To talk about China’s proactive fiscal policies and its outlook for 2019, it is necessary to start with the country’s general macroeconomic situation, as finance is to serve the overall socio-economic development and the implementation of the guidelines of the top decision-making level.

At present, China’s economy is facing challenges brought by external uncertainties, especially the escalation of trade frictions, and problems rising from inside.

Against such backdrop, the current fiscal policy inevitably needs to be more proactive, in a bid to meet the long-term goals such as realizing moderately well-off in all respects, overcoming the middle-income trap and achieving modernization by 2035.

One of the main focuses of the proactive fiscal policy is to increase tax cuts. But besides tax reduction, it should be taken into consideration China’s taxation reform -- how China develops a modern taxation system.

From this perspective, we need to be especially careful not to simply copy US President Donald Trump’s tax reduction measures.

The tax structures of China and the United States are totally different, with indirect tax at the center of the former and direct tax at the center of the latter.

Of China’s indirect taxes, the most influential is the value-added tax (VAT), which is the largest now that the country replaced the business tax with it.

We need to lower the standard rate of VAT further. These are all things that we should actively consider in 2019.

Besides, could the standard rate of 25 percent for corporate income tax be reduced to some degree? For small- and medium-sized enterprises, half the tax will be exempted, which will last through the end of the 13th Five-Year Plan (2016-2020). But after 2020, we need to consider whether to continue with such a tax exemption method or not during the 14th Five-Year Plan (2021-2025).

Along with the lowering of the standard rate for corporate income tax, there should also be encouragement for enterprises to conduct R&D and innovation. In addition, it should be emphasized that the lowering of indirect tax and corporate income tax is only part of China’s tax reform, and we must consider how to implement the central government’s plan to gradually increase the proportion of direct tax. This is something that must be mastered in a whole.

Tax reduction is, in essence, structural tax reduction, which is followed by the requirements for structural optimization. When it comes to the direct tax, income redistribution serves to promote social harmony while raising fiscal revenue.

Income redistribution plays an irreplaceable role in regulating and curbing the widening of income gap. But this is very difficult in China now that the proportion and role of all direct taxes in the whole income is quite marginalized. As a matter of fact, the whole society has paid great attention to the issue of income distribution. However, it is an arduous task for China to formulate a law-based tax redistribution mechanism under the principle of statutory taxation[ The so-called principle of statutory taxation refers to the basic principle of tax law that the tax subject must collect taxes according to and only according to the provisions of laws. That is, if there is no premise of corresponding laws, the country cannot collect taxes and citizens have no obligation to pay taxes.] for income distribution.

The most typical is the real estate tax, which has been delayed for many years.

Is it possible to consider starting legislation on it within the five years of this NPC term (there are only four years left)?

It is not easy to predict how long the process will take in China after the legislation is started. But if we go by the past experience, it is likely to be postponed to the fourth review before the whole legislative process is completed.

Meanwhile, progress has been made in individual income tax in the direct tax system. In 2018, the law was revised and improved. However, this is still not enough as the revision only integrates labor income and says nothing about non-labor income. As a result, it can be expected that from the start of 2019, for certain groups of Chinese experts, taxes will rise obviously, which only adds to the burden of innovation-driven enterprises as it costs more to keep them.

And this also exerts influence on intellectual policies, as the integration of the various kinds of income for high-level labor force, such as salary, franchise reward, increases the marginal tax rate greatly, a tax discrimination towards their contribution. So, in the future, individual income tax reform, of course, will need to be optimized.

Lastly, the reform and of opening-up must be supported by finance, but not finance alone. It’s teamwork to be done by different government departments.

The present reduction of burdens on enterprises requires the cooperation of both fiscal and other departments.

Jia Kang is head of China Academy of New Supply-side Economics.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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