Papers RESEARCH

Tax Cut:A Re-discussion

Aria

2019-05-13 08:52

Zhang Jun;Wei Sen;Du Li;Fan Ziying;Feng Jin;Zhang Yan
Fudan Journal

AbstractHow to cut taxes effectively for businesses?This problem has gradually become a major concern.Professor Li Weisen points out that, although both the Central Committee and the State Council have made cutting taxes on a macroeconomic level and specifically, cutting taxes and fees for businesses as a major policy guideline, the revenue of governments and its tax rate has been rising rapidly.This suggests that the policy guideline has not been correctly implemented.He further suggests that given the current macroeconomic condition, to cut fees for businesses truly, we have to consider cutting the VAT rate, the corporate income tax rate as well as other important tax rates.We should also consider cutting the contribution ratio of firms to the“five insurances”and the“one fund.”Professor Du Li believes that the problem of cutting taxes we are facing are inherently complex.From the experience of the US, we must pay special attention to the policy impact on the budget deficits and the interest rates.More importantly, it is necessary to focus on some policy instruments which can increase investment returns.This will help to alleviate the possible negative shocks which could be put on the economy by the tax cuts.On the other hand, our government should also be focusing on reducing the firms' burden of non-tax revenues.It should focus especially on lowering the individual income tax, as well as the burden of social security contributions.Professor Fan Ziying argues that, according to the fiscal trilemma, it is impossible to achieve tax cuts, manage debt risks and maintain active fiscal policy at the same time.In China, the growth rate of the tax revenue is closely related to the growth rate of the VAT which accounts for 40%of the total tax revenue.Additionally, the growth rate of the VAT is closely related to the production environment as well as the PPI.This year a supply-driven PPI increase has occurred, especially at the upstream of the production chain.Due to the incomplete VAT deduction chains, the increase in PPI pushed up the VAT for the firms located at the downstream, lacking sufficient and proper deductions.Overall, this causes the tax to increase too quickly.In addition, we should be very careful about the nature of the proposed tax cut.At the same time, whether we should do a“big tax cut”or a“big reform”is also an important discussion point.Professor Feng Jin suggests that, because the situation of population aging and economic development is different in various provinces, the social security contribution rate should also differ to reflect this regional difference.Besides, the contribution rate should be set at a moderate level.If the contribution rate is set too high, it will negatively influence firms' incentive to participate in the program.While consolidating the payroll tax base, lowering the contribution rate should be the next task for the reform.Furthermore, we should be actively searching for new channels of financing social security funds.Professor Zhang Jun concludes that there has been a consensus that we must decrease the overall tax burden for businesses.While discussing tax cut, we need to rationally recognize the driving factors of the rigidly rising taxes.If the primary factor has been a rising PPI caused by insufficient supply of the upper stream firms, then the rising taxes are not totally undertaken by the downstream firms.On the other hand, the non-tax revenue, including social security contribution, should be reduced further and the finance of social security funds should be further diversified.Moreover, the rate of SOEs' profit retained by the government should be higher.At the moment, the bigger challenges faced by the entrepreneurs are, in fact, the uncertainty on the economy as well as the changes in the governing methods of the government.It is extremely important that the government can provide some actual positive cases to encourage entrepreneurs, conveying important reform information as well as protecting their property rights.In addition, China's reform of transitioning from an indirect taxation system to a direct taxation system needs more clear actions.

Keywordtax cut; non-tax revenue;

The Chinese version appeared in Fudan Journal.

 


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2019-05-13 05:03
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