Gao Peiyong: Experiences and Inspirations from the 40 Years of Finance and Taxation System Reform
Created On : 2018-09-06    Views : 25

China's reform and opening up started from economic system reform, and gradually expanded to comprehensively deepening reform that covers all fields, including, economy, politics, culture, and social and ecological civilization. China's finance and taxation system reform over the past 40 years is precisely the process of adapting to this tide of reform and gradually evolving into a fiscal and taxation system that matches the socialist market economic system, the national governance system, and the modernization of governance capabilities.

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Starting point of reform: "non-public oriented" fiscal and taxation system and operating landscape 

China's fiscal and taxation system reform started from the "non-public oriented" fiscal and taxation system and operating pattern under the past planned economic system. The fiscal and taxation operating pattern during that period may be summarized from different perspectives. While, based on three basic clues: revenue--where the money comes from; expenditure--where the money is spent; policy--the objective that is represented on the revenue and expenditure arrangement, it may be summarized as the follows: fiscal revenue mainly comes from the state-owned sector--"take money from one's own home"; fiscal expenditures mainly go to the state-owned sector--"use the money on one's own business"; the fiscal policy tends to "make a discrimination" between the state-owned sector and the non-state owned sector--namely, mainly intended to develop and grow the state-owned sector.

The reason why the fiscal and taxation operation pattern is as described above is directly related toChina’s simple composition of economic ownership during that period and the urban-rural dual structure. As a direct reflection of the single public sector economy, at least on the surface, the Gross Domestic Product (GDP) during that period was almost entirely derived from the state–owned and collectively owned economic sectors. As an important constituting part of the economic and social system, during that period, the fiscal and taxation system naturally was based on the "dualistic" structure-- separate governance was implemented for different ownership, and separate governance was implemented for urban and rural areas:

State ownership-based finance. Divided based on the nature of ownership, the fiscal revenue and expenditure activities are mainly completed within the state-owned sector system. The non-state owned sector is either outside of the scope of fiscal coverage, or on the edge of fiscal coverage.

Urban areas oriented finance. With division between urban areas and rural areas, the fiscal revenue and expenditure activities are conducted mainly in rural areas. As for the vast rural areas, they are either outside of the coverage of the fiscal system, or stand on the edge of the coverage.

Production and construction finance. Regarding the nature of fiscal expenditure, fiscal expenditure activities mainly focus on the fields of production and construction. As for non-productive or non-constructive expenditure items, they tend to be placed in subordinate or marginal areas.

In other words, the coverage of the "dual" fiscal and taxation system is not complete, but selective; and the fiscal treatment it provides is unequal and discriminating; fiscal expenditure is not focused on the entire public service sector, instead it focuses on production and construction. Such a fiscal and taxation system with a selective rather than complete fiscal coverage and discriminating fiscal treatment, and emphasis on production and construction, rather than the overall public service sector, and the fiscal and taxation operating landscape as a result of it, shows difference rather than commonality.


Promoting "public-oriented fiscal reform "; building a public-oriented finance system framework

The economic system reform that began in 1978 aims to promote market-oriented reform, and to build and perfect the socialist market economy. The reform process of economic marketization first brought about the diversification of economic ownership: regarding the economic ownership structure, the GDP has been transformed from production almost completely by state owned and collectively owned economic sectors, to the current situation that GDP is produced jointly by economic sectors of different ownership. This impact is transmitted to the fiscal and taxation operating landscape, and results in diversification of the sources of fiscal revenue--from "getting wealth from one's own family" to "getting wealth from the general public".

Diversification of the sources of fiscal revenue will naturally promote and result in the public-oriented reform of fiscal expenditures--change from "working for one's own home" to "working for the public". Public-oriented reform of fiscal revenue and expenditure further results in public oriented reform of fiscal policy--change from "differential treatment" to implementing "national treatment" across the whole society.

These changes which are presented in the fiscal and taxation operating landscape occurred during the process of the fiscal and taxation system's reversion to public orientation. This is a process of adapting to the development of the socialist market economy system and urban-rural integrated development with “public-oriented fiscal reform”.

From state-ownership based finance to diversified ownership-based finance. The coverage of the fiscal system is no longer determined based on ownership nature, but it extends beyond the state-owned sector, and includes various ownership sectors, including the public sector and non-public economy.

From urban finance system to an urban-rural integrated finance system. The fiscal coverage is no longer divided based on the boundary between urban areas and rural areas, and it extends beyond the boundary of urban areas, to include all places and all members of society in both urban and rural areas.

From production and construction oriented finance to public service finance. The fiscal expenditure is no longer limited to production and construction work, rather, it is expanded to cover the range of public service matters, including infrastructure building, social administration, economic regulation, and improvement of livelihood.

The reform from "state owned finance + urban-oriented finance+ production and construction oriented finance" to “diversified ownership-based finance+ integrated finance for urban and rural areas + public service finance”, is a process of continued expansion of the fiscal coverage, and gradual implementation of non-discriminatory treatment. What is becoming increasingly more prominent during this process is public finance's inherent nature—the public-oriented nature.

In such a context, the concept of public finance and related practices began to emerge, and building of a public finance system framework, which has been a "staged" objective of the fiscal and taxation system reform during the market-oriented reform process, began to enter into people's field of view since 1998. Almost all fiscal and taxation system reform clues and finance system reform matters, including revenue, expenditure, management, and system, are attributable to this main clue, and are covered by this overall objective. In 2003, on the basis of having initially built a public finance system framework, the Central Committee of the CPC put forward a series of reform measures that are intended to further improve and complete the public finance system.

Toward "fiscal modernization": establishing a modern finance system

Since the 18th National Congress of the Communist Party of China, the Central Committee of CPC with General Secretary Xi Jinping at the core proposed a top level design and general plan for comprehensively deepening the reform, so as to lead the great journey of deepening the reform in an all-around way in the new era. The general plan of "comprehensively deepening the reform" will link and integrate the reforms and improvements in all relevant areas, including economic, political, cultural, social, and ecological civilization systems, and its overall objective is "perfecting and developing the socialist system with Chinese characteristics, and pushing forward modernization of the national governance system and governance capability".

One of the most profound impacts that this change brings on the fiscal and taxation system reform is that the fiscal sector is raised from an economic category to a national governance category. The fiscal and taxation system is raised from being an integral part of the economic system to become an integral part of the national governance system. Therefore, getting out of the paradigm of thinking that followed to the reform of the economic system, fiscal and taxation system, and the national governance system, and planning and promoting the fiscal and taxation system reform in the wider context of national governance is a logical thing. Then, a series of profound changes that are different from before emerged in the reform of the fiscal and taxation system.

From adapting and matching the economic system reform to adapting and matching the "comprehensively deepening reform". The fiscal and taxation system reform is no longer limited to adapting and matching the requirements of the socialist economic system, but it seeks to closely coordinate with all reform processes such as economic, political, cultural, social, and ecological civilization system reform, and it is committed to adapting and matching linkage of reforms in various fields, adapting and matching the overall effect of reform, and adapting and matching the overall objective of promoting modernization of national governance.

From being based in the economic field to being based in the national governance field. The fiscal and taxation system reform is no longer limited to simple reform in the economic field, and simple economic system arrangement; rather, standing at the height of national governance, and being based on the positioning that "finance is the base and an important pillar of national governance", the reform seeks to build the fiscal and taxation system into a comprehensive system arrangement that covers the whole process of national governance, and all areas.

From the pursuit a "nature matching" to "modernization matching". The fiscal and taxation system reform is no longer limited to the characteristics of the property, simply pursuing the “nature match” between the fiscal and taxation system and the socialist market economy", but extends from attribute characteristics to the characteristics of the times, pursuing the “modernization match” between the fiscal and taxation system and national governance system and governance capability. Starting from modern fiscal civilization, it seeks to build a general form of modern national finance system that conforms to the laws of history, follows the current trend, represents the development direction, and suits China's national conditions.

The above changes mark that on the basis of primarily achieving "public-oriented reform of finance", and being accompanied by the process of comprehensively deepening reform, China's fiscal and taxation reform enters a the new stage of modernization--establishing a modern fiscal system. In this sense, the establishment of a modern fiscal system pursues the same ultimate goal with building of a public financial system. Its essence is to promote fiscal modernization based on public-oriented reform of finance.

Several inspirations

From the development process ofChina's fiscal and taxation reform over the past 40 years, we can draw the following inspirations.

The fiscal and taxation system reform is an important and critical fundamental reform, since it can affect the whole situation. Only if we push forward the fiscal and taxation reform under the leadership of the CPC, can we ensure that the reform direction is correct, the reform ideas are clear, the reform measures are proper, and the reform effects are good.

One major characteristic ofChina's fiscal and taxation system reform is that it has always served as an important constituting part of the overall reform. It has always been tied to the overall reform, and obeyed and served the needs of the overall reform. This is the situation in the economic system reform stage, and this is also the case in the new stage of comprehensively deepening reform.

Over the past 40 years, there actually has been a main clue that runs throughout the fiscal and taxation system reform, which is accompanied by the historical process of reforming from the economic system to comprehensively deepening reforms, and constantly adapting the fiscal and taxation system and its operating mechanism: "public-oriented reform of finance" matches with the "market-oriented reform of the economy"; "modernization of finance" matches with "modernization of national governance"; the "public finance system" matches with the "socialist market economic system", and the "modern finance system" matches with the "modern national governance system and governance capability". This is the basic experience we can get from this adaptive reform process.

China's fiscal and taxation system reform can be said to be generally successful, since, fundamentally speaking, we have, based onChina's national situation, obtained a profound understanding about and strictly followed the objective laws of the fiscal and taxation system and its operating mechanism, and we planned and promoted the reform according to the requirements of objective laws. These objective laws can be generalized into: market-oriented reform of economy will inevitably result in public-oriented reform of finance, and modernization of national governance will inevitably require and determine fiscal modernization; in order to promote the market economy, we must promote public finance; in order to promote modernization of national governance, we must establish a modern fiscal system as a foundation and important pillar.

With the socialism with Chinese characteristics entering into the new era, it has become more urgent to comprehensively promote the fiscal and taxation system reform in the new era, marked by the establishment of a modern fiscal system,. It is imperative to fight a hard battle against the focus, difficulties and pain points of the reform of the fiscal and taxation system in the new era. Standing at a historical starting point in the new era, we need to get an in-depth understanding about the new positioning of the financial system and the fiscal and taxation system that was established on the Third Plenary Session of the Central Committee of the 18th National Congress of CPC and the 19th National Congress of CPC, and the systematic arrangement about deepening fiscal and taxation reform, under the guidance of the thought about the socialism with Chinese characteristics in the new era put forward by General Secretary Xi Jinping. The basic characteristics of the modern fiscal system can be summarized as follows: Finance has become the foundation and important pillar of national governance, and the fiscal and taxation system has become the fundamental and supporting element of the national governance system. To go a step further, the fiscal and taxation function should cover the whole process and all areas of national governance activities. In such a context, considering the current function and role ofChina's fiscal and taxation system, we can confirm that,China's fiscal and taxation reforms in the new era face a heavy task and have a long way to go.

(Gao Peiyong is a member of the Academic Committee of Shanghai Academy)