In Depth: Why China Is Taking In Less Tax as GDP Growth Stays Steady

China’s economic growth has remained stable over the past year, yet national tax revenue has continued to decline. In 2023, national tax revenue fell by 3.4% to 17.5 trillion yuan (about $2.5 trillion), and this downward trend persisted into 2024, with first-quarter tax revenue dropping 3.5% year-on-year. During the same periods, China’s GDP grew by 5% in 2023 and an even stronger 5.4% in the first quarter of 2024. This divergence between steady economic growth and falling tax revenue is unusual, as tax receipts have historically tracked GDP growth in China. The Ministry of Finance attributed the drop in tax revenue to factors like falling producer prices and the effects of tax breaks, but experts cited structural economic changes and the implementation of widespread tax incentives as contributing factors as well[para. 1][para. 2][para. 3][para. 4][para. 5][para. 6].

This growing disconnect has implications for the country’s fiscal health, as tax revenue is the main source of funding for China’s general public budget (GPB), which is the largest of the four budgets in the fiscal system. In 2024, taxes accounted for about 80% of the GPB[para. 7].

One of the critical explanations lies in the deflationary pressures facing China. Consumer prices experienced several declines over the past two years, with the consumer price index falling 0.1% year-on-year in May. The deflation is even more pronounced at the producer level: the producer price index (PPI) has declined monthly since October 2022, with a 3.3% drop year-on-year in May 2024, the sharpest since the previous November[para. 8][para. 9][para. 10].

Because China’s tax system, particularly the value-added tax (VAT), is based on the value of goods and services at each production stage, falling prices can significantly reduce tax revenues. VAT is especially vital, accounting for about 40% of total tax revenue in recent years. In 2024, VAT revenue dropped 3.8%—a steeper decline than the overall tax revenue drop—and was the only major tax type to contract more rapidly. Steep or sudden price drops can shrink the value added in supply chains before adjustment, reducing VAT liabilities. Additionally, the expansion of VAT refunds, which started in 2018 and widened in 2022, has worsened the decline by refunding more taxes to firms[para. 11][para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18].

Another fundamental factor is the ongoing industrial restructuring of China’s economy. Traditional sectors like real estate and mining, once major tax contributors, have declined. The real estate sector, in particular, is experiencing a prolonged slump, resulting in fewer tax-generating transactions, especially as pre-owned home sales—which contribute little tax—have replaced new sales. Meanwhile, emerging industries, notably new-energy vehicles (NEVs), do not yet generate enough tax revenue to compensate. This shortfall is partly due to preferential tax policies: since 2014, NEVs have been exempt from the vehicle purchase tax and, since 2012, from the vehicle and vessel tax. In 2023, NEVs’ tax exemptions totaled 121.8 billion yuan, while overall revenue from these taxes reached 379.5 billion yuan. The focus of China’s tax incentives on fast-growing industries is likely to continue the disconnect between economic growth and tax revenue[para. 19][para. 20][para. 21][para. 22][para. 23][para. 24][para. 25][para. 26][para. 27][para. 28][para. 29].

In summary, China’s declining tax revenue amid steady GDP growth stems from deflationary pressures, tax incentives, and a significant industrial shift away from traditional sectors to newer, but less taxable, industries[para. 1][para. 2][para. 3][para. 4][para. 5][para. 6][para. 8][para. 9][para. 10][para. 11][para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18][para. 19][para. 20][para. 21][para. 22][para. 23][para. 24][para. 25][para. 26][para. 27][para. 28][para. 29].