China Daily reported recently that China's tax revenue for 2006 grew by almost 22%. Over the same period, GDP grew by 10.7%. Both numbers are impressive by any measure. The discrepancy between them is most curious. Since GDP is the sum of all income, companies or individuals, and all income are subject to taxsation. Obviously, China's tax burden was not distributed evenly and the government was on the more profitable side.
Personal income taxes account for only 6.5% of the total tax revenue. The rest came from the corporate sector. In 2006, urban investment and industrial enterprises grew 26.6% and 30.7% respectively. These two sectors contributed most of the tax revenue increases. Compared to individuals, investors and companies made more money and, therefore, paid more taxes than individuals.
Since government can spend taxes only on the country it governs, taxes are a form of wealth redistribution. The simpliest way is to pay salaries to government employees. A more subtle form is to invest on infrastructure — a bridge to a remote village, a power plant when rates are regulated, high-speed data backbones, or massive projects for Olympics. These infrastructure should enable the citizens to make themselves more prosperous. So, indirectly, the wealth is redistributed. China has found a way to collect money from the most profitable sectors and invest them to fuel the growth of the whole country. The redistribution of the newly generated wealth has not been uniform. Some believe it is wrong to be, at least not now.
If we give 1.3 billion people a dollar each, the whole society is 1.3 billion dollar richer, just like if we give 1,300 people a million dollar each. But these 1,300 people will create enterprises. Those enterprises need suppliers. The ripple effect will multiply and reach widely. At the end, the society will be several times richer. Wealth works better concentrated.
What about equity? What about those millions of poor farmers in the west or rural areas? Where is the compassion when rich people get fat and happy while children are starving and left behind in the education system? I live the inequity here and witnessed the suffering. Surely something can be done.
Then I realized the truth about government. It is about priority, planning, and the selection of whom to benefit first. Throughout human history, there are always social-economical classes. Part of the population will be elite and part will get the shorter end of the stick. The job of the government is not to eliminate inequity, but to raise the quality of lives, in a sustainable manner, for most people. Impatience, short-term thinking, or succumbing to the sensational media pressure are not good governance. The choices are which and how many generations to wait for that eventual prosperity, not whether. Of course, this is a perfect disguise for corruption, but it is also the right answer. If you give the government power, it may corrupt, but it may also do much better than if you don't.
And this is why some countries experienced many decades of poverity and other reached prosperity quickly.