According to a recent Economic Observer report, reforms that will lower taxes on medium-to-low incomes and bring tax breaks to the majority of enterprises are key features of the upcoming 12th five-year plan (2011-2015).

The State Administration of Taxation (SAT) draft plan to reduce taxes and redesign the entire tax system signals China's biggest round of tax reforms since 1994.

The Economic Observer quotes two tax officials, one from Jiangsu, the other from Gansu, as admitting that taxes in China are indeed high, and that tax cuts are due.

That China levies high taxes is an acknowledged reality which must change. Statistics show that the central and local tax revenues in 2010 exceeded 12 trillion yuan, the highest ever, and equivalent to one third of the GNP, but a figure that does not include non-tax revenues and arbitrary fee collections. Financial expenditure remains opaque and unspecific.

Public concern over tax has prompted the Ministry of Finance and SAT to formulate an income tax reform scheme set to be launched in 2011. Reforms will not, as publicly hoped and expected, raise the tax floor. There are plans instead to reduce to six-or-seven the present nine income tax levels and to expand each bracket. Cutting tax levels has a more obvious effect than adjusting the tax threshold because it is equivalent to reducing rates of taxation.

Tax cuts that result in higher incomes compare in effect to "adding water to raise fish". Experts and officials, moreover, are reportedly confident that tax cuts will not diminish China's tax income, but rather nurture a more lucrative source of tax revenue through an economically revitalized public. The key factor is whether or not China's tax reforms are abreast of the times.

One example of a possible tax cut is that of making adjustments to both the rate and frequency of tax demands, thus expanding the tax base. Such a move might also encourage high-earners to keep their assets in China rather than transfer them to Hong Kong, Singapore or elsewhere, as many have been doing to avoid paying China's high personal income tax. Shanghai began pilot trials last year of a 25 percent ceiling on the income tax of financial executives in efforts to retain this source of revenue.

From another standpoint, tax incentives that enable small and medium-sized enterprises to expand and innovate will change the entire tax structure from that of robbing the poor to enrich the economy to a more balanced approach to public and government prosperity. Levying property tax, environmental tax and raising the tax on natural resources, moreover, creates an alternative source of government revenue.

Where will China be in 30 years' time? Whether or not the country can reverse its present mode of high foreign, low domestic demand, make a smooth transition from high to low carbon and successfully channel its economic strength towards enriching the people will determine China's future.

China's economic development should encompass orderly, fair distribution of large state-owned assets to the masses. This is in itself both the purpose and manifestation of social and economic progress, and implies even more allocations of government resources to public services. China must accept the contemporary reality that tax reforms are equal in priority to reforms of state monopolies and land tax.

Today's tax reform should help to define China's future approach to development; neither the Rich Country, Poor People line of the past 30 years, nor the opposite Poor Country, Rich People line, but one whose goal is a commonly prosperous government and civil society.

There are clear regional disparities in China which urbanization funded through the market would exacerbate; market forces alone cannot narrow the social security gap or balance regional disparities. This can only be accomplished through a powerful central government. Tax reforms directed at enriching the people to stimulate the private sector, must therefore simultaneously reinforce government financial vigour. The corresponding establishment of a sound national social security system and fiscal and financial transparency is, of course, also imperative.

(China.org.cn December 23, 2010)