of all taxpayers. Therefore, in terms of tax source management, priorities should be distinguished, efficiency should be stressed, and a key tax source management system should be promptly established (Kehe Ma et al. 2010).26 Regarding tax administration, if the tax department wants to prevent the loss of tax sources and tax evasion, coordination and collaboration with the industrial and commercial administration departments and the public security department should be strengthened. In the stage of tax declaration and tax warehousing, the tax department should actively cooperate with the financial and customs departments to ensure the full amount of tax warehousing. In the process of tax inspection, the tax department should actively cooperate with the audit department and public security department to inspect and severely punish tax violations. Citizens should also strengthen their awareness of tax payments, actively report tax evasion, avoid the loss of national financial revenue, actively cooperate with all sectors of society, and improve tax collection and management.

26

Ma, Kehe, Hou Wei, Wang Junxiu. The Premise and Basic model of Promoting the Specialization of Tax Source Management. Taxation Research, No. 10, 2010.

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Optimizing the Existing Tax System

First, the existing tax system needs to be streamlined. Too complex a tax structure will also make tax collection and administration more costly. It will not only increase the tax payment costs of taxpayers but also increase the tax collection costs of tax authorities, which is not in line with the economic efficiency principle of tax collection administration. Hence, it is necessary to establish a simplified and convenient tax system. Second, some tax policies need to be streamlined. To make tax authorities and taxpayers understand and implement tax policies more comprehensively and accurately, some export tax rebate practices can be referred to. The existing tax policies should be classified and merged according to tax categories. It can help those who have initial contact with the policy to have a more comprehensive understanding of the whole policy system. Policies should be formulated in response to the actual situation to effectively implement relevant policies. First of all, the policies should be moderate. The policy design should not be too loose or too strict but just right. Policy standards that are too high will also increase the risk of liability associated with them. Tax personnel may be overcautious of law enforcement, thus preventing policies from being well implemented. However, a low standard may lead to tax personnel’s abuse of the discretion. Second, opinions from all parties should be collected, and the public should be allowed to widely participate in tax legislation to uplift the scientific and democratic nature of tax legislation. Finally, the mechanism of interpersonal communication between the upper and lower levels needs to be improved. A tenable flow mechanism between the staff members of tax authorities at higher and lower levels should be established and improved. Policy makers should be permitted to go down to the primary level to connect with the primary work so that policy making can be closer to reality to improve the efficiency of policy implementation.

Conclusion

Administrating tax by law is the basic requirement of a rule-of-law state, the basic standard to measure the quality of taxation, and an important part of ruling a country according to law. Therefore, the research goal of this book is to facilitate a better tax system in response to the requirements of the new situation. With China moving toward the rule of law, this book suggested reforming tax laws and stratified governance with the view that tax neutrality, law-based taxation, tax equality and tax burden stability would be achieved. The focus was on clarifying the connotation, extension, nature, and features of a law-based tax system, the logical relationship between the optimization of the tax system structure, modern governance and law-based tax administration, the logical relationship between the tax-sharing system of tax collection and law-based tax administration, and the logical relationship between the rule-of-law tax, tax collection and modern governance. Some important conclusions are drawn here. 1.

Modern State Governance Calls for the Rule of Law

The national governance structure includes a core value system, an authoritative decision-making system, an administrative execution system, an economic development system, a social security system, and a political interaction mechanism. Therefore, the capacities of national governance and its enhancement must be reflected in the foregoing six components. The rule of law is closely related to national governance. To promote modern national governance, it is necessary to promote the rule of law in national governance. “Restricting state power and protecting civil rights” is the core of the rule of law. The rule-of-law tax is a demonstration and application of the principle of the rule of law in the field of taxation. The consistency of the rule of law with modern taxation shapes the fundamental status and role of law-based taxation on the path toward a rule-of-law country. Both tax collection and payment are the main part of law-based taxation. A harmonious relationship between tax collection and payment guarantees the smooth progress of taxation toward the rule of law.

© People’s Publishing House 2022 Q. Wang and W. Xi, Improving the Tax System amid the Rule-of-Law China, https://doi.org/10.1007/978-981-16-7033-6

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Conclusion

The New Normal of Economic Development Calls for Law-Based Taxation

China’s economic development has entered a new normal, and its economic growth has entered a shifting period. Taxation is taking on new features such as “the overall slowdown of tax growth, profound change in the structure of tax resources”, which present new challenges to law-based management and taxpaying. In the face of the new normal of economic development, it is necessary to keep the idea of rule of law in mind to adjust tax relations, regulate tax orders, and resolve tax conflicts to provide a solid legal guarantee of taxation in response to the new normal of economic development. A sound and complete tax law system needs to be set up to match a modern national governance system and governance capacity by implementing the principle of law-based tax, promoting the reform of the tax system, improving the tax law system, and raising the level and effectiveness of tax laws. China needs to define, in a sound way, the economic interests between the government (state) and the market, between the central government and the local government, between different levels of governments, and between tax collection and payment and focus on the optimization of the tax structure, the improvement of the tax-sharing system, the improvement of the local tax system, and the improvement of the tax collection and administration system. 3.

The Tax Structure Consists of the Macro, Middle, and Micro Levels

The tax structure refers to the composition system and layout of each tax classification (tax series), tax category, and tax system element in a country’s tax system. It includes three levels. The first is tax classification (tax categories). This belongs to the macro level tax structure. It refers to the composition of different tax categories within a country’s tax system. The second is tax structure. This belongs to the middle level. It refers to the tax category allocation within each tax class. The third refers to the elements of the tax system. This belongs to the micro level. It refers to the combination of all tax system elements of each tax category. The above three different levels of tax structure are mutually integrated to form a well-conceived tax system. 4.

A country’s Tax System Should Adapt to Changes in Factors Such as Economic and Social Development, Tax Collection and Administration

The tax structure model is seen when the country selects the appropriate main type of tax contingent on the specific situation, matches the different types of taxes, and forms a tax system with a clear main type of tax, distinctive supplementary tax types, mutual cooperation, and complementary functions. The model of a country’s tax structure is not fixed. It needs to be adjusted appropriately with the development of the economy and society and the change of tax collection and management. The judgment of different tax structure models is mainly based on the difference in the main types of taxes and the proportion difference between each main type of tax.

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5.

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China’s Current Tax Structure with Turnover Tax and Income Tax as the Two Main Taxes Needs to Be Further Optimized

Currently, China’s tax system operates normally. The function of the main tax categories is outstanding, and the auxiliary tax categories conform to realistic needs, forming a tax model with turnover tax and income tax as the two main taxes. However, in the current tax structure, there are still many problems that are mainly reflected in the high proportion of turnover tax, the ill-designed tax categories and tax elements, the imperfect tax system of resources and environment, and the slow reform of changing fee to tax. This book uses the generalized impulse response function method of the VAR model and Eviews to build the model. It was found that the tax system in China has a negative impact on income distribution as a whole, which is not conducive to narrowing the income distribution gap and that there is still irrationality in the tax system. Therefore, properly reducing the proportion of indirect taxes, increasing the proportion of direct taxes, and adjusting the structure of China’s tax system are to the benefit of steady economic growth. 6.

Optimization of the Tax Structure Needs to Be Stepped up Amid a Rule of Law in China

The optimization of the tax structure should adhere to the principle of “top-level design”, ensuring fiscal revenue, stabilizing tax incidence, improving tax efficiency, highlighting tax fairness, and adapting to the changing trends of the international tax structure. According to the idea of “perfecting, merging, levying, and canceling”, a medium- and long-term tax structure system should be built in China. That is, a dual tax system should be established with turnover tax and income tax playing the leading functions and property tax making up an important supplement and playing a specific auxiliary function. Among them, the optimization of the turnover tax system should be based on the requirement of tax neutrality to establish an efficient value-added tax system; the consumption tax system needs to be adjusted to improve economic efficiency and enhance its regulatory role. The optimization of the income tax system is to establish a fair and efficient income tax system in accordance to promote fairness and stabilize the economy, gradually increasing the proportion of income tax, giving full play to the role of income tax in the “internal stabilizer” of the economy, and regulating income distribution. The property tax system is optimized to promote fairness and improve the local tax system, establish a fair and efficient property tax system, gradually increase the proportion of property taxes, and give full play to the role of property taxes in promoting local economic development and regulating social wealth distribution.

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Conclusion

A Sound Financial Law System Guarantees the Implementation of the TaxSharing System and Ensures that Wealth is Ruled and Managed by Law

The tax-sharing system refers to a hierarchical financial management system that defines the scope and authority of fiscal revenue and expenditure between the central and local governments as well as between local governments at all levels. It determines the income distribution relationship between the central and local governments through the clear division of tax categories and tax jurisdiction. The premise and foundation of the implementation of the tax-sharing system is to improve the financial legal system, govern wealth by law, and manage finance according to law. The law-based tax-sharing system requires that the state’s financial power be placed under the Constitution and the law to effectively restrict the state’s financial power. Against the rule-of-law backdrop, the tax-sharing system is the standard carrier of the distribution of the financial rights of governments at all levels. The entities at all levels must have a relatively equal right to dialogue, so it is possible to establish a standardized channel of interest distribution and appeal. At present, there is inequality in dealing with the relationship between the central and the local government. The central government takes the initiative, while the local government plays a passive game because it is difficult to exploit institutional channels to influence the decisionmaking of the central government. 8.

The Improvement of the Tax-Sharing System in China Should Stick to the Rule of Law Principle

To improve the tax-sharing system in China, China must adhere to the rule of law principle. First, learning from developed countries’ sound experiences and considering the Chinese national conditions, China still needs to adhere to the principle of balancing centralization and decentralization to delineate the rights and responsibilities between the central government and local governments. The distribution relationship between governments should be established under the rule of law. Government behavior should be regulated in legal form. The division of financial power and administrative power should be clarified between governments, and the tax distribution relationship between governments should be standardized. Second, a rule-oflaw tax system should be built. Legislative power should be returned to the People’s Congress. The central and local tax revenue rights should be reasonably divided, and the law should be strictly enforced. Finally, China needs to build a rule-of-law budget supervision system and strengthen the supervision of the People’s Congress, financial departments, and society. 9.

Law-Based Local Taxation Depends on the Reform of Fiscal and Taxation Systems and on the Process of Building a Country Toward the Rule of Law

The local tax system comprises an important part of the tax system in China. As the main source of local government revenue, it plays a key role in ensuring the supply of local public goods and services. Law-based local taxation depends on the reform of fiscal and taxation systems and relies on the process of building a country under the rule of law. After more than 20 years of construction, local taxation in China has

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achieved satisfying results toward the rule of law and established a burgeoning tax law framework to adapt to the development of the market economy. However, the tax legislation system is still not sound enough, which might be seen in widespread phenomena such as “the rule of man over the rule of law, the substantive law over the procedural law, the tax task over the order of tax collection and administration”. The judicial tax security system is still in need of improvement, and tax enforcement and preservation measures are not rigid enough. 10.

Steps Need to Be Taken Dynamically to Push Local Taxation Toward the Rule of Law in China

A rule-of-law local taxation in China should meet the following goals: the legislative power and the power to stop tax levying are ascribed to the central government, the taxation power of the local governments is vested in the provincial government, and the local governments are granted with certain powers of adjustment and interpretation. In terms of tax division, China needs to first establish the tax-sharing system of large-scale tax sharing and to build a diversified local financial structure with the shared tax as the main tax and local tax as the auxiliary. With the cultivation and development of local tax, the shared tax in local tax revenue should be gradually reduced in proportion, the main local tax revenue should be expanded accordingly, and a final model shall be reached that “the local tax and the shared tax are roughly the same”. At the same time, China should determine the main local taxes dynamically and by stages. According to the idea of triple finance—central, provincial, and county— it is necessary to tackle the issue of the main categories of the local tax system at the provincial level first and then consider the choice of the main categories of the local tax system at the county level instead of determining all the main categories of taxes at all levels at one time. Among them, the main local tax focuses on the transformation of consumption tax at the provincial level and on the creation of real estate tax in the retention link at the county and city level. 11.

There is a Long Way to Go Before Tax Collection and Administration in China Are Brought Under the Rule of Law

At present, there are still many problems regarding how tax collection and administration should be brought under law in China. First, administrating tax under law needs to be strengthened. Second, paying taxes according to law needs to be enforced, and awareness of paying taxes needs to be raised. In reality, a misconception of tax leads to the lack of taxpayers’ awareness in exercising their tax rights and obligations as well as the government’s lack of due respect for taxpayers’ rights in taxation. Third, the protection of taxpayers’ rights and interests needs to be regulated. The tax administrative reconsideration department lacks independence, and the administrative “pre-reconsideration” and procedures in judicial tax relief cases are not conducive to the protection of taxpayers’ rights. Fourth, the legal environment for taxation needs to be optimized. The current tax collection and management system is not compatible with the goals of a modern tax administration because of the low

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efficiency of tax organizations, the outdated approach of tax resource management, and unspecialized management. 12.

Multiple Measures Need to Be Taken to Push Tax Collection and Administration Toward the Rule of Law

On the basis of the experiences of other countries, the following needs to be done to realize law-based tax collection and administration in China. First, the idea of the rule-of-law tax should be promoted, which can be achieved through improving the tax law, properly recognizing and utilizing tax planning and management, and optimizing tax management and services to push taxation toward the rule-of-law at a faster pace. Second, citizens’ awareness of taxpaying and tax compliance should be raised. It is necessary to promote taxation and build citizens’ tax awareness on the one hand and to tighten the penalty system and increase penalties for taxpayers’ tax fraud on the other. Third, the tax relief system should be improved. To protect the rights of taxpayers, it is suggested that the independence of the reconsideration department should be amplified, the rules of “preclearance” and “prereconsideration” should be banned, and a tax court should be set up in the ordinary court system. Fourth, the tax collection and management model should be improved, and the legal environment for taxation should be optimized. China needs to adapt to the goal of tax system reform and to transform the tax collection and management mechanism. It is essential to shift from indirect taxes to the duo of indirect and direct taxes. Taxpayers who are mainly enterprises as legal persons should be replaced by taxpayers who are mainly legal and natural persons, and cash flow tax levied should be changed to cash flow tax and stock tax. Optimizations of tax organizations and tax resource management will bring a better social atmosphere for taxation in accordance with the law.

Postscript This book is revised on the basis of the Key Project of the National Social Science Fund, Improving the Tax System amid Rule-of-Law China (14AZD087), undertaken by Professor Wang Qiao of Jiangxi University of Finance and Economics in 2014. With the continuous promotion of reform and opening up, China’s economic and social development has made remarkable achievements. China’s national governance is being set on the right track under the rule of law, and a socialist legal system with Chinese characteristics is being established and improved. At present, the basic system of China’s current legal system has been built, but there are still many problems in law enforcement and implementation, and the sound social awareness of the rule of law has not been fully established. To promote the modernization process, the Fourth Plenary Session of the 18th CPC Central Committee has made a comprehensive and important deployment of “the rule of law”. The current situation of China’s taxation system also reflects the domestic demand for the rule of law. A full-blown financial system is the basic guarantee

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for the government to make up for market failures and perform its financial functions. It can be seen from the history of fiscal development since the reform of the tax-sharing system that there are some problems in the current tax system, such as the incongruity between the structure of the taxation system and economic development, the imperfection of the tax law system, the need for further improvement of tax law enforcement and tax legislation, the unclear rights and responsibilities of the central government and local governments, the lack of a main type of tax in the local taxes, and the inability of tax collection and management to meet the needs of modernization, which have greatly hindered the construction of the socialist market economy in China. The government serves as the main entity for the provision of public goods. The establishment of a reasonable and standardized taxation system is an important manifestation of promoting the scientific and legal financial system and deepening the reform of the tax-sharing system, as well as an important step from the establishment of a socialist market economy system framework to public finance. Thus, with China moving toward the rule of law, this book suggested reforming tax laws and stratified governance with the view that tax neutrality, law-based taxation, tax equality and tax burden stability would be achieved. It traced along the technical path of the logical relationship between the connotation of the rule of law China and the taxation system, optimization of the tax system structure, creation of a tax-sharing system with standardized tax collection and management, clear division of fiscal power, administrative power and expenditure responsibilities between the central government and local governments, building a standardized local taxation system, all the way to a sound and law-based system of tax collection and management. This book discusses the optimization of the tax structure, the construction of the tax-sharing system, the improvement of local taxes, and the reconstruction of the tax collection and management system. on the basis of clarifying the connotation, extension, essence, and characteristics of the taxation system under modern national governance, the logical relationship between the optimization of the tax structure, the modern national governance system, and administrating tax under law, the logical relationship between the tax management system of the tax-sharing system and administrating tax under law, the logical relationship between the rule-of-law taxation, and the logical relationship between the tax collection and management and the modern national governance system, In the course of research, the authors received great support and help from many colleagues. First, thanks go to Wang Yingchun, deputy editor-in-chief of China Taxation Journal, Professor Liu Rong, Dean of the School of Finance and Taxation of Southwest University of Finance and Economics, Professor Hu Yuancheng, Director of the Academic Committee of Jiangxi University of Finance and Economics, and Professor Kuang Xiaoping, Director of the Scientific Research Department of Jiangxi University of Finance and Economics, as well as other experts, for their recognition of this book. Their valuable opinions greatly helped the research and improvement of this book. Second, we would like to express our sincere thanks to all the teachers who have participated in the research work and dedicated their efforts to this book. In particular, Professor Zhang Zhongfang, Professor Wu Hong, Professor Wang

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Zhuwang, Professor Yang Deqian, Professor Zhou Quanlin, Associate Professor Wu Yunfeng, Associate Professor Shu Cheng, Associate Professor Wang Lijuan, Dr. Huang Siming, and Dr. Xu Jianbin have contributed great efforts. They participated in the research and writing of this book throughout the whole process and worked together to ensure the successful completion of the project. Finally, we would like to thank Editor Wu Jidong of the People’s Publishing House for his efforts in publishing this book. This book is only a preliminary discussion of the research on improving the tax system amid rule-of-law China. In the future, it is necessary to further follow up the investigation and research with the modernization of national governance and policy changes. We appreciate it if readers could provide valuable opinions to help us improve our research. Wang Qiao, Xi Weiqun May, 2017

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