Experts cast doubt on tax cut rationale

China's tax system is a burden on companies and should be reformed, Liang Jianzhang, economist and co-founder of online travel service Ctrip.com argued at a recent symposium held at Tsinghua University.

He said his company, the country's largest travel website, paid its employees 10,000 yuan ($1,520) a month on average, but after tax deductions and social insurance payments this figure was reduced to less than 6,000 yuan.

Liang said taxes should be cut to benefit workers, but the idea was called into question by Gao Peiyong, director of the National Academy of Economic Strategy under the Chinese Academy of Social Sciences, who doubted any ordinary consumer would benefit from such a move.

90 percent of China’s tax revenue derive from corporate. Unlike western countries, more than 80 percent of China’s tax revenue derives from indirect taxes, taxes that could easily passed on from companies to consumers without later’ notice.

The divide is a showcase of the huge perception gap between ordinary people and experts when it comes to taxing in China. Any proposal to cut tax is hugely popular, but cooler heads should ask: such a move is desirable, but is it feasible?

Right now the single largest source of tax revenue in China is the VAT, or value-added tax, which in 2014 accounted for 22 percent of the total, or 3.085 trillion yuan.

In a bid to prevent repeat taxation, since 2012 the government has moved to replace business tax with a VAT in the economy's service sectors, effectively cutting taxation by 484 billion yuan. Yet this reform has not been applied to the property, construction, financial or consumer services sectors of the economy - despite a previous target to achieve this by the end of 2015.

Deteroriating fiscal conditions and "technical difficulties" were cited as reasons for the delay.

"VAT reform was planned to cut taxes by as much as 1 trillion yuan, but the reform stalled well below this target," Gao said.

"There are many technical reasons for this but in essence it was because public finances may not be able to take the hit," he said.

Besides VAT, another two pillars is business tax and consumption tax. “When the trinity is important, finance officials feel heartbroken when either of the three is cut,” according to Gao.

In a system such as China's, which is dominated by indirect taxation, even substantial cuts may not directly benefit end consumers.

But in other economies such as the United States where income and corporation tax - known as direct taxes - dominate, tax cuts can directly benefit individual households.

"In the US, taxation can be a powerful tool to narrow the gap between rich and poor, but in China the role of taxation in redistributing income is minor. In some ways the tax system is unfair to the poor," said Lyu Wangshi, a researcher with the Fiscal Research Institute.

For example, indirect taxes are usually incorporated in the price of a commodity so the burden is transferred to buyers ---no matter what their income is. But when it comes to direct tax such as individual income tax, threshold is so low (3,500 yuan per month) that it has become a de factor “tax on average wage-owners”. Rich have ample rooms to bypass the tax as much of their income does not go through payrolls.

Experts have called for years that only when direct tax’s share is raised does reducing indirect taxes feasible. But anytime when they propose to levy property tax or estate tax, they are quickly engulfed by public outcry.