THE DECLINE OF CHINA'S BUDGETARY REVENUE: REASONS AND CONSEQUENCES

SHUANGLIN LIN [*] The decline of the government revenue share in GDP has become a major concern for Chinese policy makers and many economists. This article analyzes the reasons and the consequences of low government budgetary revenue in China. It is argued that lowered corporate tax rates, small tax bases, and tax evasions are the main reasons for the decline of government revenue share in GDR Low budgetary revenues have resulted in low budgetary expenditures and growing budget deficits, stimulated the expansion of extra-budgetary and off budgetary revenues, and made the privatization of state enterprises more difficult. This article also discusses policy options for China. (JEL H2, H6, H7) I. INTRODUCTION Chinese government budgetary revenues have decreased from 32% of GDP in 1978 to 11.6% of GDP in 1997. [1] This article will examine the reasons for and consequences of the decline in Chinese government revenues and discuss policy options for China. The decline of Chinese government revenue has been a major concern for Chinese policy makers and many economists in the world. Bahl and Wallich (1992, P. 20) argued that although it's difficult to judge the overall revenue adequacy in China in the absence of concrete projections of expenditure needs, it can be safely concluded that public service levels are deficient in all parts of China and the infrastructure gap is likely to be an especially critical problem in the future. Stiglitz (1998) believed that the Chinese government revenue share in GDP is too small compared with other countries and is not adequate to fulfill China's ambitious development plan. Brean (1998) argued that China's economic development and social stability needs a larger government revenue and warned that if the government revenue stays low, the end result could be serious weakening of the government's ability to provide essential public goods and services, which could threaten macroeconomic stability and jeopardize economic transitio n. Chen (1996) and Huang (1996) also advocated an increase in the Chinese government budgetary revenues. [2] The Chinese government vowed to reverse this trend of decline in the share of government budgetary revenues in GDP in order to increase the ability of government macroeconomic control. [3] The target share of government budgetary revenues in GDP was set at 20% (Wang 1998, former Chinese minister of Finance). However, many fundamental issues have not been fully addressed, such as the reasons for and the consequences of the decline in government budgetary revenues and how the government can raise its budgetary revenues. This article argues that lowered corporate tax rates, small tax bases, and tax evasions are the main reasons for the low government budgetary revenue share in GDP. Many prior studies have argued the decline in the profitability of state enterprises as a major cause of the decline in government revenues (see, for example, Wong et al., 1995, p. 6; Sun, 1997; and Liu, 1998) and recommended improving efficiency of the state enterprises as a way to solve the revenue problem (see, for example, Ding and Liang, 1997). This paper shows that, in fact, state enterprises have paid proportionally much higher taxes than nonstate enterprises. The corporate income tax rate has declined from nearly 100% in 1978 to 33% since 1994. There existed many tax reductions and tax exemptions that reduced the tax base. Also, tax evasions are widespread in China. All these factors have caused the tax revenue to grow more slowly than GDP. The article shows that the consequence of low government budgetary revenue is severe. Low government budgetary revenues were accompanied by low government budgetary expenditures, which resulted in insufficient provisions of public goods. Low budgetary revenues caused large government budget deficits, which led to the growth of government debt issuance. Insufficient budgetary revenues also stimulated an expansion of extrabudgetary and off-budgetary revenues, which caused misuse of scarce resources and corruption. …