The high cost of China's heavy tax burden

If you want to know the character of a state, look to taxes. The Chinese state is ferociously extractive, in a way that would not be sustainable if it were to depend on popular consent. The tax burden is officially 25 to 30 per cent of GDP but in reality much heavier. The state takes money off its people in three ways: by taxes called taxes, by taxes that are not called taxes, and by hidden extractions inside the economy itself.

Formal taxes go into the "general budget". In addition, the Ministry of Finance keeps three "auxiliary budgets" for revenues not called taxes. The big components are land transaction revenues to local governments and social insurance contributions. On top of this again are a raft of hidden extractions, for example:

• Artificially low interest rates on savings in state banks (which enables the banks to subsidise state enterprises with cheap credit).

• Enterprises' and workers' contributions to "housing provident funds" and to the Disabled Person's Federation (to which disability care was outsourced when "welfare factories" were abolished in the 1990s).

• Local government embezzlement of social insurance funds for non-social use.

• Local government fees for services (legal or illegal).

• Fees to the party and its affiliates. Membership numbers in the party system add up to more than half the adult population. Membership fees are a tax, not exactly an obligatory tax but not a voluntary fee. People join for insurance, and career and business advancement. For many purposes, membership is a necessity.

• An extraordinary "fee" on citizens and businesses is the extraction of money (or gifts) through graft. The proceeds go to officials as a perceived compensation for low pay. The anti-corruption campaign has, by anecdotal evidence, eased the burden of graft in some areas, but not eliminated it, nor is that the intention.

All these are mechanisms by which money is made to trickle upwards from households' pockets into the operations of the state and its socialist market economy.

The biggest hidden extractions, however, are from two other sources. First, from the murky world of local government borrowing which has reached alarming, if unknown, levels. Much of that debt is used for non-investment purposes, does not repay itself, and has to be covered ultimately from income that thereby is lost.

Second, from labour. Chinese workers are underpaid. The labour market is rigged and workers do not have the right to organise in their own interest. Wages have risen more slowly than economic growth. This redistribution from labour to capital goes in part to funding public activity, such as infrastructural investments, and in part makes up a subsidy to private enterprise.

Auxiliary revenues add between 10 and 15 percentage points of GDP. That brings public revenue to between 35 and 45 per cent. That's on a par with the world's most advanced economies.