China's dramatic increase in fiscal revenue this year has sparked debates over a possible tax cut.

In my view, an all-round tax reduction is not in the country's best interests, but a slight tax readjustment caters to the current economic situation.

In the first half of this year, the national tax revenue hit 758.5 billion yuan (US$91.4 billion), a 27 percent increase year on year.

Many factors, including sustained economic recovery and improvement in corporate profits, contributed to the increase.

In the first half of the year, the production and marketing of the industrial sector have seen further improvement from last year. The profit of State enterprises significantly increased, and strong export and import activity raised people's incomes substantially.

The economic upturn has provided ample tax sources. Strengthened tax management, which has effectively prevented tax evasion, has also contributed to the rising tax revenue.

The debt-equity swap campaign, which transfers the debt of State enterprises in the red to relevant debt management companies, has progressed successfully with 80 percent of the 580 involved firms now operating in the black.

The increased tax revenue signifies that the proportion of social resources the government possesses has remarkably increased.

By 2000, the ratio of China's fiscal revenue to its gross domestic product (GDP) had risen to 15 percent from 10.7 percent in 1995.

The rise reflects the shifting of resources possessed by non-governmental sectors to the government.

However, farmers, laid-off workers and repositioned redundant personnel have experienced significant declines in disposable income, which translates into stagnant consumption demand.

Non-public enterprises, including collectively owned firms, private enterprises, individual businesses and shareholding companies, have also been affected by the shift in resource allocation.

Compared with the public enterprises, the disposable incomes of private sectors have decreased, evidenced by diminishing investment and output value.

The increased fiscal revenue may also possibly squeeze out private investment, which is vital to the vigor of the national economy.

There are debates in the academic circle as to whether increased government tax revenue and the issuance of treasury bonds will have a squeezing-out effect on private capital. In my opinion, this may lead to the forced exit of private capital from some investment fields.

According to economic theory, an increase in governmental investment will push up the interest rate of capital and thus raise the costs of private investment. Theory speculates that increased costs will affect the expected profits of private investment and dampen their enthusiasm.

The interest rate in China is controlled by the government and fluctuates little. In view of this, a squeezing-out effect is unlikely to result when fiscal revenue increases.

But when considering the overall capital in the market, the increased tax revenue will lead to a decrease in the disposable capital of non-governmental sectors, especially some private enterprises, which will lessen their investment accordingly.

This is the fourth year that the government has continued its proactive fiscal policy. The pouring of governmental investment into infrastructure, State-owned enterprises and the less developed western area to stimulate the economy is in reality an adjustment of industrial structure.

Given the long-term nature of infrastructural construction, the implementation of the policy requires the support of ample fiscal revenue.

If the policy continues, the economic structure is likely to change, with the proportion of the infrastructural sector and related industries, such as iron and steel, cement and building materials, rising significantly.

Given the impact of the fiscal revenue increase on the economy, the government should consider partially cutting taxes.

Tax cuts in certain industries will stimulate private investment and push forward economic restructuring.

The government should also attach importance to solving lingering economic problems, such as the non-performing loans of banks.

While issuing large amounts of treasury bonds to support infrastructural construction, the government must be cautious as to whether its fiscal capacity can support the payment of the debts in the long term.

Another potential problem is that the market has not played its full role in allocating social resources.

The government-led economic restructuring may lean towards public projects, State enterprises and the monopolized industries. If the role of the government in economic restructuring is overstressed though, the economic structure faces the danger of being distorted.

For this reason, efforts should be made to bring out the role of the market in economic structuring.

(The author is a researcher with the Development Research Center under the State Council.)

(China Daily 09/22/2001)