China’s economy is on a downward trend, with mainland scholars revealing that in 2022, the Chinese Communist Party (CCP) nationwide collected a record high of 428.3 billion yuan through penalties and confiscations. Authorities have recently emphasized the need to not impose fines arbitrarily, but concerns over increased arbitrary fines arose following the announcement during the July Third Plenum to delegate some non-tax revenue management powers to local authorities. Experts suggest that China’s economy has entered a vicious cycle, with local governments lacking funds. The CCP fears that local governments might become too passive and is turning a blind eye to revenue generation through fines, a sign of a system in decline.
A recent article by Liu Chengliang, a research fellow at the East China Political and Public Management School of Soochow University, published by mainland media Observer Net, emphasized the necessity to address the abnormal growth in non-tax revenues.
Non-tax revenue, as per official data, refers to government funds received by public units apart from taxes. This includes government fund income, special income, administrative business fee income, penalty income, state-owned capital operation income, compensated use of state-owned resources, donation income, government housing fund income, and other income.
According to CCP Ministry of Finance data, in the first 7 months of this year, national tax revenue decreased by 5.4% year-on-year, while general public budget revenue decreased by 2.6% compared to the same period last year. However, non-tax revenue, a significant component of general public budget revenue, surged against the trend by 12%, with local data showing a 26.5% increase in penalty income.
Liu’s article reveals the significant growth of penalty income as part of non-tax revenue, particularly in the years after 2020. In 2013, China’s nationwide penalty income was approximately 306.2 billion yuan. This figure increased to about 311.3 billion yuan, 371.1 billion yuan, and 428.3 billion yuan in 2020, 2021, and 2022 respectively. The penalty income from 2020 to 2022 accounted for over 10% of non-tax revenues. In 2022, penalty income reached 428.3 billion yuan, accounting for 2.1% of public budget revenue and the highest in nearly a decade, representing 11.57% of non-tax revenue.
CCP’s official data has been criticized for inaccuracies, so the authenticity of the above figures cannot be independently verified.
Liu’s article points out that the abnormal growth in penalty income stems from two main reasons: the unreasonable financial revenue structure of local governments and the insufficient self-generating financial capacity of many county-level administrative regions in central and western China. With a lack of support from higher levels and limited financial space for necessary expenditures, penalty income has become an emergency measure for some local governments to make up for their financial deficiencies.
The practice of “penalty income” by the CCP has long been criticized, with instances of exorbitant penalties in several regions. For example, a senior was fined a total of 100,000 yuan by local market regulatory authorities for earning a profit of just 14 yuan from selling substandard celery.
In 2021, state-run media reported that a mountainous county in northern China generated over 30 million yuan in a year from traffic violation fines, far exceeding the general public budget income of just over 100 million yuan.
Economist David Huang, currently residing in the US, stated that due to the deficiency in land fiscal revenue and the weak profit-earning ability of local governments, penalties are the quickest way to generate revenue and can be quickly realized. Moreover, penalties have led to rent-seeking behavior. Over the past decade, due to the impact of “the state advances and the private sector retreats,” many bureaucrats and insiders believe that they can arbitrarily punish or penalize private enterprises.
He believes that following the relaxation of epidemic “zero-clearance” measures in 2023 and 2024, if the economy fails to rebound as expected, local fiscal situations will become more challenging, leading to more fines. The current economic situation shows a vicious cycle where the lack of taxation forces reliance on increased tax types and penalties.
Official CCP financial data for the first half of the year, revealed a fiscal deficit reaching a staggering 5.7 trillion yuan across all regions except Shanghai.
Huang pointed out that before 2019 and 2020, approximately 11 provinces and municipalities in China had balanced budgets, some even with surpluses. However, post-pandemic and compounded by the trade war, the overall fiscal situation has become dismal, likely resulting in increased penalty income. This tactic, while temporary, exacerbates the downward spiral of the economy.
Chinese-American economist Li Hengqing emphasized that as each dynasty reaches its later stages and faces financial difficulties beyond what regular taxation can solve, resorting to arbitrary fines becomes the norm. Fines also have a covert aspect, with practices like collecting tolls on public roads, targeting out-of-town vehicles for fines while sparing local ones, often due to intricate local connections.
Li noted that the authorities have been emphasizing ending arbitrary fines, suggesting the severity of the situation regarding discretionary fines at the local level. While such directives may lead to some restraint in local fines, they do not address the fundamental issue. To truly solve the problem, significant tax reductions, promoting private sector participation in the economy, and reducing the market monopoly of state-owned enterprises are essential.
It is worth noting that following the CCP Third Plenum in mid-July, financial powers were decentralized to local governments. On July 31, Wang Dongwei, Deputy Minister of Finance of the CCP, announced that primary responsibility for non-tax revenue management now lies with local authorities. This shift aims to delegate some non-tax revenue management powers to local regions based on actual needs for differentiated management. Regarding toll roads, fees are to be optimized based on the principle of “user pays.” The CCP has not elaborated further on how this “differentiated” management and “optimization” will be implemented.
Li Hengqing stated that by delegating jurisdiction over non-tax revenues to local governments, the CCP’s central government intends for regions to fend for themselves, allowing them to utilize any means necessary to raise revenue. In such a scenario, whoever can get their hands on the money would be deemed a hero. In this context, the only option left is to exploit the common people, as they lack power and resources to resist, thereby being subjected to arbitrary actions.
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