He Dexu and Xi Penghui: Deepening the Reform of the Fiscal and Tax System with a Focus on Chinese Modernization
Finance is the foundation and an important pillar of national governance; the fiscal and tax system consistently plays a fundamental, institutional, and safeguarding role in governing the country and ensuring social stability. Since the 18th CPC National Congress, the Party Central Committee with Comrade Xi Jinping at its core has attached great importance to and coordinately advanced reforms in the fiscal and tax fields, achieving historic accomplishments in the reform of the budget system, the tax system, and the fiscal framework. General Secretary Xi Jinping has pointed out that "a scientific fiscal and tax system is the institutional guarantee for optimizing resource allocation, maintaining market unity, promoting social fairness, and achieving long-term national peace and stability." He emphasized the need to "deepen the reform of the fiscal and tax system, improve the fiscal transfer payment system, refine the fiscal systems at and below the provincial level, steadily advance the construction of the local tax system, and consolidate local basic financial resources and self-development capabilities." The "Recommendations of the Central Committee of the Communist Party of China on Formulating the 15th Five-Year Plan for National Economic and Social Development" (hereinafter referred to as the Recommendations), deliberated and adopted by the Fourth Plenary Session of the 20th CPC Central Committee [1], set forth requirements for key fiscal and tax work during the "15th Five-Year Plan" period. These provide scientific guidance for further deepening fiscal and tax reform and promoting the high-quality development of fiscal work.
An Objective Requirement for Advancing Chinese-path Modernization
Deepening the reform of the fiscal and tax system is of great significance for comprehensively advancing Chinese-path modernization through high-quality development. Incorporating it into the overall package of further comprehensively deepening reform reflects the Party Central Committee's profound considerations and strategic planning for fiscal work.
Deepening the reform of the fiscal and tax system is an inherent part of modernizing the national governance system and governance capacity. "Achieving new breakthroughs in further comprehensively deepening reform" is one of the primary goals for economic and social development during the "15th Five-Year Plan" period proposed by the Fourth Plenary Session of the 20th CPC Central Committee, with "the profound advancement of the modernization of the national governance system and governance capacity" being a core component. The establishment of a modern fiscal system is an important guarantee for this modernization, placing higher demands on fiscal and tax reform. On one hand, a modern fiscal system is the basic guarantee for the scientific and standardized nature of daily governance activities, providing necessary, reasonable, and stable financial support for the fiscal activities of governments at all levels. On the other hand, the modern fiscal system is a crucial component of the macroeconomic governance system; fiscal policy tools—consisting of budgets, taxation, and other elements—are vital forces for optimizing resource allocation, enhancing economic efficiency, promoting social fairness, and achieving macroeconomic stability. Fiscal and tax reform must properly handle the relationship between the government and the market, as well as intergovernmental fiscal relations, focusing on promoting the transformation of government functions and regulating the management of fiscal revenue and expenditure. Since the start of reform and opening up, fiscal and tax reform has served as a breakthrough point and a vanguard for economic structural reform. In the great journey of advancing Chinese-path modernization, deepening fiscal and tax reform is of great significance and serves as an important lever for further comprehensively deepening reform.
Deepening fiscal and tax reform is an inevitable requirement for the sustained and healthy development of the socialist market economy. Since reform and opening up, China has gradually established and improved the socialist market economy system, achieving tremendous economic success. In 2024, the Gross Domestic Product (GDP) reached 134.91 trillion yuan, with the added value of the secondary and tertiary industries accounting for 36.5% and 56.7% of GDP, respectively; the national per capita disposable income was 41,314 yuan, and per capita consumption expenditure was 28,227 yuan. The role of innovation-driven development has significantly strengthened, with the added value of equipment manufacturing and high-tech manufacturing above a designated size [2] rising to 34.6% and 16.3% of the total industrial added value, respectively. The "15th Five-Year Plan" period is a critical stage for basically achieving socialist modernization [3], placing urgent demands on constructing a high-level socialist market economy system, of which deepening fiscal and tax reform is a key measure. As the principal contradiction in Chinese society has evolved [4], the public's focus on economic efficiency, green development, social fairness, and regional balance has continuously increased, requiring government revenue and expenditure activities to respond accordingly. Simultaneously, a new round of technological revolution and industrial transformation is accelerating, with new business forms such as the digital economy and artificial intelligence flourishing, and their impact on fiscal revenue and expenditure methods is becoming increasingly apparent. Deepening fiscal and tax reform to adapt to these new characteristics and trends in economic development has become an intrinsic requirement for building a high-level socialist market economy system.
Deepening fiscal and tax reform is an important force for economic and social transformation and upgrading. China's economy has transitioned from a stage of high-speed growth to a stage of high-quality development, and is currently in a critical period of transforming the development model, optimizing the economic structure, and shifting growth drivers. Deepening fiscal and tax reform is a key focal point for promoting this transformation. On one hand, some traditional industries contain abundant financial resources; the transformation and upgrading of the economy and society will inevitably impact existing financial capacities, a phenomenon more common in primary-level [5] finances. Relying solely on central transfer payments cannot fundamentally solve the "tight balance" (紧平衡) problem of primary-level finance; it is necessary to strengthen the coordination of financial resources through deepening reforms in budgeting, taxation, and the fiscal system to guarantee the available financial resources of local governments and provide support for economic and social development. On the other hand, economic and social transformation requires balancing the cultivation of new kinetic energy with the renewal of old kinetic energy, using fiscal and tax reform to incentivize market entities to upgrade and foster new drivers of economic growth. China has a vast territory with diverse resource endowments and certain regional gaps; the ability to cultivate new drivers and undertake new industries also varies. By increasing financial support and optimizing policies through fiscal and tax reform, China can effectively promote a smooth transition between old and new growth drivers.
New Challenges Facing Fiscal and Tax Reform
Through years of reform practice, the framework of China’s fiscal system has been basically established, and its fiscal strength has continuously grown. At the same time, it must be noted that as the comprehensive deepening of reform moves into deeper waters, various new problems and challenges will inevitably be encountered on the road ahead.
Currently, the problem of gaps in urban-rural regional development and income distribution remains prominent. Achieving common prosperity is not only an essential requirement of socialism with Chinese characteristics but also an important feature of Chinese-path modernization. However, common prosperity is not simple egalitarianism; rather, it involves making the "cake" bigger through high-quality development and dividing the "cake" well through reasonable institutional arrangements, thereby promoting coordinated urban-rural and regional development and improving people's well-being. How to improve the fiscal and tax systems and mechanisms to steadily promote common prosperity is an important issue that needs to be studied now and in the coming period.
The deepening degree of population aging is changing the current fiscal operation model. This not only has a direct impact on the scale of fiscal revenue and expenditure but also places new requirements on existing operational models by changing the structure of revenue and expenditure. By the end of 2024, the population aged 60 and above accounted for 22% of the total population, and is expected to exceed 30% around 2035. Rapid aging places urgent demands on fiscal and tax reform; it is imperative to accelerate the formation of a fiscal and tax system that adapts to the changing demographic situation.
China's economy is in a period of transition between old and new growth drivers, and fiscal operations are in a state of "tight balance." In 2024, general public budget revenue was 98.1% of the budgeted amount, with tax revenue decreasing by 3.4%. In 2025, national general public budget revenue is expected to grow by only 0.1% year-on-year. How to orderly advance various reforms under a state of tight fiscal balance and lay a more solid foundation for basically achieving socialist modernization is a major subject facing fiscal and tax reform.
Several Important Principles to Grasp in Deepening Reform
To deepen the reform of the fiscal and tax system and accelerate the establishment of a sound system compatible with Chinese-path modernization, we must accurately grasp several important principles.
First, enhancing fiscal sustainability. The Recommendations clearly propose to give play to the role of proactive fiscal policy and enhance fiscal sustainability. The basic function of the fiscal and tax system is to guarantee and stabilize the necessary fiscal revenue to support the government's necessary expenditure activities. In 2024, the national tax revenue was 17.50 trillion yuan, accounting for 79.64% of general public budget revenue and 42.82% of the total of the "four budgets" [6], representing a decrease of 5.9 and 8.0 percentage points, respectively, compared to 2013. The decline in tax revenue has forced governments at all levels to alleviate "tight balance" pressures through other one-time revenues, which affects the efficiency of resource allocation. Therefore, fiscal and tax reform must focus on enhancing fiscal sustainability.
Second, improving economic operational efficiency. Finance is an important policy tool for improving economic efficiency. From the perspective of institutional design, it is necessary to reduce resource misallocation and guide the rational flow of factors of production, thereby promoting high-quality economic development. Furthermore, while safeguarding fiscal revenue and regulating social functions, the principle of neutrality should be maintained as much as possible to minimize direct government intervention in microeconomic activities and create a fair and reasonable tax environment. The formulation of public policy needs to handle the relationship between the local and the global, and the current and the long-term, preventing excessive intervention from distorting market signals while avoiding short-term or fragmented measures that trigger redundant investment.
Third, maintaining social fairness. Promoting social fairness is an important guarantee for long-term national stability. Fiscal and tax reform must maintain social fairness, gradually narrowing the income gap between different groups through tax optimization and fiscal system changes, fully releasing the potential of human capital, and enhancing the vitality of the consumer market. From the revenue side, this involves gradually increasing the proportion of direct taxes and reducing the actual tax burden on low- and middle-income groups; from the expenditure side, it involves increasing investment in education, healthcare, and social security, and promoting the equalization of regional financial resources through transfer payments.
Fourth, promoting macroeconomic stability. Currently, uncertainty and instability in the external environment are increasing, and China's economic operation still faces many risks and challenges. Fiscal and tax reform should help give play to the role of proactive fiscal policy and promote macroeconomic stability. On one hand, this requires innovating fiscal policy tools and systems to achieve greater efficacy in proactive fiscal policy. On the other hand, fiscal and tax reform often touches upon the adjustment of interest patterns; a dynamic balance must be sought between institutional design, the pacing of implementation, and supporting safeguards.
Highlighting Key Areas to Drive Effective Reform Implementation
The fiscal and tax system concerns the overall economic and social situation. Deepening fiscal and tax reform requires highlighting key areas, planning actively, and advancing steadily to better serve the construction of Chinese-path modernization.
Establish a budget system that is comprehensive, standardized, transparent, scientifically standardized, and subject to strong constraints. Improving the modern budget system is of great significance for better playing the role of the government and optimizing resource allocation. To deepen the reform of the budget management system: first, strengthen the coordination of fiscal resources and budgets, bringing all revenue obtained by virtue of administrative power, government credit, and state-owned resources and assets under government budget management to enhance the budget's ability to safeguard the implementation of major Party and state policies, with a focus on managing revenue from state-owned capital operations and debt. Second, strengthen budget performance management, deepen "zero-based budgeting" reform, and scientifically allocate fiscal resources to solve the problem of rigid expenditure structures and effectively alleviate "tight balance" pressures. Third, unify the power of budget distribution, improve the uniformity and standardization of budget management, and better serve major national strategies to ensure funds flow into key areas.
Improve a tax system conducive to high-quality development, social fairness, and market unity. Taxation is the main source of national finance and a sharp tool for regulating income distribution. To deepen tax reform: first, form a tax system compatible with new business forms. In 2024, the added value of China's core digital economy industries accounted for about 10% of GDP, and the circulation of data factors promoted the efficient allocation of production factors. In this context, taxpayers, locations of taxation, and tax objects in market economic activities may become blurred; researching a tax system compatible with new business forms has become an inevitable choice. Second, improve the direct tax system. It is suggested to give full play to the regulatory role of individual income tax in income distribution, improve the individual income tax system that combines comprehensive and categorical elements, refine tax policies for business income, capital income, and property income, and implement unified taxation on labor-based income. Pacing should be carefully managed to avoid capital flight caused by an excessively high direct tax burden. Third, deepen the reform of tax collection and administration. The rapid development of the digital economy provides opportunities to refine tax collection models; the "controlling tax through data" (以数控税) model utilizes digital technologies such as big data, artificial intelligence, and blockchain to empower tax administration, helping to break down information silos, strengthen tax supervision capabilities, and plug potential loopholes.
Establish a central-local fiscal relationship characterized by clear powers and responsibilities, coordinated financial resources, and regional balance. Deepening fiscal and tax reform is an important measure to alleviate the contradiction between revenue and expenditure and reduce the pressure on local fiscal operations. On one hand, expand local tax sources and increase local autonomous financial capacity. Consideration can be given to moving the collection stage of consumption tax downstream and steadily delegating it to local governments, improving the Value-Added Tax (VAT) credit refund policy and deduction chains, and optimizing the sharing ratios of shared taxes. Improve the fiscal transfer payment system, clean up and standardize special transfer payments, increase general transfer payments, and improve the degree to which the financial resources of cities and counties match their respective administrative powers (事权). Appropriately devolve certain non-tax revenue management authorities to be managed differentially by local governments based on actual conditions. On the other hand, appropriately strengthen the central government's administrative powers and increase the proportion of central fiscal expenditure. In principle, central fiscal powers should have expenditures arranged through the central level to reduce the number of central powers delegated to local authorities. For common fiscal powers, the central government can further increase the proportion of fiscal expenditure and increase support for underdeveloped areas.
(The authors are both special researchers at the CASS Research Center for Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era)