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# 2.7 Price controls as implicit taxes

In view of the fact that the system of price controls<sup>is an implicit</sup> subsidy to users financed by an implicit tax on<sup>producers, reference was made</sup> above to the need to view taxes and price controls<sup>an integrated system. This</sup> has already been illustrated in terms of the constraining<sup>role of the dual</sup> pricing system in tax reform. This subsection looks<sup>at price reform more</sup> closely. Since indirect taxes are levied principally<sup>on non-agricultural</sup> goods, the discussion on price controls is<sup>confined to non-agricultural goods</sup> as well.

The subsidy to consumers implicit in price controls on<sup>final goods may</sup> be tentatively calculated as follows. These are based<sup>on data published in the</sup> Statistical Yearbook of China 1987 (SYC) and<sup>relate to the year 1986. The SYC</sup> presents data on the ratios of market prices<sup>to state list prices for</sup> 'Miscellaneous goods for daily use' and 'Other'.<sup>The former category is taken</sup> to mean the same as 'Daily articles' in the table on retail<sup>sales while the</sup> latter is taken to include all other categories<sup>of consumer goods apart from</sup> food. The ratio of rural market price to state<sup>list price is less than one for</sup> "Miscellaneous goods for daily use' and this<sup>suggests that the rural goods may</sup> be of inferior quality. For this reason, the urban<sup>market price (for both</sup> categories of goods) is used as the best measure<sup>of the market price. This may</sup> lead to an overestimate of the subsidy implicit in price controls.

The ratio of urban market price to state<sup>list price was 1.08 for</sup> 'Miscellaneous goods for daily use' and 1.30 for<sup>'Other".6' The magnitude of</sup> the subsidy also depends on the proportion<sup>of sales that take place at</sup> controlled prices. It is difficult to obtain<sup>detailed information on this, but</sup> the State Price Bureauz/ says that in 1986,<sup>47 percent of consumer goods</sup> were sold at state list prices, 19 percent at<sup>guidance prices§' and 34</sup> percent at market prices. No figures are available<sup>on the relationship between</sup> guidance prices and state list prices. The present<sup>calculations assume that</sup> they are equal, and this provides another<sup>element of overestimation of subsidy</sup> implicit in controls on non-agricultural final goods.

The above implies that about 70 percent<sup>of 'daily use goods" are sold at</sup> state-list prices. The prices of these goods<sup>are 8 percent below market price.</sup> The average price of daily use goods is therefore<sup>reduced by 70 percent of 8</sup> percent = 5.6 percent. For other goods, 60 percent<sup>of the sales are at a price</sup> that is 30 percent lower so that average prices<sup>are lower by 18 percent. The</sup> table of retail sales indicates that daily<sup>use goods account for approximately</sup> 10 percent of retail sales, while other non-agricultural<sup>goods account for</sup> §/ These ratios have varied considerably over the<sup>last few years, increasing</sup> during the inflationary period of 1988/9 and<sup>decreasing more recently.</sup> 7/ Quoted in World Bank (1990).

8/ Guidance prices are applied to some consumer<sup>prices instead of State list</sup> prices. They are maximum prices, rather than fixed<sup>prices, and are easier to</sup> change than list prices.