The Research On Establishing China's Tax Expenditure System

The tax expenditure system started from the financial management practices in the late 1960s and early 1970s. Acting as the scientific and systematic tax incentive management system based on"tax expenditure concept", it grants the tax incentive with the same budgetary managing methods and procedures of the direct financial expenditure, which becomes a positively important innovation in the tax incentive management reforms in western countries. The establishment of Chinese tax expenditure system by learning from experiences in western countries has been listed in the general plans of Chinese financial system reform.The research on the tax expenditure in China has been conducted for more than 20 years and significant developments have been achieved in a variety of basic principles. However, the tax expenditure is novel in China, and it is still in the preliminary phase in the aspect of understanding western experiences as well as combining the theoretical research with the systematic establishment. The dissertation aims at offering the systematic analysis on the fundamental theory and practices on the establishment of China's tax expenditure system, putting forward the concrete and relatively unified thoughts to help establish the tax expenditure system with the Chinese characteristics.The dissertation comprises of nine chapters in addition to the introduction on the status de quo of the research at home and abroad. The first four chapters covers the basic concepts and the fundamental theory of the tax expenditure system, the analysis on the international practices; the thoughts on establishing the tax expenditure system in China are discussed strategically and systematically from Chapter 5 to Chapter 9.The tax expenditure concept is the theoretical basis for tax expenditure system. The reasonable application of the tax expenditure concept is the vital prerequisite to establish the Chinese tax expenditure system. Chapter one explores the essence of tax expenditure concept by tracking the source and the comprehensive analysis, expounds ways to apply the fundamental principles of tax expenditure concept and defines the tax expenditure. Then by means of comparison between the tax expenditure and direct financial expenditure, it reveals the characteristics, advantages and disadvantages, and effects. It illustrates the significance of tax expenditure system.A unified tax expenditure system includes two aspects. One aspect includes all kinds of tax preferential terms to realize the social and economic targets; the other aspect includes all kinds of legal measures taken to manage and control the existing tax preferences. The former is the specific form of tax expenditure. The latter, as the essential contents of the tax expenditure system, includes four procedures such as project identification, cost estimates, budget and report compilation of the tax expenditure. This chapter takes it as the guiding principle, elaborates the general outline of the tax expenditure system, helps to have a better understanding, summarizes functions of financial and tax management of tax expenditure systemDifferent subjective thoughts, objective requirement and relative situations cause the differences in systematic contents, forms and methods in various countries. China's tax expenditure system should be based upon the combination of international practices and China's situation, the unity of necessity, flexibility, requirement and support. Chapter Three reviews the background and development of tax expenditure system in western countries, analyses performances of tax expenditure system in 13 typical countries and sums up some enlightening thoughts so as to lay a solid foundation for the plan and enforcement of Chinese tax expenditure system.Chapter Four analyses tax expenditure system in view of public management reform. The tax expenditure system in western countries was established to mainly handle the lack of control and invalid operation of tax relief, optimize the financial expenditure framework, promote the tax reform and enhance the financial transparency. But in a broad sense, tax relief management is categorized in the public management. By means of Public Economics, New System Economics and Information Economics, the analysis indicates that the tax expenditure system plays a positively significant role in remedying legal deficiencies, invalid governance contract, perfect systematic establishment and code conveying while tax relief system plays the positive role. The theoretical understanding lays a solid foundation on the establishment of tax expenditure system.The malfunction on tax relief leads to the establishment of China's tax expenditure system as well as that in western countries, whereas causes to malfunction in China are quite different from those in western countries. It belongs to typical governmental malfunction. Chapter Five emphasizes the necessity to establish the tax expenditure system in China, clarifies the misunderstanding to tax expenditure system, highlights guidelines and general strategies to establish China's tax expenditure system. As for guidelines, the practical and realistic approach should be pursued. The gradual proceeding, skillful handling of the relationship between regulation and characteristics are desirable. The choice of target on tax expenditure system rests on coordinating financial aggregate, enduring the financial equality and optimizing preferential structure. The management of tax expenditure budget includes turnover tax and enterprise income tax, deals with some major tax categories and tax preferences in the economic field. The tax expenditure system is implemented to aim at the basic model of the comprehensive budgetary management in western countries, transcending the quasi-budgetary management model of foreign countries by stages and by levels.Chapter Six discusses the identification and attempts in China's tax expenditure. The tax expenditure identification is the qualitative analyzing process on the tax expenditure. It mainly deals with the standard tax base, how to define income, clarification of basic tax system and category of tax structure of preferential terms. The identification of China's tax expenditure takes international experiences as reference to China's financial and tax system, weighs financial and tax situations in China. First, feasibility is the priority. Feasible international experiences can meet China's situation. A compromising plan should be made by means of balancing two kinds of identifying methods such as the specific, strict method and the general, rough method. Defying the basic tax system is based on the tax category and tax expenditure items without considering the dispute on uniform tax base in a theoretical way. The basic tax structure of income tax is decided by the regular income defined by transaction in the international practice. The reference basis and the normal basis by US Ministry of Finance are the model for judging standard for basic tax system. Simple order method is referred for the classification of some difficult preferential terms. Second, practical and independent principles are required to make specific identification while ignoring controversy between China's relevant tax system and tax policy. Third, the scientific planning and practicability are the practical standard on identification applied in China. Fourth, right-duty system is regarded as the accounting basis to define basic tax system and tax expenditure. Fifth, necessary and flexible adjustment to the principles of established tax expenditure identification is required with the development of tax reform. By taking enterprise income tax and value added tax as examples, this chapter attempts to offer tax expenditure identification and puts forward a series of identification principles.Chapter Seven discusses tactics and methods of estimate of China's tax expenditure cost. The estimate of tax expenditure cost is the qualitative analyzing process on the tax expenditure This chapter highlights the main tactics for the estimate of tax expenditure cost in present situation. First, the universal preliminary-phase principle and simplicity are observed for amount estimates. Second, the basic principles of the revenue forgone approach and revenue gain approach in foreign countries are employed to adjust to the specific situation in China. The cost estimate of tax deferred items can be implemented to measure loss interests by either the revenue forgone approach or present value approach. Third, the accounting measures for estimate of tax expenditure cost should be kept in accordance with the present enterprise accounting and tax system. Fourth, the annual cost of tax expenditure in the future is predicted in a possible way. The estimate of tax expenditure cost mainly focuses on measures to evaluate costs of all kinds of tax expenditure items. In view of cost occurrence mechanism, all kinds of tax expenditure in existing tax regulations in China come under the subtraction and division of tax base, tax amount and tax rate, meanwhile the subtraction and division of tax amount and tax rate is connected with tax base. Thus the expenditure amount of all kinds of tax expenditure items is calculated by estimating relevant tax base. The procedures for estimating tax expenditure cost can be conducted on the macro- and micro-level in a coordinating way. Every tax payer acts as the basic unit for statistics and measurement for cost of each tax expenditure item on the micro level. On the macro level, the total approximate value of each tax expenditure cost is estimated by calculating tax revenue, evaluating samples, evaluating base or regression analysis. It is an important measure to do the calculations by using computer mini-simulated model in many developed countries. China will also follow this measure, so preparations should be made in advance. In addition, the relevant data system should be established to meet the requirement.Chapter Eight probes the theory, procedure and methodology in establishing China's tax expenditure appraisal. Based on contents and targets of reasonable tax expenditure appraisal, a unified tax expenditure appraisal system should possess a set of appraisal forms, methods, indexes and standards. The tax expenditure appraisal should center on policy effectiveness and policy scheme. In the present phase, the appraisal system of China's tax expenditure should be established mainly on the suitability of tax expenditure policy, achievement effectiveness and cost effective appraisal. The appraisal aims at providing quantitative data, guidelines to optimize tax expenditure structure, policy basis to re-allocate policy resources and implement tax reform, necessary guarantee to establish better public financial relationship and promote financial and tax management. The appraisal methods should combine quantitative appraisal, objective appraisal, qualitative and subject appraisal. The internal appraisal, follow-up appraisal and formal appraisal in governmental financial and tax departments should be given priority to. The appraisal approaches can be cost-benefit analysis, effect analysis, dynamic comparison, advantageous analysis, amortization calculation and etc. The fundamental standard to measure tax expenditure policy lies in the country's social and economic strategic and expected targets of tax expenditure policy. In order to satisfy contents and purposes of tax expenditure appraisal, detailed measuring standard or indexes of tax expenditure are established. The relationship among relevance, quantification and explanation should be effectively balanced. The calculating methods should be pluralistic. The calculation of the quasi-value of tax expenditure measurement should be based on different features of qualitative appraisal standard and quantitative standard. Chapter Nine designs the compilation and implementation of China's tax expenditure budget. The design priority is to set up the basic framework of tax expenditure budget, including the use and contents of tax expenditure report, the status of tax expenditure budget in the financial budget system, the relationship with general budget of financial revenue and expenditure, the classification of tax expenditure items, compiling method of tax expenditure table and etc. Considering the requirement for establishing tax expenditure system in China in present phase, tax expenditure report is to control the tax expenditure scale, coordinate the tax expenditure and direct expenditure, serve to adjust, optimize tax preferential policies and tax reform, enhance the transparency of tax policy, enlarge supervisory scope of tax preferences and strengthen monitoring. That will be the basis for stipulating contents of the tax expenditure report. The rolling compiling method year by year should be employed in the tax expenditure report. The rolling estimate of data in the chart is three years. The tax expenditure chart in the report should cover the tax category from less to more according to the tax expenditure appraisal and estimates. The tax expenditure budget should act as the special component of financial budget system. It is compiled and set up independent of common financial revenue and expenditure budget, It is listed in the financial revenue and payment balance system in a single row, unified analysis and balance. In the trial and tentative phase, it acts as the referential and guideline document with relevant controlling power by administration. It will become the legal component of financial budget. Under the present financial and tax system in China, tax category is the fundamental category, the tax expenditure table is compiled in the segmented method like industry, department and specific tax expenditure form. The second problem to be solved in the tax expenditure budget design is to choose the setting method for proper tax expenditure scale. The maximum of tax expenditure budget scale is determined by total amount balance of financial revenue and expenditure, the structural adaptability and balance relationship between tax expenditure and direct expenditure on the premise of balance of fixed financial revenue and expenditure targets. The minimum of tax expenditure scale is determined by the indispensable analysis of tax expenditure. In addition, the tax revenue and direct expenditure in the former Federal Republic of Germany are placed in a more important position, the tax expenditure increases lower than tax revenue and direct expenditure. The third problem is the procedure and measurement arrangement of budget management. The tax expenditure report can be co-compiled by budgetary institutions of finance and tax departments in cooperation with tax departments. The compilation starts from the second half of the year. The compiling procedure is regulation stipulation, identification estimate, appraisal, then it becomes the formal document, submitted to the People's Congress for discussion (approved) and publication. The tax administrative institutions should be in charge of the enforcement and monitor of tax expenditure budget. Tax departments act as the main administrative body. The management of tax expenditure budget should make good use of existing financial and tax managing foundation, attach great importance on the effective link between the compilation of tax expenditure budget and the existing preferential rebate budget management, coordinate management of tax expenditure budgetary terms of existing tax preferential policy, combine the management of tax expenditure budget and existing tax administration basis, especially the existing managing basis of tax preference. As for the budget control measurement on tax expenditure amount, Dutch budget monitoring system and Canadian expenditure"mail"monitoring method can be imitated. Considering the contingent liability of the tax expenditure, the risk management of tax expenditure should be monitored in the budgetary control of the tax expenditure amount.Its main originality is as follows:1. It further perfects the definition of tax expenditure and in the analysis of the characteristics of tax expenditure it discloses its nature of contingent liability that has not been mentioned in the previous literature. As a result, it remedies the theoretical oversight in tax expenditure and helps broaden the horizon in establishing tax expenditure system and enrich its administrative measures.2. While drawing on the traditional classification of tax relief, based on the key elements of the definition of tax expenditure and to meet the needs of analyzing and managing tax expenditure, it reclassifies various forms of tax expenditure. This not only helps optimize its policies , but also directly benefits the selection of its appraisal methods, the evaluation of the its contributions and the compilation of its reports.3. Drawing on the relative theories and approaches of public economics, new institutional economics and information economics, it analyzes the special mechanism and the flaws of traditional administrative model of tax relief, elaborates on the positive side of the tax expenditure system. The theoretical analysis of domestic and overseas tax structure system has never been done before. Therefore these ideas are completely new.4. The author has been doing research into the establishment of the overall strategy of China's tax structure system, the identification of its programs, the appraisal of its costs, the drawing up and carrying out of its budgets. The author has proposed some innovative thoughts, such as financial aggregate coordination, targets of tax expenditure system in the optimized structure, the implementation of tax expenditure system by stages and etc. The major progress the dissertation achieves is as follows. First, it systematically puts together, supplements, develops and perfects the author's achievements in the former researches, primarily forms a relatively complete, practical and specific institutional framework and strategic system. Second, compared with the current research achievements, it puts forward some original ideas of which the most remarkable ones are as follows:( 1 ) Based on the results of overseas tax expenditure systems, various thoughts at home and the analysis of the realistic conditions of China's tax expenditure system, it puts forward objective, positive, scrupulous and rational guiding ideology in system establishment.( 2 ) It puts forward relatively complete identifying strategies in tax expenditure with Chinese characteristics and in a specific"exemplary"identifying attempt, it puts forward identifying propositions which are different from the general rule abroad and some research results at home aiming at such tax systems clauses as tax rate brackets that are lower than the legal maximum tax rates of corporate income taxes and value-added taxes and value-added tax rebates for exports.( 3 ) In accordance with the peculiarity of China's fiscal levy management, it systematically puts forward points of views which either draw upon or discard cost-appraising experience in international tax expenditure. In the cost-computing-approach research concerning the form of specific tax expenditure, it does not simply follow domestic literature or the present-value method used in the general economic analysis and it designs detailed and practical application programs and methods used in appraising accelerated depreciation costs. In regard to the micro-simulating model construction and data system construction which the domestic literature simply mention and the macro tax expenditure cost appraisal, it puts forward some foresight opinions concerning its guiding ideology, first-phase preparations and research approaches.( 4 ) While designing the fundamental framework for China's tax expenditure budgets, it elaborates on the issue of combining the ignored tax expenditure budget management and the current basis of financial levy management and it practically brings the current tax-collecting-and-managing approaches, including tax incentive management, into line with tax expenditure budget management and transforms, supplements, perfects and constructs a series of new institutional models in tax collection and management and tax incentive management. On the issue of tax expenditure quantity control, it puts forward the idea of according tax expenditure budget some direct constraining power and designs more elaborate system for tax expenditure quantity control measures. Meanwhile, based on the contingent characteristics of tax expenditure, it advances some suggestions about the channels and methods to control tax expenditure risks.5. Tax expenditure evaluation is universally an important link both in theory and practice that calls for urgent breakthrough in the development of tax expenditure system. Currently, it has just been mentioned in research literature and some western countries have gained some local experience in it, yet no systematic research, esp. into China's tax expenditure evaluation, has been done. The dissertation has systematically discussed China's expenditure evaluation contents, its objectives, styles, methods and its benchmark and it has the significance of filling the gap and laying foundation for further research. Furthermore, apart from absorbing the evaluation methods advanced in current research literature and drawing on some methods in public policy and direct tax expenditure evaluation, it adds the amortized computing evaluation methods applicable for tax expenditure risk evaluation.The dissertation has made some achievements, but imperfection does exist as a result of lack of research conditions, research approaches and the limitation of the author. For example, the cost appraising methods of most tax expenditure styles lack further authentic simulation research; macro tax expenditure cost appraising methods still need further specifying; the construction of micro cyber simulation models and risk control for tax expenditure is still at the primary and superficial level of raising questions and reflecting upon principles; the research into tax expenditure evaluation methods is in fact mainly in conceiving stage, it is still far away from practical application; the research into tax expenditure evaluation contents calls for further effort, esp. the immediate establishment of a series of evaluation target systems. The author will try to do further research into and make more achievements in these issues in the future..