The Chinese Communist Party (CCP) is planning to impose a new local surcharge tax with a theoretical revenue scale of nearly $1 trillion yuan ($138 billion) per year to keep local governments afloat, after a top meeting earlier this month, according to Chinese media reports.
The official “decision” passed at the CCP’s Third Plenum in mid-July stipulates that in order to solve the financial difficulties of local governments, “it’s necessary to increase local independent financial resources, expand local tax sources, and appropriately expand local tax management authority.”
Chinese finance media outlet China Business News reported on July 23 that authorities are planning to merge urban maintenance and construction taxes, education surcharges, and local education surcharges into a local surcharge. Local governments will be authorized to determine the specific tax rates for the new surcharge, according to the plan.
China has levied an “urban maintenance and construction tax” since 1985, with the revenue going to local governments. Data from the CCP’s Ministry of Finance show that urban maintenance and construction taxes for 2023 was 522.3 billion yuan ($72 billion), accounting for about 4.5 percent of local general public budget revenue.
The CCP began to impose “education surcharges” at the national level in 1986. Later, local governments were also authorized to levy local education surcharges. In 2010, the surcharges were fully implemented across the country.
Education surcharges and local education surcharges are administrative charges and both belong to local revenue. The education surcharge tax rate is 3 percent, and the local education surcharge tax rate is 2 percent. The taxes are imposed on all work units and individuals who actually pay value-added tax and consumption tax.
Local Governments in the Red
The news caused an uproar on Chinese social media.The CCP’s intent to increase local taxes may help them solve local governments’ financial difficulties, but it’s a very bad move for the Chinese economy and will cause great harm to the Chinese people, Frank Xie, a professor at the Aiken School of Business at the University of South Carolina, told The Epoch Times.
“During the last tax reform, the CCP transferred a lot of tax rights and benefits to the central government, so the local governments actually received less money. Later, they came up with a way to overcome this problem, which was to sell land,” Mr. Xie said.
“Now, after the real estate bubble burst, the income from land sales has dropped sharply, and to almost none. In fact, many local governments can no longer pay salaries to their staff and have to ask the central government for money.”
Mr. Xie said that the CCP won’t let local governments go bankrupt, but the central government can’t afford to bail them out.
“Now [the CCP central government] are letting the local governments increase taxes and decide how much to increase by themselves,” he said.
Mr. Xie predicts that the local governments will increase taxes drastically and increase the burden on citizens, “just like killing the goose that lays the golden eggs. It will reduce the government’s deficit pressure, but it will put more pressure on the people.”
Mr. Xie said that the CCP is basically forcing the people to rebel.
Harmful to Consumption and Overall Economy
Taiwanese economist Huang Shicong told The Epoch Times that the CCP’s finances are facing considerable difficulties, and many local governments are stuck in debt traps.“Imposing these taxes is just transferring wealth from ordinary people to local governments,” Mr. Huang said.
He said this will reduce people’s spending power, which, in turn, will affect the fiscal system.
“This move is only a short-term operation, but in the long run, it will definitely affect the development of the entire economy,” Mr. Huang said. “Maybe one day, people will have no money to be collected by the governments. This is a situation of drinking poison to quench thirst.”
Li Hengqing, an economist based in the United States, told The Epoch Times that after Xi Jinping came to power, the central government’s fiscal power was greatly expanded, and all the money was brought to the central government.
“Now, the debt has put great pressure on local governments, and the central government has no money to bail them out, so the power to levy taxes is being given to local governments in various places,” Mr. Li said.
He said that unlike in democratic countries, “in communist China today, the levy of taxes and the increase of taxes are not approved by the people.”
Mr. Li said he believes that if the central government encourages local governments to try to solve fiscal difficulties through increasing taxes, “it eventually will cause social unrest.”
“The central government has not said that it will take the blame for the local governments for it, so local government officials might be very cautious about it,” he said. “If the attempt fails, they may lose their lives. Therefore, the current proposal of raising local taxes is meaningless.”
