Libmonster ID: IN-1245
Author(s) of the publication: N. G. PROKHOROVA

N. G. PROKHOROVA

Post-graduate student, Saint Petersburg State University of Economics

Keywords: China, fiscal federalism, China's tax system, tax reforms

The great powers of the Celestial Empire, after being separated for a long time, tend to unite again, and after a long union they again disintegrate.

The Three Kingdoms Novel, Chapter 1.

To date, the development of federalism in the field of public finance in China is not inferior to the indicators of developed federal states, such as Canada (49.4% in 2011), Switzerland (39.4% in 2011) and the United States (36.8% in 2011)1 and is 47.5% (2013). Despite the fact that, according to Article 3 of the Constitution of the People's Republic of China, China is a unitary state, recently more and more often there are opinions of experts, both in China and abroad, about the so-called "federalism with Chinese characteristics"2.

If in matters of politics, ideology and social issues, administrative-territorial units are completely subordinate to Beijing, then in the economic sphere local governments have much more freedom, so experts talk about a decentralized system of state and municipal finances in China, or about tax (or fiscal) federalism.

THE CONCEPT OF FISCAL FEDERALISM

There are many definitions of tax or fiscal federalism. The most general approach is as follows: fiscal federalism should be understood as "a system of public finance management based on the differentiation of budget rights and powers between different levels of government in the field of budget formation and expenditure, while combining the interests of participants in the budget process at all levels of the budget system".3

In other words, fiscal federalism is a system of organizing public finances in which the revenue and expenditure powers of budgets are divided between different levels of government - between national and subnational governments. The theory of tax federalism began to take shape in the second half of the twentieth century, the main theorists of which are such American economists as Ch. Tibu 4, V. Ots 5, etc.

According to the theory, tax federalism is a progressive system of organization of public finances, since it has many advantages over the unitary structure of public finances.

First, local self-government bodies are closer to the end user and have the relevant necessary information, so they are considered the most effective in providing public goods, and are also an important stimulator of regional economic growth.

Secondly, the high degree of financial independence of territorial authorities in the system of tax federalism, in comparison with the unitary system of public finance, allows us to take into account the peculiarities of territories for appropriate adjustment of budget and economic policies.

Finally, in the case of transition economies, fiscal federalism is considered an appropriate means of stimulating market transition.-

page 28

It is also an important condition for the functioning of a market economy throughout the country.

However, international practice shows that only in a few countries fiscal federalism actually functions and benefits both the development of regions and the economic growth of the entire country. Therefore, there is still a debate in scientific circles about the need to introduce and improve tax federalism. 6 Empirical data on various systems of public finance organization also do not provide an unambiguous answer about the effectiveness of fiscal federalism.

EXPERIENCE OF TAX FEDERALISM REFORM IN CHINA

Fundamental changes in the entire Chinese economy have also affected the sphere of public finance, the decentralization reform of which began in the early 1980s. Then tax revenues were distributed between the central and local budgets in different proportions. Until that time (1957-1979), the tax system was centralized, and local governments played the role of agents of the central budget for collecting and transferring taxes, after which the center, according to the plan, distributed financial resources among the territories of the country7.

The distribution of tax revenues took place in the form of "fiscal contracts" between the central and local budgets, in which each local budget agreed with the center on the procedure for transferring taxes to the center. From 1985 to 1993, several types of "fiscal contracts"were applied. The first type involved transferring a fixed quota (as a percentage) of tax revenues to the central budget. The second one allowed provinces to transfer a fixed amount of their income to the central budget. The third type of contracts assumed that local budgets retained a fixed part (as a percentage) of their tax revenues and transferred all the rest to the central budget. 8 Later, new types of "fiscal contracts" appeared, which were adjusted to take into account the economic growth indicators of the territory.

This diversity of relations between the central and local budgets has created confusion and increased administrative costs. However, in reality, the type of" fiscal contract " for each province was very conditional, since local budget revenues depended on the results of lobbying and negotiations between the head of the province and the central authorities. In addition, this system has created opportunities for local authorities to hide part of their own income in order to receive subsidies from the center. It is not surprising that in the period 1980-1993, the number of provinces that transferred tax revenues to the central budget was constantly decreasing, while the number of recipient provinces receiving subsidies and subsidies grew 9.

Despite all the shortcomings, the first stage of tax federalism reform, which introduced a system of "fiscal contracts", had a positive impact on the economic development of the regions and the country as a whole, as it increased the interest of local governments in stimulating local economies.10 The process of tax decentralization in the 1980s and 1988 gradually concentrated tax powers in the hands of local governments, which became one of the mechanisms for accelerating the economic transition from a centralized economic system to a market economy.

However, the constant deterioration of the central budget showed that the system of "fiscal contracts" is imperfect and requires reforms. This was mainly reflected in a sharp decline in tax revenues to the central budget, as well as in a general decline in the share of tax revenues in GDP: from 28.2% in 1979 to 12.3% in 1993.11 The increase in inflation in 1992-1993, which was caused by other reforms, further reduced central budget revenues. In this context, it was decided to carry out the next stage of tax federalism reforms.

The 1994 reform led by Premier Zhu Rongji laid the foundation for the tax federalism system currently in effect in China. The essence of the reform was that the system of "fiscal contracts" was abolished, and all taxes were divided. This reform had two objectives: first, to increase the tax revenues of the central budget, and second, to fix the permanent composition of tax revenues of local budgets in order to avoid contractual methods of financing local budgets.

The reform introduced a new tax classification. According to the principle of belonging to the level of government, taxes were divided into central and local; according to the principle of crediting to budgets of different levels, taxes were divided into central, local and joint*. For example, value-added tax (hereinafter referred to as VAT) was assigned to central taxes based on the principle of belonging to the level of government and to joint taxes


* Joint taxes are those taxes that are distributed between the central and local budgets in a certain proportion (author's note).

page 29

taxes based on the principle of crediting to budgets: VAT is distributed between the central and local budgets in the proportion of 75% -25%, respectively 12.

Another important innovation was the division of tax authorities into central tax inspections, which managed and collected central and joint taxes, and local tax inspections, which managed and collected only local taxes.

Under the new procedure, local governments immediately received revenues from local taxes, and joint taxes were first transferred to the center, and then distributed back to local budgets. This principle has significantly increased the role of the central budget and made local budgets dependent on transfers of joint taxes and transfers.

The results of the reform were not slow to come: in 1994, central budget revenues increased by more than 2 times compared to the previous year, and the share of central revenues in the budget increased from 22% to 56%, while the share of central budget expenditures increased by only 2%.

The Chinese tax system has been reformed several times since the 1994 reform. One of the most important tax reforms that influenced the development of tax federalism was the reform of corporate profit taxation carried out during the global financial and economic crisis of 2008-2009.

Prior to this reform, the income tax of municipal and private enterprises was administered by local tax authorities and partially credited to local budgets. State-owned, large private and foreign enterprises.-

they paid income tax to the central tax inspectorate. The 2008-2009 reform concentrated all powers to administer corporate income tax in central tax administrations, negatively affecting local budget revenues.

CURRENT STATE OF TAX FEDERALISM IN CHINA

To date, there are 22 types of taxes in China, and their classification according to the principle of belonging to the level of government and according to the principle of crediting to budgets of different levels is presented in Table 1.

Despite the fact that the number of taxes forming local budgets exceeds the number of taxes of the central budget, revenues from local taxes play a secondary role in the formation of local budgets. This is confirmed by the structure of local budgets for 2013 (see Table 2). Local taxes on property and natural resources cannot provide local governments with the necessary financial resources due to the peculiarities of certain elements of these taxes.

The analysis shows that more than 40% of China's local budgets are supported by transfers from the central budget. Such a high share of transfers indicates a high dependence of local budgets on the center, which is one of the most important problems of tax federalism in China.

Since 1994, China has developed a special procedure for separate administration (i.e., collection and control) of local and central taxes, for which there are two types of tax inspections. The central tax authorities, which collect and control central and joint taxes, are subordinate to the State Tax Administration (GNA) and are divided into three levels: provincial, municipal and district. The system of central tax inspections is highly hierarchical, i.e. the lower level is subordinate to the higher level of inspection-this concerns the internal structure, personnel and budget issues, as well as the appointment of managers.13

Local tax authorities, which control the collection of local taxes, report to local governments. The State Tax Administration provides methodological and technical support to local tax authorities, monitors the implementation of national tax policies, and collects statistical information.

This state of affairs positively characterizes the development of tax federalism in China, as local tax authorities are practically independent of the decisions of the central tax authorities of the GNA and can flexibly respond to changes in the economic state of the provinces in the administration of taxes. However, on the other hand, the lack of proper control from the center can cause negative social phenomena, such as corruption, collusion with taxpayers, etc.

An important problem in the development of fiscal federalism in China is the tax powers of local governments on legislative initiative. Officially, local governments have the right to independently impose and suspend local taxes in the provinces, but this applies only to the slaughtering tax and banquet levy 14However, to date, there is no reliable information available.

page 30

Table 1

Classification of taxes in China

Source: compiled by the author.

information that at least one administrative division in China collects such taxes.

Similar to Russian practice, local governments in China have the right to clarify the Laws of the People's Republic of China on taxes in the form of issuing Norms and Rules for the Application of relevant Laws, as well as to change the procedure and terms for collecting local taxes.15 But the main tax tool in the hands of local governments is tax incentives. Since local self-government bodies are interested in the economic growth of the territories under their control, in the last decade they have taken more and more initiatives to stimulate both the economic development of the territory as a whole and individual industries through taxes.

Tax methods are most actively used to boost the development of private businesses in the financial sector and real estate. For example, in 2008, the Beijing authorities announced that some financial companies, subject to certain conditions, can receive back from the budget the monetary amounts of taxes they previously paid. In 2009, in Shanghai, the city government announced a 50% reduction in business tax and duties for certain financial companies, as well as preferential taxation of the income of senior executives of financial companies.

Chongqing authorities went the farthest. In 2008, a whole package of tax measures to stimulate the housing market was announced, which included an instant refund of part of the housing tax.

page 31

Table 2

Structure of sub-national budget revenues in China in 2013

Type of income

Share of revenue in total local budget revenues in China (%)

Inter-budget transfers

41,00

Indirect taxes (on goods, works, and services)

21,66

Non-tax revenues

12,72

Taxes on profit and income

9,08

Resource taxes and fees

6,41

Property taxes

4,37

Fee

3,76

Other tax revenues

1,00



Source: calculated by the author based on data from the website of the Ministry of Finance of the People's Republic of China - http://www.mof.gov.cn/index.htm

In 2009, the city government continued this tax policy, as a result of which the tax burden fell below the level allowed by the central authorities. At the same time, despite the public outcry, the Ministry of Finance, together with the State Tax Service, limited themselves to a warning.

These cases demonstrate a fairly high degree of independence of local governments in implementing tax policy, despite the fact that many tax benefits provided at the local level are often not authorized by the center. Since 1998, the State Tax Administration has periodically conducted campaigns to identify problematic provinces where local governments exceed their tax authority and provide tax incentives and preferences that are not regulated by the central authorities.

So far, the largest was the 2005-2006 campaign, which revealed that in 7 provinces, local governments granted 2,149 businesses tax incentives totaling $ 1.19 billion in the period up to 2006. some 12% of China's budget in 2006), and in the same provinces, 5.46 million yuan was improperly returned to taxpayers. 17

Summarizing the results of the analysis of the development and state of tax federalism in China, we note that the Chinese public finance system has a fairly high degree of decentralization, although it requires further reform due to existing problems.

First, for several decades, both central and local budgets were not balanced. The central budget received more revenue than it spent on spending powers, while local budgets were unbalanced in favor of spending powers prevailing over revenue. According to experts ' estimates, the activities of local self-government bodies account for about 50% of state revenues and 80% of state expenditures.18 This explains the high share of inter-budget transfers in the structure of local budgets and indicates a strong dependence of local governments on financial resources coming from the central budget.

Secondly, local self-government bodies experience difficulties in forming their own budgets only at the expense of local taxes, which leads to a significant increase in municipal debt and the emergence of not always legal ways to finance expenditure obligations and local governments ' own projects.

Third, the limited legislative rights of local governments to regulate their own tax revenues have led to violations in the form of unauthorized tax benefits and subsidies. The lack of real opportunities to implement tax initiatives in practice negates the advantages of fiscal federalism.

Finally, the 1994 reform introduced many new challenges that could threaten the sustainable development of the Chinese economy.19 Among these problems, we can highlight the problem of inconsistent tax policies in the provinces and the problem of excessive tax burden on the service sector. In addition, in the context of a new stage of reforms of the entire Chinese tax system, the existing system of tax federalism requires attention from the country's leadership and an early update.

Therefore, in the summer of 2014 The Standing Committee of the National People's Congress (NPC) has approved the tax plan.

page 32

by defining 2016 as the year of implementation of the main provisions of the reforms. Setting specific deadlines and targets for this plan shows the importance of developing tax federalism and the determination to further improve the institutional foundations of the economy, despite the skepticism and inertia of the bureaucratic apparatus.

The details of the reform of tax relations between budgets have not yet been disclosed, but according to Finance Minister Lou Jiwei, the goal of the reform is to improve the system of tax federalism through increasing efficiency and rationalizing relations between the central and local budgets.20

LESSONS FOR RUSSIA

As in China, the problem of developing inter-budgetary relations and tax federalism is very acute in our country. Reform and improvement of the public finance system in Russia are constantly taking place, and concepts and programs for the development of federalism and inter-budgetary relations are regularly adopted, but despite this, many indicators lag behind those in China. In this regard, the Chinese experience of tax federalism can also be useful for our country.

One example of the practice of tax federalism that can be applied in Russia is the Chinese experience of separate administration of central and local taxes. The differentiation of tax authorities, depending on the type of tax, can significantly increase control over the collection of relevant taxes. In addition, the transfer of some legislative initiatives to the regional level in our country may allow the authorities to take into account local characteristics, and therefore increase the efficiency of the Russian public finance system.

In our opinion, the main task of reforming the system of tax federalism in Russia is not just to increase the independence of sub-federal budgets, but rather to create a system of incentives for sub-federal authorities. What we should learn from China is the active involvement of local governments in the economic development of provinces and districts. Local governments in China are looking for various ways to overcome existing restrictions and challenges in order to stimulate local economic activity and, ultimately, accelerate the country's economic growth and improve the quality of life of the population.


1 Данные сайта ОЭСР - http://www.oecd.org/tax/federalism/oecdfiscaldecentralisationdatabase.htm

2 For more information, see: Zuenko I. YuPacific Russia in intercivilizational and All-Russian space: past, present, Future (Seventh Krushanov Readings, 2011). Vladivostok, pp. 343-352 (Zuenko I. Yu. 2011. Osobennosti razvitiya sistemy administrativno-territorialnogo deleniya v sovremennom Kitae. Vladivostok) (in Russian); Karpov M." The Chongqing Model "by Bo Xilai: the case of" federalism with Chinese characteristics " or the forerunner of the disintegration of the PRC? - http://www.ru.journal-neo.com/node/117271; Cao Y., Qian Y., Weingast B.R. From Federalism, Chinese Style, to Privatization, Chinese Style - http://cog.kent.edu/Hb/CaoQuianWeingast.pdf

3 Cit. Software: Budget system of the Russian Federation. / Ed. Vrublevskaya O. V., Romanovsky M. V. St. Petersburg, St. Petersburg. 2008, p. 364.

4 Подробнее см.: Tiebout Ch.M. An Economic Theory of Fiscal Decentralization - http://www.nber.org/chapters/c2273.pdf

5 Подробнее см.: Oates W.E. Toward A Second-Generation Theory of Fiscal Federalism // International Tax and Public Finance. 2005, N 12, p. 349 - 373 - http://econweb.umd.edu/-oates/research/2ndGenerationFiscalFederalism.pdf

Zheng Y. et. al. 6 De Facto Federalism in China: Reforms and Dynamics of Central-Local Relations // Series on Contemporary China. New Jersey, World Scientific. 2008. Vol. 7, p. 460.

Fraschini A. 7 Fiscal federalism in the big developing countries: China and India // Tax systems and tax reforms in South and East Asia. Routledge. 2006, p. 63 - 91.

Bahl R. 8 Fiscal Policy in China: Taxation and Intergovernmental // Fiscal Relations. San Francisco: The 1990 Institute. 1999.

Zheng Y. 9 Fiscal Federalism and Provincial Foreign Tax Policies in China // Journal of Contemporary China. August, 2006. Vol. 15(48), p. 479 - 502.

Jin H 10., Qian Y., Weingast B.R. Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style // Journal of Public Economics. September 2005. Vol. 89(9 - 10), p. 1719 - 1742.

Rosen D.H., Bao Beibei. 11 China's Fiscal and Tax Reforms: A Critical Move on the Chessboard - http://rhg.com/notes/chinas-fiscal-and-tax-reforms-a-critical-move-on-the-chessboard

Zheng Y. 12 Op. cit, p. 483.

Cui W. 13 Fiscal Federalism in Chinese Taxation // World Tax Journal, October 2011, p. 455 - 478.

14 Ibid., p. 460.

15 Guowuyuan guanyu quxiao jishi jiaoyishui, shengchu jiaoyishui, shao you tebie shui, jiangjin shui, gongo tiaojie shui he jiang tuzai shui, yanxi shui xiafang gei difang guanli de tongzhi (Decree of the State Council of the People's Republic of China on the abolition of fair tax, cattle trade tax, special tax on frying oil, tax on prizes and prizes regulation of the payroll tax and the transfer of management of the slaughtering fee and banquet fee to local authorities) - http://www.tzcs.gov.cn/dishuifaguiku/difangshuilei/fenshui-zhongguiding/zonghexingshuisho uzhengce/1354142202.html

Cheng H., Deng H. 16 Chongqing tuichu goufang tuishui zhengce ciji loushi (Chongqing has a policy of stimulating urban construction through tax refunds) - http://www.caijing.com.cn/2009-01-21/110050447.html

Cui W. 17 Op. cit., p. 465.

18 Zhongguo fazhan chengzhenghua ying jiyu difang zhengfu gengduo shuishou quanli (Urban development in China should give local governments more tax powers) - http://www.chma-irn.com/news/20140521/152229129.shtml

Rosen D.H., Bao Beibei. 19 Op. cit.

20 Caizhengbuzhang Lou Xuwei jiedu shenhua caishui gaige (Minister of Finance Xiuwei Lou explains aspects of deepening public finance reform) - http://news.xinhuanet.com/fortune/2014-07/06/c_1111474358.htm


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