This is Professor Sheng Hong's address at the China Economy 50 Forum on September 16th, Beijing. The topic was added by the Editor, and this address is translated by Mr. MA Junjie, Project Researcher at Unirule.
As Professor WU Jinglian mentioned, the core issue for the protection of private property rights are the market and rule of law. In this light, I believe we economists, and this Forum, should shoulder the responsibility to address the following issues:
Firstly, in the planned economy era, we should stress the effectiveness of the market economy;
Secondly, in the transitional phase from a planned economy to a market economy, we should propose the steps, methodologies and paths;
And lastly, we should recognize that after the market economy is installed, the role of an economist is marginalized by the fact that hundreds of millions of people would make their own choices based on their own judgments, which would usher in great efficiency boost. If there’s one role that we should play, that is to raise warnings as we see the possibility of the market system being interrupted, or even reversed.
I would like to raise the warning now, because we are faced with this very situation.
To sum up the marketization process of China, I would like to emphasize two points: firstly, we have shifted to a market economy. As we transitioned from a planned economy to a market economy, economic efficiency was greatly improved, and wealth was created in a tremendous scale. Secondly, at the early phase of a market economy, the government still measures its revenue based on the standards of a planned economy. This was indicated by the fact that our government still extract a fairly small proportion from the national income based on the old standards and practices, that is to say, the macro tax rate was low.
With a growing market and wealth, and thanks to the lack of effective constraints, the proportion of the national wealth that was extracted by our government grew higher.
I raised this concern a few years ago, around 2010, that the ratio of fiscal income to GDP had increased by 12%. Adding other fees and dues, such as the land rent and compulsory safety insurances, that constituted the macro tax burden, how high is our tax rate? This is a critical issue. We had some research from the past, and now we are completing another research in this. The current research proposed several judgment of the net rate of asset return of listed industrial companies. And we concluded that this rate is lowering.
If we take into account the risk-free interest rate and a rationally-defined risk premium, and after subtraction, we get negative results. That means the profit margin has been subtracted to zero, even negative figures. Such results were witness ever since 2012.
How about 2018? Firstly, for the first half of 2018, the growth rate of general fiscal income was higher than the GDP growth rate, and the ration of the fiscal income to GDP has also been increasing; secondly, the fiscal income of 2017 was way higher than other years; thirdly, the tax reform that was recently undertaken was, in fact, about transferring the duty of collecting the dues and fees from human resource authorities to social security authorities, which in practice resulted in an increase of tax burdens for the people. Why so? After the reform, the collecting rate was based on the whole salary level instead of the primary salary level. Besides, the tax authorities have bigger and more coercive discretions than the human resource authorities, which means it would raise the rate of social and labour insurance dues. This also is an increase of our macro tax burdens.
Having said that, I would like to register my warning that our macro tax burden has become so heavy that it is likely to lead our economy to the brink of peril.