Surging Tax Revenues Call for Change of Tack

Xinhua ^ | July 13

[nickcarraway]

BEIJING, July 13 -- Compared to last year's growth of 25.7 per cent, the expansion of China's tax revenues by 21.7 per cent during the first half of this year may appear moderate.

But in view of the government budget report delivered at the annual session of the National People's Congress in early March, which predicted only an 11 per cent growth in fiscal revenues in 2005, the current surge in tax revenue is amazing.

The latest statistics from the State Administration of Taxation show the country's tax revenues exclusive of tariffs and agriculture tax reached 1.58 trillion yuan (US$190.5 billion) during the January-June period, increasing by 218.9 billion yuan (US$26.47 billion) over the same period last year.

That means the growth rate of government coffers has beaten the forecast by achieving expected annual growth in just six months.

Had the country been on its way to further stoking its economy, the faster-than-expected growth of tax revenues would be easy to understand.

However, all the rapid growth has taken place during the government's year-long campaign to slow economic growth.

Breakneck investment growth in the first quarter last year, particularly in some overheating sectors, had spurred policy-makers to slam on the brakes. While being cautious enough to avoid being hard-line, the central government has resolved to rein in unsustainably fast growth with monetary, fiscal and administrative measures.

In fact, the budget report also admitted that it has considerably lowered revenue forecasts by taking into account the government's ongoing macro-economic controls.

Signs such as the falling consumer price index, a key inflation measurement, in recent months had sparked fierce debates among domestic economists over whether deflationary pressure is looming.

Yet the robust growth of tax revenues, mainly powered by a substantial increase in both turnover taxes and income taxes, paints a rather different picture. Given no significant change in the tax code, such a strong growth of tax revenues should be naturally interpreted as a result of business activities that have been more dynamic than expected.

If so, questions must be raised about the effects of the country's macro-economic control policies. Not that such policies have been ineffective, but to what extent have they slowed economic growth?

Other key half-year statistics are due to be released soon. As well as these figures, the tax revenue data will help policy-makers grasp the economic conditions. Then much needed policy adjustments can be carried out promptly.

If the economy does have to be slowed down, the swelling government coffers lead to other questions. Why have tax revenues continued to soar during an economic slowdown? How have tax burdens affected enterprises and individuals?

Answers to these questions will be crucial to the success of the government's macro-economic control not only in the second half of this year but also in the long run.

Besides these questions, the unexpected rapid increase in tax revenues also presents rare opportunities for policy-makers.

If the trend continues, the government will likely reap additional revenue of more than 200 billion yuan (US$24 billion).

By tapping such new financial resources, the government should reconsider how much more quickly and effectively it can address problems at the top of its list of priorities.

Swollen government coffers will make an early scrapping of the agriculture tax on farmers a possibility. More funding for education and heath systems is also badly needed.