public finance
In this essay I will focus on one of the hottest economic issue tax reform, and discuss the necessity of this reform ,mainly use the tax system’s development in China to anaylse the exist tax problems. To study the high tax cost in China and figure out what’s the reason behind this phenomenon, compare the personal income tax in China with UK and discuss the redistribution problems in China. I would also talk about the efficiency and equity issues in my essay and then give some own idea about the optimal tax system in the end.
In most countries Tax reform is one of the hottest economic topic in recent years, and the tax also matters to a country’s economic development. As we all know there is no tax system could adjust to the whole society for a long time, because the world changes quickly nowadays. Brown and Jackson (1990) indicate the function of the tax is not only to increase the government’s income but also the good instrument to maintain the social stability and to deal with the distribution and allocation problems. It is necessary to adjust some of the social problems by this instrument and it also can be a good way to encourage the meaningful investment or activities in public. Rory Meakin (2012) suggests that Australia has a good tax system but it still has its problems. He also compared the tax system between Britain and Australia and Rory believes that the government’s reform is aim to make a cheap, fair and
legitimate tax system, while he analyses the opacity and complexity problem in Barclay and suppose that tax should be neutral in the society. His journal name tax reform equals to growth and he totally agree that raise the tax and keep the tax neutral is the better way to face the tax problems nowadays. And most of the countries in the world like to make appropriate tax reform to prove the development of their economy.
In China, the Chinese government considered the specific characteristics of China's socialist market economy, in order to adjust the development of worldwide economy, they believe that the new tax reform is more urgent than before. As the fast changing economic environment, the old tax system cannot satisfy the new market economy. Donglai Ma (2001) assumes that tax reform is a good way to stimulate the investment and consumption, better tax system could help to build more healthy market, and after China entered the World Trade Organization ,the protocol from WTO gives a lot of new regulations and principles. The general agreement on tariffs and trade also make some new requests for China’s original tax system. And China also did a lot of changes on tax reform in past years. For example, the government made some changes on the consumption tax of car in recent years. They raise the tax of the luxury and high emission car and cut the tax of the low emission car. From the perspective of environment protection, maybe the high emission car
should be limited and the tax reform just help to solve this problem at the same time. Ma meng (2008) from Shenzhen newspaper suggests that the changes on car consumption tax could also let the factory focus on produce more low emission cars, the tax reform could also help for the industry structure adjustment.
Qi an (2010) analysed the tax misery index released by Fobes magazine, and the magazine suggests that China rank as the second country which suffer a high tax misery index in the world. The tax revenue painful index in China seems much higher than the rest countries in the world except France. It is obvious that the citizen in China are more care about the threshold of personal income tax, the personal income tax threshold experienced several times of changes from 800 RMB in 1994 to 1600 RMB in 2005, and after the tax reform in the year of 2009 the personal income tax threshold is 2000 RMB in China, the last adjustment of the threshold of personal income tax is increase to 3500 RMB IN 2011, as China is a developing country, especially in some big cities most of the young people even cannot afford their basic life expenditure, let alone the high price apartment. They need to pay the food, rent, and transportation by only 2000 RMB or 3000 RMB salary, most young graduates from University in China earn about 3000 RMB a month, except for the basic expenditure for life they should also consider to buy the high price
apartment in the near future in order to start a family, while there are still some voice from the public ask the government to raise the threshold of personal income tax ,the forward tax reform in China may focus on this hot debated question in the near future, but the changes still means that every kind of tax need to be regulate to adjust the development of the society, especially the personal income tax, it is mainly responsible for the adjustment of income gap. An (2010) also put forward the suggestion that government should classify the category of jobs and it could be better for the social equity. The reasonable tax system needs more careful classification to ensure citizen’s right. According to the increasing price of commodities, it is a necessary step to consider the reality of people’s salary conditions. The government should take care of the gap between the wealthy and poor. The changes on personal income threshold is a powerful way to face this situation and also good for the social stability.
The citizens from public always ask for the reform on personal income tax, while Conlan (1986) has some different opinion on this. He doubt that the whether the cut in personal income tax make some good reflection on economy, such as whether personal savings and investment increases because of the cut of tax, whether the cut in tax have some connections with the economic growth? While as in China, as the traditional consuming habit, people are more likely to put their money in
the bank, and the lower tax will do some contribution on their personal savings, but China is a special exception, this situation is not in common for the most developed country. And for different country the government need take specific tax reform to strengthen their tax system. Actually it is no easy task to make new tax reform every time. From the examples of China’s situation, we could see that tax reform is really important not only for the country’s development of economy but also could protect the social stability. Reasonless tax system could trigger some severe results in public, and the extremely heaven tax system even result in bad rebellion or war in ancient times All above may be the reason why it is necessary to do the tax reform and make the tax system advance with time. On the other hand tax is the main income for the country, the tax income also act on national defense, the environment protection and so on, cut the tax income may also lead to the country’s financial deficit, and the government may feel hard to sustain the good welfare for citizen and protection for the country is also what we should take into consideration. Nowadays, the tax law plays an important role in most of the countries but it still makes some economic distortion when it was effect. It is obvious that tax system can influence on the economic market, even the investors behavior. Jiguang Zhai (2009) states that the economic distortion exist in the current market in China, for example, the value added tax for normal enterprise is 25 percent but for high or new
technology enterprise it is much lower, 15 percent. Even though the normal enterprise may make more money than high or new technology in China, but for the sake of the lower value added tax, investors are more likely to invest their money on the high or new technology, they may get more net profit because of the low tax. He also suggests that there exist the potential economic distortion in the market. Such as in China the government make different tax standard between the processing of products, repair of products sales of products and other labor services. The Chinese government formulated the value-added tax for the processing of products. Repairing of products sales of products and collect the sales tax from sales tax. Some of the smart investors may notice that and change their investment to some extent. That may be the distortion because of the tax system. And it was said that the tax system would twist different industry, company size even the way people do business. Zhai (2009) also assumes that most countries only collect the value-added tax, but in China there is another familiar tax named sales tax. There two different taxes also use different ways to calculate, then the economic distortion came with the oversight part in the tax law. For the sake of convenience of collecting the tax, they made two standards, but that it does not means the different altitude to different industry. For the personal income tax reform Yuxin he, Jie Han and Weina Zheng(2010) collects 230 thousand citizens massages an found that the distortion exist
in personal income tax in China. The threshold of personal income tax is 2000 RMB, if in a family the husband earns 3000 RMB for one month and the wife lose her job at home, 1000 RMB in the husband’s salary need to collect tax as the law, but for another family the couple both work and earn 1500 RMB each then no one need to pay the tax, and the family revenue was still 3000 RMB. Brown and Jackson (1990) shows a table that classify the structure of personal income taxpayers carefully, from single person has no children and with children, married couple both working or the husband is working and the wife has no income. All the possible family structure are clearly classified in the table, and it is obvious that UK doing the classification since the year of 1987 and make several adjustments from 1987 to 1993.After the analysis of the current situation Yuxin He, Jie Han and Weina Zheng (2010) suggests that the government should do the new tax reform and collect the personal income tax according to the unit of family not the individual. This suggestion seems fair for most of the low income family.
While it seems that the suggestion for collect personal tax according to family unit is follow the social equity, Brown and Jackson (1990) assumes that vertical equity means people who earn more than others should pay more taxes at the same time. Equity is probably one of the reasons why we do tax reform on personal income tax.
Zhou Sha (2009) states that China is one of the countries have the highest tax income in the world and it is also a high tax cost country in the world. The tax cost accounted 8 percent of the whole tax income in China in the year of 1992, while the figure is 0.53 percent in America and 1.13 percent in Japan. China has been developing at a high speed in the past years, the development of economy also promotes the increase in the tax income. In addition, many complex problems also come with the development of tax system. Yeqing Feng (2005) indicates that there are two main reasons result in the high tax cost in China. Firstly, the tax collectors only pay attention to the tax scale and tax income but ignore the tax cost during the collect process, and for some of the taxpayers do not understand the meaning of tax income for the government and country, tax evasion happens all the time. Secondly, the tax system is not perfect nowadays. The government in China does not have an efficient tax collection system, especially some rural areas in lack of the supervision mechanism, some of the tax collectors are also in charge of the check and ratify work. It provides the conditions for the randomness of the tax collection compliance. While these reasons could not summarize all the possible complicated issues that result in the high tax cost in China, but they are all the blocks for the tax collection in China.
The speculation in China’s real estate market is always result in rising of the real estate prices quickly. The government in China aims to take lots of measures to deal with this situation include the tax reform. Recently, the voice from public expects the government limit the real estate speculator by the new tax reform. While the tax law set the rules to collect more tax during the real estate trade but the law collect less tax when people keep the property, however, this provision reduce the cost on holding lots of property and stimulate the speculator invest more on the real estate at the same time (Haifang Yao 2010).As we all know, the purpose of the real estate tax is increase the income of the fiscal revenue and improve the government’s ability to manage the real estate market. When comes to the problem of real estate speculation, it makes the tax reform become a difficult problem. Yao (2010) also indicates that is difficult to do the tax reform in the aim of the macroscopic readjustment and control, and it may have some bad influences on the compliance of the new tax regulation, and the stable tax system. As in China the tax system structure is not reasonable enough, If the new tax reform increase the holding tax of real estate, it may impair the benefit of the citizen who really need to buy a room for himself or the family. Even though the tax reform seems can be changed easily by the expectation of the public, but the compliance may result in more problems than before. It is hard to
solve the speculation issues only by look forward the change on tax reform.
While, because of the high speed developing economy in China, the reasonless distribution structure exist in many fields of the country. Brown and Jackson (1990) states that the tax system is an useful instrument. Our government uses it to redistribute the social wealth and income. The social welfare depends on whether the tax system works well or not. Shouwen Zhang (2011) states that it is undeniable there is a strong relationship between distribution adjustment and the adjustment of the tax law. The distribution of wealth and income are unbalanced, the benefit distribution’s unbalanced, these are all the most intractable issues nowadays in China. People has high expectations on the tax reform, they believe that tax reform plays a significant role in solving the distribution issues. Zhang (2011) also insists that in order to do the appropriate adjustment in distribution, the more important is to make good reform on tax system first. The rational tax reform will also advance the good transformation on distribution. The first distribution in China is more focus on the efficiency, in company with the development of the economy, it ignore the equity in the first distribution, then it cannot solve the problem of the excessive income gap, and as we all know, the excessive income gap is quite a severe situation in most developing countries and it
may affect social stability and trigger many bad social problems, and the excessive income gap is absolutely not the only question came with the first distribution. When the government realize the existed income gap, redistribution become the only thing government can do to deal with income gap.
From the perspective of Jianwen Liu (2011) the reasonless fiscal income and outcome in China is one of the vital question that result in the unbalanced income distribution. Only the rational structure of income and outcome can solve the unbalanced issue. Brown and Jackson (1990) states that in order to reach the redistribution purpose the government should use taxes to finance the public services like education, welfare, health services and so on. Liu (2011) also indicates that for the purpose of the reasonable redistribution, it is better to improve the percentage of the company or the individual’s benefit in the distribution of national income, such as increase the government’s expenditure in healthcare, education and welfare field, and limit the over expansion in competitive fields are all the good solutions. These are all the fields the government needs to support by the tax income.
Redistribution is not only matters to the benefit of the citizens but also matters to the relationship between citizens and government, and also have big influence on the rich and poor, and tax reform, the reform of the
tax law are all the means connect with redistribution. The function of tax reform is broad and important, especially in cope with the problem of income gap and unbalanced distribution, as for most countries, tax reform is the direct and effective way to help the adjustment of redistribution (Zhang 2011).
Joel Slemrod (1990) suppose that an optimal tax system need clearly reflect the personal preference, the technology as well as the current market condition, an effective and low cost administrative tax instrument is also important, choose the best tax system after compared with the rest systems under an aggregative standard.
Firstly, In an optimal tax system, specific and appropriate classification for every tax category seems more fair, but it does not mean to expand the tax base, as Slemrod (1990) suggests that for commodity tax the uniform tax rate is optimal, if in order to pursue the particular classification on commodity tax may increase the tax cost at the same time. Low administrative cost also should be considered under this situation, costless management and administration is also accord with the optimal tax system’s requirement.
Secondly, professional tax officials and simple structure tax authorities are both the requirements of an optimal tax system. Professional tax officials should not only know clear about the tax law but have the ability
to let the people know the necessity of tax income for the country and let them accept to pay the tax in time and willingly. A simple and effective tax authority is equally important for the optimal tax system.
Tax reform is necessary and need to comply with the development of economy. With a continual readjustment tax reform mechanism, every small change in tax system would be more suitable for the time. An optimal tax system is not static in every era. While some of the unfitted tax system nowadays may become the best choice because of the development of the science and technology in the near future.
In conclusion, the tax reform is an important issue of concern, especially in some developing countries, the tax system has more severe problems, tax system still has so many areas need to improve. It is difficult to take into account both efficiency and equity, but with the specific investigation in certain country, compare analysis the questions exist before, and the tax reform can change to meet the needs, then it will not be an inextricability problem to have an optimal tax system.
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