The proposed increase in the minimum threshold of personal income tax, from the current 2,000 yuan ($308) to 3,000 yuan, has put the country's latest draft amendment to the Personal Income Tax Law in the spotlight.
The high degree of public attention has highlighted the necessity of the country reforming its public fiscal and taxation system to lighten ordinary people's tax burdens and improve their living conditions. This is especially true as the central government is committed to promoting growth in people's incomes at a rate no lower than the growth rate of the country's gross domestic product during the 12th Five-Year Plan (2011-2015) period.
Under these circumstances, how to push forward some sweeping and effective reforms of the country's fiscal and taxation system to make it more adaptable to the needs of the national economic and social development remains an urgent task.
The country should first try to build a more reasonable revenue and tax distribution system, by reducing the current five-layer structure to a triple-layer structure comprising the central, provincial and county-level governments - China's current fiscal make-up includes the prefecture and township levels.
Reducing the fiscal structure from five to three would be more compatible with market economic principles and China's current economic and social development stage. It would also push forward the country's long-awaited comprehensive reforms aimed at reducing its administrative levels and lowering its administrative costs. The formation of such a simplified and clarified administrative, fiscal and tax distribution system would also boost the performance and efficiency of the three levels of government.
Following the construction of such a triple-layer fiscal framework, the country should then clarify and more clearly demarcate their administrative powers and responsibilities. For example the central government should mainly be involved with large-scale and long-term projects, such as national defense, while local governments should concentrate on the provision of public services.
The formation of a fiscal power for governments at various levels that can match their administrative power remains the key to whether the country can successfully reform its central government-tilted public fiscal system during the 12th Five-Year Plan period. It will also provide an institutional guarantee for the government's endeavors to promote the balanced distribution of public services and perfect the country's socialist market economic system. As a move in this direction, the country should try to promote more reasonable fiscal and tax distribution among different levels of governments and implement real estate and resource taxes to consolidate the local fiscal foundation.
Currently, China's fiscal and taxation system is heavily tilted to the central government, with local governments entitled to a smaller share of fiscal revenues. As a result, the fiscal resources of local governments remain inadequate and they are incapable of exercising their administrative responsibilities. Undoubtedly, a fiscal power proportionate to their administrative duties would provide an important fiscal guarantee for local governments to effectively fulfill their administrative functions, especially with regard to education, healthcare, infrastructure construction and social security.
The country needs to try and expand its tax sources in a bid to consolidate its fiscal foundation. The central government should only collect such revenues as personal income tax, consumption tax, and customs tariffs, while local governments should receive the revenues from property taxes.
The effects of the property taxes piloted in Chongqing and Shanghai in early 2011 are yet to be seen. If they prove effective, such property taxes could constitute the main tax source for local governments. In addition, the feasibility of a business tax, an urban construction tax and a resource tax should be studied and implemented as important tax sources for local governments.
Given that China's resources are mainly distributed in the less-developed central and western regions, the adoption of a resource tax would increase the coffers of these regions. Moreover, it could be used to promote the conservation of resources and environmental protection.
To develop itself into an innovative nation, China should also try to boost its capability for innovation and advance its long-sluggish industrial restructuring and transformation of the national economic growth mode. An improved innovation capability would also help conserve resources and build an environmentally friendly society.
To this end, China should try to build a public fiscal system that is beneficial to innovation activities at the national or enterprise levels. For example, more preferential tax policies could be adopted to encourage and stimulate enterprises to strengthen research aimed at boosting their capability for innovation.
Putting in place a reasonable environment and resource tax would help form a solid foundation for the country's bid to transform its current and long-controversial development model. That calls for a reasonable incentive and punishment mechanism to be adopted for the exploration and mining of the country's mineral ores and other resources.
The author is director of the Research Institute for Fiscal Science of the Ministry of Finance. The article first appeared in the magazine China Development Observation.