China: How Can Revenue Reforms Contribute to Inclusive and Sustainable Growth?

IMF Working Papers, March 24, 2015

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Revenue reforms can contribute to more inclusive, green, and sustainable growth in China.
Relative to OECD economies, fiscal policy in China is less redistributive.
The reforms considered could potentially boost revenue by as much as 6½ percent of GDP.
Additional revenue could be used to reduce the deficit, finance priority social and infrastructure spending, and offset cuts in other taxes.
The paper illustrates how revenue reforms could be part of a comprehensive fiscal package that achieves the needed consolidation in the (augmented) deficit and fosters higher quality growth.

Improve the progressivity of labor taxes:
- Reform individual income tax.
- Adjust social security contributions to increase progressivity.
Introduce a recurrent property tax to broaden and diversify the tax base.
Finish the transition to a comprehensive value-added tax.
Increase environmental taxes to promote a more environment-friendly economy.

Revenue boost estimate:
- Potential increase in revenue: 6½ percent of GDP.
Suggested uses of additional revenue:
- Reduce the fiscal deficit.
- Finance priority social spending.
- Finance infrastructure spending.
- Offset reductions in other taxes while maintaining fiscal balance.

Framing: Revenue reforms are evaluated for their capacity to support inclusivity, environmental sustainability, and fiscal consolidation.
The paper situates China’s fiscal redistribution relative to OECD norms and identifies tax-structure reforms to enhance equity and environmental outcomes.
The proposed reforms are illustrated within a comprehensive fiscal package aimed at consolidating the (augmented) deficit and improving growth quality.

IMF Working Paper No. 2015/066 (March 24, 2015), 30 pages.