Tax reform charts new path for development – Opinion

The resolution of the third plenary session of the 20th Central Committee of the Communist Party of China, held from July 15 to 18, said that China will “deepen reform and advance China's modernization under the rule of law and ensure the unity between reform and the rule of law.”

As finance is the cornerstone of good governance, China must ensure that its financial policy supports comprehensive reform and contributes to the country's modernization, which is a difficult task given the complexity of the international environment and domestic problems. But, in line with the Party's guidance, China's financial policy has been designed to facilitate reform.

Achievements and new directions

Since the 18th CPC National Congress in 2012, guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, China has made remarkable progress in the financial sector while adhering to the new development philosophy that emphasizes stability and progress. It has coordinated the “Five-Area Comprehensive Plan” and the “Four-Axis Comprehensive Strategy,” keeping in mind domestic and international imperatives, balancing development and security, and pursuing high-quality development.

President Xi Jinping said that comprehensive reform is the driving force behind China's modernization. In this regard, China's financial policy has always focused on building a modern tax system in line with the national governance system, strengthening fiscal management and promoting fiscal reforms.

China's financial management, which focused on the balance between “revenue and expenditure,” has become a key tool for macroeconomic control. Active fiscal policy uses fiscal tools to manage short-term economic fluctuations and supports long-term economic transformation. Structural tax cuts began in 2012, followed by large-scale tax cuts in 2016.

These measures have reduced operational costs, helped taxpayers, facilitated business transformation and boosted consumer spending. Over the past 12 years, tax and fee cuts have exceeded 14 trillion yuan ($1.95 trillion), the largest amount among major economies, enabling China to maintain healthy growth despite economic shocks such as the COVID-19 pandemic.

China's macroeconomic tax burden has stabilized after 2023 thanks to tax reforms. These reforms have optimized major tax categories, replacing corporate income tax with value-added tax (VAT), closing loopholes in the tax system, limiting double taxation, and promoting industrial division. Corporate and personal income tax reforms have reduced taxpayers' burdens, helping finance play new roles in the new era.

New roles of taxation in national development

China's financial sector has undergone considerable development, promoting the building of a high-standard socialist market economy. The Third Plenary Session of the 18th CPC Central Committee in November 2013 set out the goals of comprehensive reform to improve the socialist system and modernize national governance.

A modern and scientific fiscal system not only modernizes financial mechanisms, but also aims to strengthen governance by optimizing resource allocation, preserving market unity, promoting social equity and ensuring long-term stability. Regarding budgetary support for poverty reduction, from 2013 to 2020, the central, provincial and local governments allocated nearly 1.6 trillion yuan (223 billion U.S. dollars) for poverty reduction work, with the central government contributing about 41.3 percent of the amount.

New functions in governance

China's financial system today is characterized by governance and control that are essential to ensuring the rejuvenation of the Chinese nation. Fiscal policy supports economic and social prosperity, ensuring stability in times of uncertainty, and the financial sector connects the state, market, society and people, maintaining the right balance, avoiding excesses and ensuring governance based on communication and coordination.

One of the new roles of the financial sector is to lay a solid foundation for China's transformation into a modern socialist country by the middle of this century. In the context of a new technological revolution and industrial transformation, finance is also the driving force for the development of new high-quality productive forces.

Since 2012, China has also seen rapid growth in investment in research and development, which has promoted innovation. According to the National Bureau of Statistics, China's R&D expenditure reached 3.3 trillion yuan in 2023, an increase of 8.1% over the previous year. And the intensity of R&D expenditure (the ratio of R&D investment to GDP) was 2.64%.

In 2023, the national fiscal expenditure on science and technology reached 1.06 trillion yuan, an increase of 7.9 percent over the previous year, accounting for about one-third of the total R&D investment. This notable growth in R&D funding highlights China's efforts to strengthen its original innovation capability and basic research.

Despite significant budgetary pressure, financial support for the science and technology sector has increased, demonstrating China's commitment to promoting technological innovation, which is essential to improving national scientific and technological strength.

Vision of the 20th CPC Central Committee

The 20th CPC Central Committee said the next few years will be crucial for advancing China's modernization and realizing national rejuvenation. However, China's financial sector, with its new roles, functions and positioning, still has room for improvement.

Against the backdrop of a new round of fiscal and tax reforms, China's financial system is about to embark on a new journey by completing certain tasks. First, it must fully implement Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era and integrate financial reforms into the Party's policies and decisions.

Second, we must understand the profound significance of the resolution of the Third Plenum of the 20th CPC Central Committee, which stressed the importance of economic reform to promote social equity, improve people's well-being and facilitate systematic integration. These efforts will better integrate production relations with productive forces, the superstructure with the economic base, and national governance with social development.

Third, China should set its reform priorities, bearing in mind that effective macroeconomic control and governance are essential to realizing the benefits of the socialist market economy. Accordingly, China will improve its macroeconomic control system, intensify financial and fiscal reforms, strengthen macroeconomic policy, and improve mechanisms for strategic planning and policy coordination.

China will also implement measures to prevent and mitigate risks in key areas including real estate, local government debt and small financial institutions, in line with the central government's requirements to complete reforms by the 80th anniversary of the founding of the People's Republic of China in 2029.

The author is an associate researcher at the National Academy of Economic Strategy, Chinese Academy of Social Sciences.

The views expressed do not necessarily represent those of China Daily.