Chapter 2. On Trade Surplus from Property Rights 35
3.5 Reasons for the Underestimation of the Service
Why does the service industry of China account for such a low pro- portion in the GDP? This situation can be attributed to two reasons, namely, the change in the statistical system of China and the loss of a large amount of data in the service industry.
First, the change in the statistical system of China is likely to lead to the underestimation of the data in the service industry.
Two accounting systems are applied in the world, namely, the sys- tem of material product balance (MPS) and the system of national
74 From Trade Surplus to the Dispute over the Exchange Rate
accounts (SNA). The MPS mainly describes the flow of physical objects in the process of production and exchange, and the SNA includes the service activities of non-material production. In 1952 and 1984, China adopted the MPS. Under the planned economy sys- tem, the authorities placed much focus on the MPS. They paid more attention to the products than to the exchange and treated the ser- vice industry of non-material production lightly. When the economic reforms began in 1982 and 1992, China simultaneously adopted the MPS and the SNA. The National Bureau of Statistics issued not only the national income data with the MPS as the core but also the GDP data with the SNA as the core. The contradictions and confusion between the data are unavoidable because of the co-existence of two different statistical systems.
In the 26th UN Statistical Commission Meeting in 1991, all coun- tries around the world agreed to take the SNA as the basis for inter- national economic statistics. Eastern Europe and Russia decided to use the SNA as soon as possible. In 1992, China enactedthe National Economic Accounting System of China (Trial Scenario, 1992) with reference to the internationally accepted standards. Since 1993, the statistical data of China have gradually dovetailed the international standards. By canceling the MPS and adopting the basic accounting principles and methods of the SNA, China has designed and compiled the input–output table, fund flow statement, balance sheet, and bal- ance of payments statement based on its specific conditions. The country has also set up the national economic circulation account and successfully solved the connection of the historical data under the two economic accounting systems.
The World Bank and the main statistical institutions all attach great importance to the estimate of the GDP of China. In 1992, the World Bank adjusted the data of China and pointed out the deviation of the different degrees of overestimation or underestima- tion of the self-produced food, inventory increase, welfare services, and subsidiaries of enterprise losses. The data are difficult to unify because of the multiple standards of the statistics of the rural service industry, the housing services of residents, the rural industrial, and
Interpreting the Economic Scale of China 75
the agricultural and sideline products. After five years of improve- ment, in 1999, the World Bank sent experts to Beijing to conduct a detailed investigation on the data source and statistical methods of the estimate of the GDP of China. The World Bank made the fol- lowing conclusion: “We have no reason to believe that the statistics of China’s GDP is worse than that of other developing countries.”3 Since then, the World Bank generally accepted the official estimate of the GDP of China.4
In April 2002, China joined the General Data Dissemination Sys- tem, whose framework covers four aspects of requirements formulated by the International Monetary Fund (IMF), namely, data character- istics, quality and integrity of data dissemination, and public access.
On December 23, 2003, the National Statistical Work Conference was held in Beijing, which aimed to improve the GDP accounting and data dissemination system, implement the reform of the national census system, and adjust the census projects and cycle. Despite the many deficiencies of China’s GDP statistical system, China devel- oped toward the correct direction with a positive trend.5 As a large country, China has run for 30 years under the planned economy sys- tem so the people have formed a fixed understanding of some of the statistical terms. The inertia of the traditional customs is severe. A long time of education and correction is necessary to change these perceptions. As the statistical system of China has not fully separated from the MPS system and is still in the transition process toward the SNA, the loss of several data in the service industry in the statistics of the country is understandable.
3When affirming the progress of China, this statement also objectively points out the existence of a considerable gap between the statistics of China and the universal stan- dard. See 21st Century Business Herald, “GDP Reform: Entry of Statistics into WTO”, December 29, 23.
4The World Bank maintained that the necessary original data of the service industry should be added to the statistics of China. The calculation of the agricultural and indus- trial outputs using the method of the constant price needs further consideration. As the comparable price may overestimate the growth rate of agriculture, industry, and even the entire national economy, adopting the price index deflation method is recommended.
5See Xu (2001), Reform and Development of China’s National Accounting System, China Statistical Press.
76 From Trade Surplus to the Dispute over the Exchange Rate
Second, the tax system reform of China is seriously backward, resulting in the loss of some data in the service industry.
Both the manufacturing industry and agriculture have specific products, but the service industry largely involves relationships among people, such as in haircutting, medical care, household man- agement, and so on. Without the visible products, the means through which the data of the service industry should be calculated has always caused difficulty in statistics. In western countries, the data of the ser- vice industry mainly come from the process of taxation. They obtain the output data of the service industry through the individual income tax returns. Therefore, a complete set of individual income tax return procedures is necessary, and the appropriate incentive mechanism in the collection of the individual income tax and the subsequent tax refund process should be designed to encourage the people to partici- pate in the process of designing an appropriate incentive mechanism.
These steps will motivate people to report their individual income taxes accurately.
As presented in Tables 3.5 and 3.6, the individual income tax is a main tax in the tax system of Western countries, accounting for 15%–
55% of the government revenues. In 21 industrialized countries, the
Table 3.5: Proportion of the individual income tax in industrialized countries.
Proportion Proportion in the Year in the GDP total tax revenue
The U.S. 1978–1982 9.55 48.51
Canada 1977–1981 6.42 41.22
Australia 1978–1982 13.35 55.19
Japan 1977–1981 4.12 36.72
France 1978–1982 4.89 13.07
Germany 1977–1981 4.28 16.00
Italy 1977–1981 7.80 24.91
The UK 1978–1982 10.90 35.40
Average 8.12 29.04
Source: IMF, Government Finance Statistics Yearbook, 1985 Volume 9. The last line in the table is the average value of the 21 industrialized countries.
Interpreting the Economic Scale of China 77
Table 3.6: Proportion of the individual income tax in China (100 million yuan).
1990 1995 2000 2009 2010 2013
Total tax revenue 2821 6083 12581 59521 73202 110531 Individual income tax 21 131 659 3949 4837 6532 Proportion of the 0.74% 2.15% 5.24% 6.63% 6.61% 5.90%
individual income tax in the total tax revenue
Source:China Statistical Yearbook, 2014.
proportion of the individual income tax in the financial revenue of the government is 29.04% on average. However, in 2013, the individual income tax in China accounted for only 5.9% of all taxes. Thus, the tax system of China apparently still retains the characteristics of the planned economy.
China has not yet established the corresponding individual tax declaration and tax refund systems, and many people have low aware- ness of paying taxes. Therefore, the proportion of the individual income tax is very low. Moreover, the contributions of the great number workers in the service industry are not included in the GDP.
For example, at least tens of millions of domestic service attendants (housekeepers) are employed in China, but these people do not pay any tax. In Western countries, homemaking service is an important part of the service industry, and consequently, the contributions of the homemaking service are included in the GDP. However, this part is not included in the statistics part of China. People have a cer- tain misunderstanding that, as homemaking service attendants are paid generally miserable wages, whether they are taxed or not does not matter much. This is true in terms of the financial revenue, but statistically, it results in the loss of data on the contributions of tens of millions of workers. The individual economy accounts for a large proportion in the service industry, but tax evasion is com- mon among many small enterprises (especially the independent busi- nesses). These are the reasons why the data of the service industry are significantly underestimated.
78 From Trade Surplus to the Dispute over the Exchange Rate
Therefore, China should promote a tax reform, relieve the tax bur- den of enterprises, increase the employees’ wages, and appropriately increase the proportion of the individual income tax, thus gradually transferring the main tax burden from the enterprises to the individ- uals. At present, the proportion of the individual income tax is so small that it cannot regulate the income gap. Progressive individual income tax can effectively narrow the gap between the rich and the poor and let the rich pay more taxes and the poor pay less. If the tax burden is undertaken by the enterprise, the chairman and the com- mon employees bear the same shares of tax. China has also designed a progressive tax system, but because of the low proportion of the individual income tax, it cannot regulate the income gap. From the economic theory, when the same tax is collected, taxing consumers instead of the producers is more effective. Placing the tax burden on the shoulder of the producers will easily result in efficiency loss.
Refer to Tax Reform in China (in Chinese) and Understanding the Gap between the Rich and the Poor in China (in Chinese) written by Xu Dianqing for a discussion on the tax reform. The discussion will not be repeated here.
The data of the service industry can only be accurately calculated when the proportion of the individual income tax is increased to a reasonable level through tax reform.