Tax added to 'mass incidents' question

PUBLISHED : Monday, 31 October, 2011, 12:00am
UPDATED : Monday, 31 October, 2011, 12:00am


These days, riots and protests, dubbed 'mass incidents' in a euphemism used by state media, have become increasingly widespread and violent on the mainland despite the leadership's heavy-handed efforts at maintaining social stability.

Given the sensitivity, the central government has tried to keep the annual number of mass incidents a closely guarded secret in recent years. An official estimate has been given only one time, in 2005, when the Chinese Academy of Social Sciences, a leading government think tank, said in its annual paper that the number of mass incidents rose from 10,000 in 1993 to 60,000 in 2003, with the number of protesters increasing from 730,000 to 3.07 million.

Analysts have generally estimated the annual total to be about 100,000 in the past few years, as officials have readily admitted they have worsened in scale and influence since 2003.

Even using the government account of 60,000 for 2003, the figures still paint a worrying picture, as they equate to an average of 164 riots and protests a day on the mainland.

Until recently, the key causes triggering riots were social or legal, with most attributed to land disputes, miscarriages of justice and increasingly because of pollution.

Now they have taken on a new dimension; and taxation is behind it. Last week, hundreds of owners and migrant workers of small workshops in the eastern town of Zhili in Zhejiang province, known as China's children's wear capital, went on the rampage, clashing with police and torching cars over a tax dispute.

The riot, the first involving tax collection, highlights the urgent need to overhaul China's tax regime and how taxes are collected.

The mainland's current tax system, which was revised in the 1990s, has become a serious drag on economic growth, creativity and productivity. And it has increasingly become a source of national discontent.

Adding fuel to the recent debate was the Ministry of Finance's announcement earlier this month that the country's total tax revenues soared 27.4 per cent to 7.13 trillion yuan (HK$8.7 trillion) in the first three quarters, compared with gross domestic product growth of 9.4 per cent for the same period. Four key contributors rose by double digits - value-added tax by 18.7 per cent, business tax by 24 per cent, corporate income tax by 35.8 per cent and personal income tax by 34.4 per cent.

Normally, a country's growth in tax collection correlates with its overall economic growth rate. But China's tax revenue growth rate is nearly three times the economic growth pace. Those figures indicate something is amiss at a time when businesses are grappling with declining orders and rising inflation, while the price of raw materials and wages continue rising in a slowing economy.

Taxation officials partly attributed the double-digit growth in tax collections to better enforcement, but the violent riot in Zhili suggests a different explanation. Officials reportedly collected taxes arbitrarily, charging 600 yuan for each sewing machine used, twice as much as last year. But aggressive collection methods are just a small part of the bigger problem with the mainland's tax regime - its tax burden is simply too high.

To be sure, Beijing has taken some reform measures, including raising the threshold for personal income tax to 3,500 yuan from 2,000 yuan, effective from September 1. Earlier this month, it also decided to raise the threshold for levying value-added and business taxes on small enterprises, and launched value-added tax experiments in Shanghai.

The Zhili riot has shown an impetus to accelerate tax reforms. These should include drastically cutting the top bracket for personal income tax from 45 per cent to about 25 per cent, eliminating the tax on cosmetics and luxury brands to spur consumption, and simplifying the VAT regime to remove repetitive taxation and reduce the overall tax burden for companies.