Ahmad, Ehtisham, Raju Singh, and Mario Fortuna, 2004, “Toward More Effective Redistribution: Reform Options for Intergovernmental Transfers in China,” IMF Working Paper, WP/04/98 (Washington: International Monetary Fund)
Ehtisham Ahmad and Raju Singh are Division Chief and Senior Economist, respectively, in the Fiscal Affairs Department, and Benjamin Lockwood is Professor of Economics at Warwick University. This paper forms part of a larger project, which also included Professor Mario Fortuna (Azores).
The simulations presented here use available published data from the China Statistical Yearbook.
This is based on the fact that the exempt sectors comprise the primary sector (agriculture), the construction sector, and all services, and government sectors except for commerce.
In the 1997 input-output table, input-output coefficients are reported for all the components of secondary industry separately (mining and quarrying, foodstuffs, textiles, other manufacturing, electric power steam and hot water, gas and petroleum, chemicals, building materials and non-metal products, metal products, and machinery and equipment). We calculate the unweighted average of these coefficients, and then apply this average to the figure for secondary industry minus construction. Note that provincial input-output tables were not available and there may be differences in the coefficients across provinces. Thus, the estimates above should be seen as rough approximations, or illustrations of method.
Figure 1 shows the more realistic case of 50 percent collection efficiency, but the picture is similar in the other polar case of 100 percent collection efficiency. Note also that three outlying provinces are responsible for the inverted U-shape. If these provinces are excluded, the richer provinces would be seen to lose more than the poorer ones.
Generally, the formula is that the new rate (as a fraction), is equal to 0.25 times 134.17/(134.17-X), where X is the revenue gain/loss in billion of yuan as given in Table 3, so X = 20.94 or 41.87.
In 2001, the financial and insurance sectors accounted for 28 percent of the business tax proceeds.
In terms of the Chinese classification of national income, the service sectors added to the VAT base are: services to farming, forestry and fishery, geological prospecting and water conservancy, transport, storage, post and telecommunications services, real estate, other; and one-third of: social services, health care, sports and social welfare; education, culture, arts, radio, film and television; scientific research and polytechnic services.
Let Ri denote the business tax revenue in province i. Then (i) states that ai = λsi for province i, where si is the share of insurance and finance in province, and (ii) states that
Of course, when the VAT share of 25 percent is included, a province receives 25 percent plus the incremental tax share