China Environmental Law

More information on the proposed changes to China’s tax revenue allocation scheme, and the impact of those changes on environmental protection.  Here is the current national/local spilt according to a new article  in the  Economic Observer:

• Income taxes (corporate and individual): 60% national/40% local
• Value-added taxes (VAT): 75% national/25% local

Here are the two proposals for change, both of which aim to “redirect a significant portion of taxes that were being collected at the local level to China’s central government”:

1. Ministry of Finance (MOF): corporate and local income taxes: 100% national government; VAT: 65% national/35% local.
2. National Development and Reform Commission (NDRC): corporate and local income taxes: 60% national/40% local; VAT: 100% national.

I suspect the NDRC plan actually increase national revenues the most. The NDRC’s rationale for directing 100% of VAT taxes to the national government was based on the fact that

To guarantee value-added tax revenues, . . . local governments often push the development of manufacturing companies, wasting natural resources.

Thus, there was an explicit environmental policy basis for the proposed change. It clearly supports the Ministry of Environmental Protection’s priority of toppling the “development is king” mentality among local officials. The NDRC suggests that “[l]ocal governments should stress public services more and let the central government handle their economic development [which will no doubt enhance the NDRC's authority, but all for a good cause].”

To some local officials, the tax reform seemed headed in the opposite direction they had expected. Recent years have seen many complaints over local financial plights and calls for more local share in taxes, which the central government had promised to react to.

At a seminar on tax reform organized by the NDRC last year, whether to tighten or loosen the central control of tax collection became a heated debate. Shortly thereafter the 17th National Congress of the Chinese Communist Party responded–in Chairman Hu Jingtao’s report to the Congress, he proposed building up a tax system where “financial power matched administrative power”.

All administrative power resides at the national level, although some of that power has been delegated to sub-national entities; therefore, I read this quote from Chairman Hu as saying financial power should be centralized at the national level, and delegated, i.e., tax revenues (not taxing power) doled out, where needed. In the environmental enforcement context this will be a vast and significant improvement. I’m sure there may be many other reasons why these proposals are not good ideas, but this is the China Environmental Law blog and we just focus on our little patch of grass. That patch will be much greener if MEP has more money.