China at a crossroads on the way to tax reform
14 August 2013
An overhaul of China's creakingly inefficient tax system is needed to maintain the PRC's progress towards sustainable growth and build a more equitable country, according to Asian Development Bank Vice-President Stephen Groff.
Speaking at an international forum at the University today, Mr Groff said China's growth was unsustainable without changes to taxation and fiscal transfers.
He acknowledged that improvements had seen fiscal revenue rise from less than 10 per cent of GDP in the 1990s to 20 per cent today.
But he added: "A lot more is needed. Fiscal revenues are still low compared to OECD countries. Less than 3 per cent of the population pays income tax.
"And while the percentage of government revenue spent on social security, education and health is up, it is well below the average of other middle income countries."
Mr Groff, who is responsible for the ADB's operations in East Asia, said China would have to be prepared to broaden its tax base, curtail tax evasion and strengthen tax administration.
Progressive taxes on capital gains and property would have to be considered, he said, while the introduction of inheritance and gift taxes would help balance income distribution. "The ultimate goal must be a genuine property tax based on home values and universally imposed on all urban homes," he said.
Higher tax revenues would allow for higher spending on areas such as education and health, which in turn would increase private consumption and support domestic demand-led growth.
Mr Groff welcomed the recent cooling of Chinese economy, despite the short-term pain. "In the longer term, a shift to steadier, more balanced growth, which is both inclusive and environmentally sustainable, is essential for the PRC's continued prosperity and development, and by extension, the rest of the world's too."
But he said China was at a crossroads, and its next economic steps would have a huge bearing on the world.
He said: "Restructuring and rebalancing the economy so that growth comes from more domestic sources rather than from the volatile ebb and flow of factory-driven exports and investments will make growth far more sustainable.
"Ensuring the fruits of growth are made available to all will help build a fairer and more equitable country."
The forum, organised by the International Portfolio, was also addressed by Kerry Brown, executive director of the University's China Studies Centre.
Professor Brown said: "China's aim to double its GDP by 2020 will be tough. It is the first time that such a big economy has undertaken such an ambitious pathway."
Since joining the World Trade Organization in 2011, he said, China had increased productivity in many ways that were not predicted. "Joining the WTO has made China a winner, but it has had mixed results for the developed world.
"While the developed world thought that it could bring China into a rules-based game, China has actually rewritten the rules."
Contact: Richard North
Phone: 02 9351 3191