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Larger-scale tax and fee reduction conducive to fiscal sustainability

Author  :  LIU YING     Source  :    Chinese Social Sciences Today     2019-03-28

In the context of a complex and volatile international situation, a sluggish external demand and an increasing downward pressure on the Chinese economy, it is high time for macroeconomic regulation policy to play a countercyclical role. The 2019 Government Work Report of China directly pinpoints the maladies and difficulties that enterprises face and proposes more effective proactive fiscal policies. On the basis of implementing the individual income tax preference, the report iterates a tax and fee cut for enterprises, and it explicitly points out that this year’s tax and fee reduction will amount to two trillion yuan. 

Looking back, the tax and fee reduction in 2018 totaled about 1.3 trillion, and the number in 2017 was about 1 trillion. The reduction has increased year by year.

Proactive fiscal policies

The first measure is to implement a larger-scale reduction of taxes and fees. Inclusive tax reduction and structural tax reduction can be combined to give priority to lowering the tax burden on the manufacturing industry and small and micro enterprises. It is stated in the government work report that the government will deepen the value-added tax reform, reduce the current tax rate of 16 percent on manufacturing and related industries to 13 percent, and lower the tax rate on transportation, construction, and related industries from 10 to 9 percent.

The second measure is to reduce such corporate burdens as enterprises’ social insurance contributions. An overly heavy social insurance burden, coupled with a downward economy, would make enterprises’ normal functioning difficult, especially for small and micro enterprises. The government work report proposes to lower the share borne by employers for urban workers’ basic pension insurance. Local businesses can cut the number down to 16 percent. The government will also overhaul the charges and fees levied on enterprises and encourage cuts in the cost of electricity, broadband services and logistics. The electricity price for industrial and commercial businesses will also be lowered. Within two years, almost all expressway toll booths at provincial borders will be removed and a number of railway and port charges will be abolished or lowered. The average broadband service rates for small and medium enterprises will be lowered by another 15 percent, and average rates for mobile internet services will be further cut by more than 20 percent, according to the government work report.

The third point is that the reduction of taxes and fees does not mean a reduction in social benefits. The newly amended law for individual income tax should be well implemented so that the about 80 million taxpayers eligible for the tax cuts will enjoy what they deserve. In reducing burdens on enterprises, employees’ social insurance benefits should remain unchanged and pensions should increase appropriately and be paid on time and in full. 

How the reductions will be realized

First of all, we must moderately improve the deficit-to-GDP ratio, which will ensure the prevention and control of debt risks and the realization of debt sustainability. This gives full consideration to factors such as government revenue and expenditure and the issuance of special bonds. Second, we must make effective use of local government bonds. The inclusion of local government debt in the government budget will not only provide financial support for the construction of key projects, but also create conditions for better forestalling and defusing local governments’ debt risks. Finally, as the government work report proposes, governments at all levels should tighten their expenditure so as to support the ease of burden on enterprises. The central government needs to increase revenue and reduce expenditure, and meanwhile local governments need to vigorously optimize their expense structure and put various funds and assets into good use through multiple approaches.

Like adding more water nourishes the fish in the pond, tax and fee reductions strengthen the basis for economic growth while ensuring fiscal sustainability. It is a major measure to lighten the burden on enterprises and boost market dynamism; it is also a major decision to support stable economic growth, employment and structural adjustments through macro policies. 


This article was edited and translated from Beijing Daily. Liu Ying is a research fellow from the Chongyang Institute for Financial Studies at Renmin University of China.



(Edited by BAI LE)

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