A study of tax loss in China

Abstract

Tax loss implies that governments lose their revenue because the tax authorities have failed to obtain taxes owed from taxable economic activities. Measuring the size of tax loss will not only disclose the actual government revenue situation, but also guide tax authorities toward improving the taxation system and enhancing efficiency in tax collection. In China, very few researches on tax loss have been accomplished because of the political issues and insufficient information resources. The thesis developed a new methodology to disclose the seriousness of tax loss, and proposed an effective countermeasure to control tax loss in China. The main contributions of this thesis are as follows: 1. A unique methodology and two approaches - income-expenditure and fuzzy logic - have been developed to evaluate the size of tax loss with insufficient available data in China. The analysis results show that the ratio of tax loss to tax revenue is imitative among 6.7% to 32.4% in China during the year 1987 to 2003, and the situation has improved in the last few years. 2. A clinical study on the tax loss situation of Xiaogan, a city in middle area of China, is introduced. This should be the first actual case study carried out for academic purposes in China. As such, it provides rather concrete evidence on how serious the tax loss situation is in China. With the help of local tax authorities, the tax compliance situation was investigated through an applied tax audit on taxpayers. About 200 taxpayers were randomly sampled from the audit results, and based on their data the probability of tax evasion and the relationship between tax loss and its possible causes were analyzed using the regression method. 3. A new countermeasure to prevent tax loss in China is proposed. According to observation, falsifying invoices has become the most popular method for evading taxes in China. The deficiencies with the existing VAT invoicing terminal are discussed, and a new anti-counterfeit VAT invoicing system, recently adopted in China, is described in detail.