China’s tax revenue has experienced a continuous decline from late 2023 to early 2025, despite consistent GDP growth. In April 2025, there was a slight monthly increase in national tax revenues, but overall, for the first four months of the year, tax revenues fell by 2.1% compared to the previous year. The first quarter of 2025 saw an even sharper drop of 3.5%, contrasting with a 5.4% GDP growth during the same period. For the full year 2024, tax revenue decreased by 3.4%, while GDP grew by 5%.
Since the 1994 tax reform, tax revenue and GDP generally moved in tandem. However, several factors have contributed to the current divergence. One key factor is the difference between nominal tax collections and GDP figures. China’s VAT-based tax system amplifies these effects, as falling prices reduce nominal value added and thus tax revenue. Sectors like mining and real estate, once major contributors to tax revenue, have declined, while emerging industries such as new energy vehicles contribute less tax. Tax incentives, enforcement strength, and past major tax benefits also play a role.
Tax policy changes since 2018, including reductions in VAT rates and deductions for R&D expenses, have increased the scale of tax cuts. While these measures aim to stimulate businesses, they also widen the gap between tax revenue and GDP. Local governments increasingly rely on non-tax revenue to compensate for tax shortfalls. Despite a gradually falling macro tax burden ratio, some taxpayers feel their burden remains heavy due to unofficial fees and charges.
VAT, which accounts for about 40% of tax revenue, fell by 3.8% in 2024, more than the overall tax decline. Since VAT reductions in 2018 and 2019, VAT rates have been adjusted, but debates continue about whether lowering VAT rates helps enterprise competitiveness. VAT revenue and overall tax revenue began falling in December 2023 but rebounded with new policies in late 2024. However, VAT growth remains sluggish.
The introduction and expansion of the VAT credit refund system since 2019 have placed additional downward pressure on tax revenues, particularly as regions accelerate infrastructure investment. These policies, while supporting certain sectors, have amplified the rate at which tax reductions outpace tax growth, especially in advanced sectors benefiting from incentives.
Price drops, as measured by PPI, strongly influence tax revenues. When PPI falls, so do nominal value added and profits, depressing VAT and Corporate Income Tax collections. Historical analysis shows tax revenues are highly elastic to PPI changes: for every 1% drop in PPI, tax revenues drop 1.5-1.6%. This is because China’s tax structure is heavily enterprise-focused and sensitive to prices, more than to consumer or GDP deflators.
Structural economic shifts affect tax sources: mining, real estate, and finance now contribute less due to lower prices and shifting business models, such as the rise in secondary housing transactions, which are taxed less than new home sales. Fast-growing sectors like NEVs produce little tax due to efficiency-based incentives and profitability issues.
Meanwhile, non-tax revenue has grown rapidly as a “seesaw effect,” with fines and asset-based charges rising faster since 2024, and non-tax revenue predominantly driving what little fiscal income growth remains. Some regions with low non-tax revenue, such as Shenzhen, saw fiscal income fall.
Debate continues on China’s overall tax burden, which has dropped from 28-29% of GDP in 2018 to about 26% in 2023, with tax income/GDP at only 14.4%, below both peer and advanced economies. Long-term sustainability concerns arise as public spending needs rise due to population aging and debt pressures. Despite market preferences for lower taxes, further large-scale reductions may be unfeasible; reforms are needed to minimize unofficial fees and structural inefficiencies, as current excessive and irregular charges create real burdens for businesses.
— new from Caixin Global