Introduction

Between 1949 and 1978, China exercised a fiscal and taxation system adapted to a system of planned economy. Financial policy thus covered every aspect of social life. But since the introduction of the policies of reform and opening to the outside world, China's finance sector has broken away from the unified distribution of revenues and expenditures system that complied with a highly-concentrated system of planned economy, and gradually carried out reforms of the fiscal and taxation system. The reform is aimed at diversifying financial policy and distributing mostly by coordinating benefits for the purpose of controlling economic operations indirectly and guiding resource distribution. Since 1984, the Central Government first practiced different responsibility methods for revenue and expenditure in different places, and then shifted the national budget system from single entry to double entry. In 1992, in order to meet the needs of micro-control, the financial system started to be greatly reformed. By 1994, a structure of financial system meeting the needs of the socialist market economy, with tax distribution as the core, has been primarily formed. Its major contents are: (1) on the basis of the taxation system, to establish a multi-level financial system that rationally divides central taxes, local taxes and taxes shared by the central and local governments; (2) in the aspect of taxation policy, to set up a new system of turnover tax with added value as the mainstay, and consumption and business taxes as supplements, and at the same time to establish and perfect the income tax system; (3) to practice a double-entry budget system consisting of regular and constructive budgets; (4) to promote the balance of total economic output and the economic structure by means of comprehensively utilizing the budget, taxation, the state debt and allowances.

 Taxation

Before the reform and opening, China exercised a single taxation system. Because taxation had no connection with the economic activities of enterprises, this system lacked vitality. In 1981, the Chinese government began to collect income tax from Sino-foreign joint ventures and solely foreign-funded enterprises, taking the first step in taxation system reform. From 1983 to 1984, the reform consisting of the replacement of profits by taxes was carried out in domestic enterprises, and a foreign-related taxation system was set up. As a result, instead of a single tax category, a compound taxation system in which turnover and income taxes were the mainstay and other tax categories were in coordination with it was initially in place and promoted the control of finances and the economy. In 1994, the reform of the taxation system was deepened, and a complete structural adjustment of the taxation system was made by taking the market economy as the norm. In 1996, China lowered the rate of Customs duties and export drawback, and exercised import supervision.

 Fiscal Solvency

Over the past 21 years of reform and opening to the outside world, with the rapid development of the national economy and the deepening of the reform in finance and taxation, the goal of fiscal solvency has been becoming nearer. In 1978, the state financial revenue was 113.2 billion yuan, while it reached 1,137.7 billion yuan in 1999. Especially in 1999, the Chinese government continued to implement an active financial policy, expanding the domestic market by various means, including increasing state debt investment, which played a key role in stimulating the economy.

Taxation is a major source of the state financial revenue. In 1978, all kinds of taxation brought in a total of 51.93 billion yuan; in 1999, the figure was 1,031.1 billion yuan. The accumulated taxation income was 7,435.2 billion yuan from 1979 to 1999. Since the reform, the distribution relationship between the central and local finances has been gradually smoothed, a system of tax distribution under which central finances are growing in a stable manner has been established, micro-control over central finances has been improved, and a basis for standard transfer payments has been set up. Among the state financial revenue, central finances accounted for 17.58 billion yuan in 1978 -- 15.5 percent of the total; in 1999, the figure was 579.8 billion yuan -- 51.0 percent of the total.