ASIAN Development Bank Vice President Stephen Groff, speaking at the China Development Forum 2013, against the backdrop of the leadership change in China, cautioned that failure to overhaul taxation and fiscal transfers to balance income distribution could pose a major risk to the sustainability of the country’s growth.

Recent fiscal reforms in China had reduced the number of personal income tax payers to less than 3 per cent of the population. Tax evasion was high and collection and enforcement were low. Moreover, the narrow base left policy-makers with no powerful income distribution tool. Therefore, Groff advised China to broaden the income tax base through measures to curtail tax evasion, reduce the informal sector in the economy, and strengthen tax administration.

Currently the VAT was China’s single largest source of tax revenue, but it was regressive. Direct taxation was more effective in adjusting income differences, and therefore more equitable. Therefore taxing capital gains and property, and introducing inheritance and gift taxes would also help to balance income distribution, suggested Groff.

Improved tax collection would allow for higher social expenditure. Increased fiscal spending on health, education and pensions would reduce life-cycle savings, free up household resources for consumption, increase living standards and help to balance income distribution. While the Government was piloting some important initiatives, such as the introduction of a property tax on luxury housing, the ultimate goal had to be a genuine property tax based on home values and universally imposed on all urban homes.

Without overhauling the tax revenue sharing system between the central and local governments, large disparities in public social spending per person would emerge, and perpetuate inequality.