China’s current value-added tax regime is undermining Beijing’s efforts to rebalance the economy towards consumption, economists argue
As China seeks public feedback on the implementation of its recently passed value-added tax (VAT) law, a group of economists has urged the government to introduce more radical reforms to give local authorities stronger incentives to spur consumption and rein in their excessive industrial expansion.
China’s current VAT system – the country’s largest source of tax revenue – undermines Beijing’s efforts to develop a more consumption-driven economy by creating an incentive structure that dampens officials’ “enthusiasm for fostering consumer markets”, the economists said in an article published in early August.
The main issue with the system is that it allocates tax revenue to regions based on where a product or service was produced, rather than where it was consumed, according to the paper co-authored by Sheng Songcheng, a former head of statistics at China’s central bank, and two researchers at the CEIBS Lujiazui International Institute of Finance.
The policy effectively rewards regions with large industrial bases, which encourages officials to pursue “a local development model that overemphasises investment while neglecting consumption, exacerbating overcapacity and hindering economic transformation and upgrading”, the authors said.
