Why Some Chinese Provinces are Collecting Taxes Early This Year

... and Chinese web users are unhappy about it

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As China's economic growth loses steam, its government has started to place more burdens on the shoulders of its citizens. According to the the Xiaoxiang Morning Post (@潇湘晨报), at the end of October, the Treasury Bureau of Zhejiang province asked companies to pay business taxes which were not due until 2013. Ye Tan (@叶檀), an economics and finance commentator, wrote on Sina Weibo, China's Twitter, that the phenomenon was not confined to Zhejiang. "I just received a call from a friend who is an entrepreneur in northeastern China. He said that local officials were collecting taxes for 2013. If companies refused to pay, officials would look up account books [and find an excuse to fine them]." @猪肉脯lora adds that Jiangsu province also follows this practice.

We've seen this before

As expected, the chatter kindled web users' discontent. @行者平疆 traces the phenomenon to hundreds of years ago, saying that the government is just following an "old tradition." "It reminds me of what happened under the ruling of emperor Chongzhen [the last emperor of the Ming Dynasty from 1628-1644 A.D.]. The government went crazy creating new taxes, then in a single breath collected 40 years' worth." @早安我的城市 sees the phenomenon as a dangerous signal. "Historically, these actions have only been seen during wartime. But now it's happening during peacetime too. If the trend continues, our country won't be a country anymore."

Why the rush?

By pre-collecting taxes, the government is trying to offset a decrease in revenues. The growth rate of public revenues on a year-on-year basis was "only" 10.9 percent during the first three quarters of 2012, compared to 22.4 percent in the same period in 2010 and 29.5 percent in the same period in 2011. Although the growth of public revenues still far exceeds those of GDP and per capita income, many local governments have opted not to adopt austerity policies to rationalize their balance sheets, instead desperately searching for more revenue to cover their spending.

China's revenue stagnation can be traced to two chief factors. First, there is the slowdown in economic growth. In the second quarter of 2012, the year-on-year GDP growth rate was 7.6 percent, the first time the number has been lower than 8% since the outbreak of the global financial crisis. In the third quarter, the rate fell to 7.4 percent. Lower aggregate demand reduces the country's taxable base.

The second reason is a reduction in revenues from China's unique and troubling system of "land finance" (土地财政). The term refers to a local government practice of appropriating land from farmers with low compensation, then selling the parcels at high prices to real estate developers. (Strictly speaking, what is bought and sold is not the land itself but the right to use it, as legally speaking, all land in China is ultimately publicly owned.)

In recent years, as China rapidly urbanized and housing prices skyrocketed, so-called land finance was tremendously profitable. In 2010, the practice brought 2.9 trillion RMB to government coffers (about US$465 billion) making up about 35 percent of overall public revenues. But since 2011, China's powerful State Council has implemented a set of strong measures to cool the real estate market. As a result, the land finance sector has been shrinking. In the first half of 2012, land finance revenue decreased by 27.5 percent on a year-on-year basis.

These numbers are troubling on their surface, but behind them lies something more profound: The state's propensity to reap a disproportionate amount of economic gain vis a vis the private sector, one of the most severe problems resulting from China's "strong state, weak society" political structure. Three elements undergird this predatory public finance system.

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Yueran Zhang is a Chinese writer based in Durham, North Carolina. He contributes regularly to Tea Leaf Nation.

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