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Public needs to see where tax money goes

By Jin Liqun (Global Times)

07:41, August 28, 2012

I was chatting with the head of a Tibetan autonomous prefecture one evening during my recent trip over there, when the news of the updated tax revenue flashed on the TV screen. My sensitivity to such information has been blunted ever since I left the Ministry of Finance. The news did not escape the local leader, however. "That is great news for us!" He blurted out, "We hope that the national revenue will go on rising."

His jubilation at the revenue increase reminded me of what I saw earlier that day. I visited the permanent residences for the Tibetan herdsmen, financed by the public resources. Now the herdsmen, who still have to roam with the herd during much of the year, have a warm home to come back to in winter, and to be united with their elderly, and the children, who go to the local schools.

Over the recent years, the fiscal policy has obviously left an indelible footprint on the vast hinterland areas, with rural infrastructure substantially improved. However, reactions to the taxation policy differ. Recently the rise of tax revenue has become a controversial issue.

Grousing about tax payments is universal. Everybody wants to enjoy the public goods, but nobody wants to pay taxes if they have a choice. That's quite normal.

The problem is that the critics are not just the ordinary people, but are pundits and even opinion leaders in China. Their vociferous critiques carry more weight than complaints by the man in the street.

Concern about "overtaxing" has gained ground from the fact that in 2006-11, the fiscal revenue grew at an annual rate of 21.8 percent, compared with GDP's average annual growth rate of 10.5 percent.

The general public is left with the impression that tax revenue has grown much faster than GDP, without understanding some of the technicalities behind these numbers.

Prepare yourself for something technical and a bit baffling, if you are a layperson but curious about the intricacies of the taxation system.

The bifurcation of tax revenue and GDP is inherent in the accounting practice. Tax revenue is calculated in nominal terms, whereas GDP growth is done in real terms based on a certain reference year.

In the same period of 2006-11, GDP grew at the rate of 16.9 percent in nominal terms, but only 10.5 percent in real terms, hence the discrepancy.

Furthermore, tax structure implies tax buoyancy in boom times. The value added in the manufacturing and service sectors account for over 80 percent of the GDP. With the fast growth of these two sectors, the tax revenues as a whole will certainly outpace the growth rate of GDP.

And there is no one-to-one correlation between revenue related to tax bases and GDP growth. Some tax categories have nothing to do with GDP's performance. For instance, VAT (value added tax) on properties and land use, particularly in urban areas, grows regardless of the GDP growth.

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