The latest consumption tax adjustments reflect the Ministry of
Finance's cautious, pragmatic approach to taxation reform.
The new levies on fuel oil, some wooden products and luxury
goods will mean a bigger role for taxation in promoting
conservation and in wealth distribution readjustment.
But fiscal policy designers refrained from going too far in
using taxation to achieve these policy goals.
Many items originally proposed as subjects of consumption tax
did not make the final list. The ministry restricted the items to a
scope where there was a consensus for the levy.
Some items, such as high-end furniture and garment and
consumption at karaoke shops, were dropped due to practicality
problems.
This is fair, as tax should be an auxiliary tool for economic
managers.
Employment and stimulation of domestic demand, both sensitive to
tax changes, are also on policy makers' agendas.
A fine balance should be achieved.
Overly aggressive tax policies could be counterproductive if
they create confusion and distortions.
The announcement on Tuesday about consumption tax changes also
indicated that the finance ministry has opted to de-link reform of
consumption tax and value-added tax (VAT).
This is a realistic decision.
While the progress of VAT reform has been slower than planned,
there is no reason to postpone changes to consumption tax as
well.
Both consumption tax and value-added tax are products of the
country's 1994 overhaul of its taxation system. A major aim of the
massive change 12 years ago was to put in place a system that
suited the emerging market economy.
Since then, the system has remained basically unchanged.
But as policy goals and the economy itself have developed, the
need to modify the system has become increasingly evident.
For one, the current VAT system is thought to discourage
innovation, as enterprises cannot obtain tax rebates for purchasing
new equipment.
VAT reform is likely to lead to deceased tax revenues, but
introduction of new consumption taxes has the potential to increase
revenues.
With this in mind, VAT and consumption tax reforms were
originally meant to be packaged together, with the hope that the
latter would compensate for the losses in VAT.
But VAT reform experiments in northeastern provinces, while
achieving some of the expected goals, were not successful enough to
prompt policy-makers to spread the reform nationwide.
Policy-makers appear to have gradually given up the idea of
using new gains from consumption tax to make up for the predicted
decline in VAT.
Indeed, unless the items for consumption tax are drastically
expanded and high rates stipulated, it is impossible for
consumption tax accounting for just above 6 per cent of total tax
revenues to shoulder this task.
In addition, changes of consumption tax should not only be about
rate rises and new levies for more goods. Tax rates for some
products should be reduced, as we now see for small-engine
cars.
Fiscal policy makers' approach to reform is commendable. This
approach is in line with the paramount goal of tax reform boost
development in the long term with no major fluctuation in revenues
in the short term.
(China Daily March 23, 2006)