In the perplexing Chinese economy of the past two years, there is a very significant and urgent phenomenon that needs explanation: why does GDP still maintain a growth rate of around 5%, while tax revenue continues to decline? And the gap between the two is still widening.

Looking back over the past decade, the short-term divergence between tax revenue and GDP is not the first time it has occurred, and it can often be attributed to institutional tax cuts. For example: in 2016, the comprehensive implementation of the business tax to value-added tax reform, reducing the burden on the service industry by about 500 billion yuan; in 2019, a large-scale reduction in the value-added tax rate; in 2022, under the impact of the pandemic, the introduction of 4.6 trillion yuan in tax cuts and tax refunds, accounting for 27% of the total tax revenue for that year. The margins by which tax revenue lagged behind GDP in these three years were 1.9%, 5%, and 6.5%, respectively.

However, in most years, especially after the comprehensive implementation of the “Golden Tax Phase III” system, the growth rate of tax revenue was significantly faster than GDP. In 2017, tax revenue outperformed GDP by 3.8%, in 2018 by 1.7%, in 2021 by 3.8%, and in 2023 by 3.5%. This is partly due to the fact that the electronic tax collection system has strengthened the tax base, and partly reflects the structural trend of continuous improvement in tax collection efficiency.

The problem appeared in 2024. In the absence of large-scale tax cuts, the growth rate of tax revenue plummeted, and the scissors gap with GDP widened to -8.4%, further widening to -8.9% in the first quarter of 2025. This figure not only far exceeds the abnormal years in history (in 2022, when the tax cuts reached 27%, the largest scissors gap between tax revenue and GDP was also -6.5%), but also completely breaks the common sense understanding of “tax revenue and GDP being positively correlated”.

This means that some fundamental changes are taking place, and it is worth us to delve deeper and ask: where did the tax revenue go?

By | Zhong Li

Edited by | Yang Shao

01 The Basic Structure of Chinese Tax Revenue

First of all, it needs to be clarified that we are only discussing “tax revenue” itself here, so the issues to be discussed next are not related to land transfer fees. China’s government revenue can be roughly divided into four accounts: tax revenue (including non-tax revenue), government fund revenue (mainly referring to land finance), state-owned capital income (profits turned over by state-owned enterprises, this part is very small and can be almost ignored), and social security contributions. Among these four accounts, the largest and most core is still “tax revenue”.

If we further break down the tax structure, we will find that the top four tax types are: domestic value-added tax (VAT), corporate income tax (CIT), individual income tax (IIT), and consumption tax. Among them, the sum of value-added tax and corporate income tax can basically account for more than half of the total tax revenue. Therefore, to understand the problem of Chinese tax revenue, the most direct entry point is to look at what changes have occurred in these major tax types.

China has long been an industrial-led economy. In 2023, the proportion of industry in GDP reached 26%, while the median for OECD countries is only 16%. Under such an industrial structure, there is no problem in anchoring tax revenue in the production link—this is an arrangement that matches the economic structure. But the problem is that the risk brought about by “high value-added tax dependence” has become a structural problem that cannot be ignored.

To further understand this, we need to clarify the difference between “direct taxes” and “indirect taxes”. Simply put, direct taxes (such as corporate income tax, individual income tax, and property tax) are levied directly on a person’s income or assets, and the tax burden cannot be easily shifted, so they are usually considered to have better income redistribution functions. Indirect taxes (such as value-added tax and consumption tax) are levied on the transaction of goods and services, and the tax burden is more easily shifted to consumers. This also means that low-income groups may bear a higher proportion of the tax burden because they spend more on rigid consumption, forming the so-called “regressive effect”.

When a country’s proportion of indirect taxes is too high, it will bring three consequences:

First, it weakens the redistribution capacity of the tax system. Low-income earners consume a large proportion of their income, and indirect taxes are more “harsh” on them; second, indirect taxes do not have the function of an “automatic stabilizer” like direct taxes—they will not be elastically adjusted with the economic situation, but may amplify macroeconomic fluctuations; third, and most importantly, indirect taxes are strong in concealment, and the collection process is almost “unfelt” by taxpayers, thus also weakening the public’s tax awareness and supervision awareness. People lack awareness of government budgets and public expenditures, and it is naturally difficult to form effective public audits and accountability mechanisms.

No matter from which angle, the reality is that the biggest structural problem of Chinese tax revenue lies in its high dependence on indirect taxes.

02 Value-Added Tax Declines, Where Does It Start?

Among China’s major tax types, value-added tax (VAT) has always occupied the most core position. Its income fluctuations often directly reflect the macroeconomic operating conditions and the quality of the tax base. The divergence between tax revenue and GDP in the past two years has largely been caused by the continuous decline in VAT revenue.

From 2020 to 2024, China’s VAT revenue was: 5679.1 billion yuan, 6198.2 billion yuan, 4871.7 billion yuan, 6933.2 billion yuan, and 6667.2 billion yuan. There was a significant decline in 2022 due to large-scale tax cuts, but it is more noteworthy that in 2024, there was a drop of -3.8% compared to 2023.

In fact, the problem had already appeared in 2023. Although the VAT in the first quarter of 2023 briefly rebounded by 34% year-on-year due to the low base effect brought about by the previous year’s retained tax refunds, it quickly fell back, and the fourth quarter saw another year-on-year decrease of 7%. After entering 2024, the decline further expanded: a year-on-year decrease of 7.1% in the first quarter, 9.6% in the second quarter, and 6.8% in the third quarter. It was not until the fourth quarter of 2024 that VAT showed a weak positive growth of 1.3% for the first time.

There are several obvious reasons behind the continuous decline in VAT revenue:

The first is the excessive scale of export tax refunds. In recent years, China’s exports have continued to expand, and the scale of export tax refunds has also risen sharply. In 2023 alone, the amount of export tax refunds processed reached about 1.8 trillion yuan, equivalent to about 22% of the net domestic VAT revenue for the whole year. The proportion of China’s export tax refunds in the overall tax revenue has also slowly climbed from 9% to 11%. Export tax refunds are intended to ensure that exported goods are tax-free when leaving the country, but the excessive scale has led to a significant reduction in net tax revenue. For example, in 2024, the tax refund rates for some aluminum profiles and photovoltaic products were lowered or even cancelled, in an attempt to alleviate this tax refund pressure.

China’s economy has always had the saying of “three carriages”—investment, consumption, and export. When investment is suppressed by the overall debt scale, and consumption is relatively stagnant because the income and welfare system cannot be comprehensively reformed, the proportion of exports in the economy will become higher and higher, then export tax refunds are still an important factor in suppressing VAT revenue.

The second is the sharp decline in real estate-related taxes. The entire real estate industry chain, from land transfer, building materials production, construction, to housing sales, is an important source of VAT at every stage. However, with the obvious cooling of the real estate market, land transfer fees in the first 11 months of 2024 decreased by 22.4% year-on-year, and the area of real estate transactions also shrank significantly. According to estimates by CICC, the overall contraction of this industry directly led to a year-on-year decrease of about 380 billion yuan in VAT revenue from the real estate chain in 2024, becoming an important factor in the continued low level of VAT revenue. This also explains why, despite the cyclical downturn in the real estate market, the government still has a strong impulse to maintain the property market.

The structural concentration of tax revenue makes this impact more obvious. China’s tax revenue is highly concentrated in a few industries. In 2021, the manufacturing, wholesale and retail, finance, real estate, and mining industries together contributed 77% of the tax revenue, but only accounted for 59% of the nominal GDP. When the real estate, mining and other industries decline, the impact on the overall tax revenue will be further amplified.

Third, the continuous deflation of producer prices (PPI) has dragged down the VAT tax base of the manufacturing industry. VAT is based on the tax-inclusive price of enterprises selling goods and services. The continuous negative growth of PPI for 31 months means that the prices of industrial products have continued to fall, and the taxable sales of enterprises have naturally shrunk. According to estimates by Huachuang Securities, for every 1 percentage point decrease in PPI, the drag on the growth rate of VAT revenue reaches 1.5 to 1.6 percentage points. In 2024, the average negative growth of PPI was 2.7%, and the drag on the overall VAT revenue was about 260 billion yuan or more.

Finally, local governments have implemented large-scale tax incentive policies to attract investment. In the past few years, various regions have successively introduced investment incentive measures, including the reduction of the VAT collection rate for small-scale taxpayers from 3% to 1%, the substantial reduction and exemption of the purchase tax on new energy vehicles, and the exemption of VAT on the transfer of housing held for more than two years in some cities. The tax reduction for the purchase tax on new energy vehicles alone reached about 500 billion yuan in the three years from 2023 to 2025, and the tax refund policies of various regions further eroded the VAT tax base. In 2024, the scale of this “tax concession” exceeded 450 billion yuan, accounting for nearly 30% of the VAT shortfall for the whole year.

This part of the tax refund should be distinguished from the VAT rate reduction in 2019 and the general tax cuts in 2022. Although they are all “tax cuts” on the surface, the former belongs to structural policies, releasing clear directional signals; while the latter are general burden reductions, aimed at comprehensively alleviating the pressure on enterprises, and do not guide the flow of specific resources. The structural tax cuts in the past focused on “supporting the weak”—such as supporting small and medium-sized taxpayers and the development of private enterprises; but since 2023, the tax reduction policies have clearly favored “export-oriented enterprises” and “advanced manufacturing”, almost without exception. The problem is that these areas are now generally in a state of overcapacity, and continuing to “irrigate” them will instead exacerbate tax revenue loss and resource misallocation. If the original intention of tax cuts is to make room for the market, then the practices in 2019 and 2022 may be more prudent and effective.

All of the above not only explains why VAT revenue continues to decline, but also illustrates the structural challenges we are currently facing: under the circumstances that the economic structure adjustment has not yet been completed, the tax revenue focus is highly concentrated, and external stimulus measures are limited, maintaining fiscal stability is no longer a technical issue under “strong growth”, but is gradually evolving into a governance challenge under “tax base degradation”.

03 From Enterprises to Individuals: How Profit Decline Transmits Tax Revenue

In addition to VAT, corporate income tax (CIT) is also one of the important pillars of China’s tax structure. The trend of corporate income tax in recent years also shows significant changes and problems in the profitability of Chinese enterprises.

In 2021, China’s corporate income tax revenue reached 4.89 trillion yuan, a significant increase of about 15% year-on-year. This is of course related to the low base in 2020, but if you remember, China’s early pandemic prevention and control in 2020 was indeed relatively effective, making it one of the few countries in the world that could maintain stable exports from 2020 to 2021. Coupled with the rise in commodity prices, industrial profits soared by 34.3% year-on-year that year. Strong corporate profits provided a rich tax base for tax revenue.

In 2022, corporate income tax revenue increased slightly to about 5.0 trillion yuan, an increase of 2.3% year-on-year. However, in this year, industrial profits had already turned negative (-4%), while tax revenue could still maintain growth, mainly due to the concentrated payment of taxes delayed from the previous year, and the energy, metal and other commodity industries still maintained high profits, offsetting the weakness of other industries.

The real turning point occurred in 2023. Corporate income tax revenue fell to 4.11 trillion yuan, a year-on-year decrease of 17.8%. Industrial profits fell by 2.3% for the whole year, the sharp contraction of the real estate market led to widespread losses for real estate companies, and the manufacturing industry continued to suffer from deflationary pressure, and profit margins were significantly compressed. At the same time, the policy encouraged enterprises to invest in research and development, and the preferential policy of 100% additional deduction of research and development expenses, although it promoted innovation, also significantly compressed the taxable profits of enterprises, becoming another structural reason for the shrinking of the corporate income tax base.

In 2024, corporate income tax revenue continued to hover at a low level, with an annual revenue of about 4.08 trillion yuan, a further decline of about 0.5% year-on-year. In this year, industrial profits fell by 3.3% year-on-year, manufacturing deflation did not stop, real estate losses continued, and exports also suffered from the impact of US trade policy fluctuations. In the first quarter of 2025, corporate income tax fell again by 6.8% year-on-year, to about 1.0 trillion yuan.

The same trend is also reflected in individual income tax. The overall individual income situation in society has a clear isomorphism with enterprises, but individual income tax lags behind enterprises by 2-3 quarters, and the profitability of enterprises is transformed into changes in enterprise employment strategies, and there is a certain transmission time.

In 2021, China’s individual income tax revenue reached about 1.40 trillion yuan, a significant rebound, for the same reason as above. In 2022, individual income tax continued to grow, reaching about 1.49 trillion yuan, an increase of 6.6% year-on-year, which is the lag effect mentioned above.

Individual income tax revenue also turned a corner in 2023, with an annual revenue of about 1.48 trillion yuan, a year-on-year decrease of 0.6%. In particular, the soaring youth unemployment rate and the cooling of the platform economy directly affected the overall income level. At the same time, the sluggish real estate market severely affected the income from property transfers, further suppressing tax revenue. In 2024, individual income tax revenue further decreased to about 1.45 trillion yuan, a decrease of 1.7% year-on-year. In addition to economic factors, the increase in special additional deductions (such as children’s education, housing loan interest, etc.) also weakened the collection base of individual income tax.

In the first quarter of 2025, individual income tax revenue was about 0.37 trillion yuan, an increase of 7.1% year-on-year, but this rebound was more due to the delayed entry of year-end bonuses and the high base effect during the Spring Festival, rather than a substantial income recovery.

At this point, we can clearly see that: VAT, corporate income tax, and individual income tax are all under great pressure. A tax system that relies on export tax refunds, industrial profits, and real estate transactions, under the current background of rising uncertainty in the global market, weak domestic demand, and tightening industrial profits, has gradually revealed its fragility.

04 The Dilemma of Fiscal Sustainability

Tax revenue is not only a fiscal indicator, but also directly related to the daily life of every citizen. Public services such as education, medical care, old-age care, and infrastructure all rely on fiscal support. When tax revenue continues to be low, the government either relies on large-scale borrowing or resorts to more extreme and unsustainable methods such as “deep-sea fishing” to maintain basic expenditures. The risks of local government debt need not be elaborated, and the impact of other unconventional means on the economy and social order cannot be ignored.

Now, local governments are increasingly relying on tax revenue, because land transfer revenue decreased by 18.3% and 11.9% respectively in 2024 and the first five months of 2025, further weakening local revenue. This fiscal dilemma has long been ignored. On the one hand, the official statistical deficit is biased low, and the rapid growth of non-tax revenue in the short term has masked the real pressure on fiscal revenue. In addition, the high-growth model driven by land finance and credit in the past has also made people ignore the fundamental problem of long-term shrinking of the tax base. And by 2025, this problem is already difficult to avoid.

To truly restore tax revenue growth, at least several preconditions need to be met.

First, industrial deflation must end. However, as of early 2025, PPI has been negative for 28 consecutive months, and overall demand is still weak, and the tax base is difficult to effectively recover.

Second, the real estate market must stabilize and rebound, but in the first half of 2024, real estate investment fell by 10.1%, and the sales area of new houses fell by 19%. Coupled with negative population growth and oversupply, the hope of recovery is slim. By May 2025, several key indicators have weakened again.

Third, corporate profits need to improve significantly, but under the background of weak domestic demand and continuous Sino-US trade friction, the possibility of a short-term rebound is extremely low.

Fourth, structural tax reform must be promoted, including the pilot implementation of property tax, expanding the coverage of individual income tax, and adjusting the proportion of export tax refunds. However, the above-mentioned tax reforms all face huge resistance. For example, property tax is expected to bring in 0.5–0.8 trillion yuan in revenue each year, accounting for only 3%–5% of the national tax revenue in 2024, but it may directly exacerbate the systemic risks of the real estate industry, and it is almost impossible to implement it in the short term.

Yes, it is very difficult to achieve each item. Behind the current tax dilemma is the dilemma of the economic system and the product of the problems accumulated in the economic development model of the past ten years. Under the background of industrial deflation, deep adjustment of the real estate market, deterioration of the foreign trade environment, and resistance to tax system reform, any single stimulus measure is difficult to reverse the trend of long-term shrinking of the tax base. Therefore, in the next few years, China’s tax revenue is likely to continue to be lower than the GDP growth rate, and fiscal sustainability will face severe challenges.