Squeezing Every Last Yuan: Beijing's Path to Economic Armageddon | Digging into China

Hi, I'm Dong Seong. Welcome to Digging into China, where we explore China in depths to review unique perspectives. Towards the end of every dynasty, the ruling regime invariably turns to raising taxes, relentlessly increasing them, extracting every last scent from the people and ultimately igniting widespread unrest. The rationale behind this desperate approach is straightforward. It follows the path of least resistance. When the dynasty is on its lost legs with no viable options left, any reform carries a cost. Taxing defenseless citizens, however, requires a little effort. It's the simplest and the fastest way to see results, even if it means plunging the populace into hardship. In the short term, this allows the regime to amass vast revenues, swelling its coffers almost overnight. Those in power uh revolve in the satisfaction of accounting their wealth brimming with ambition and the dreaming of limitless possibilities utterly indifferent to the suffering of ordinary people. This pattern has held true across history's dynasties and it remains true for the current CCP regime. In this discussion, we will examine how much the CCP has increased the taxes in recent years and theoretically how much revenue this measure could generate for the state. To provide a context, we must first establish a critical benchmark. At what point does the scale of tax increases trigger a cascading effect leading to catastrophic consequences? A key concept to understand is the deposit the loan gap. the difference between total deposits and the total loans. This gap reflects the level of cash liquidity in society. A large gap indicates robust liquidity while a smaller one signals frugality. As of July 2025, China's total deposit stand at 325 trillion yen with total loans and 273 trillion resulting in a deposit loan gap of 55 trillion yen. This might seem substantial, but within that figure, 46 trillion UN consists of government and institutional deposits, essentially the state's own funds. Subtracting this leaves just 9 trillion UN as the true deposit gap belonging to the public. This 9 trillion yen represents society's actual wealth, its net liquid assets. The entire national economy depends on these funds to sustain activity, supporting China's 9 trillion UN primary real estate market, over 40 trillion UN in retail consumer goods, and more than 50 trillion Y in fixed assets investment annually. To meet this 100 trillion yen demand, every UN must circulate at least 10 times to keep the economy functioning smoothly. The critical point here is that the deposit loan gap after excluding government deposits is the true liquid capital sustaining the economy. China's gap is a mere 9 trillion yen and it must circulate at least 10 times yearly. If onetenth of this is drained, the economy will slide into severe recession. If 1/5if is taken, a liquidity crisis becomes inevitable. And if one-third is removed, the economy will collapse entirely with industries facing a devastating liquidity breakdown, leaving no sector unscathed. In essence, draining 2.7 trillion yen, onethird of the 9 trillion yen in liquid funds would spell absolute disaster for the national economy. But the tipping point comes even sooner. After draining just one trillion yen, the economy would already face sharp decline. At two trillion yen, a liquidity crisis would spread widely. Beyond that, catastrophe would fully unfold. To cope, the Chinese government would likely intensify tax hikes, further draining liquidity and worsening the crisis. Thus, I set two trillion yen as the threshold for disaster. If two trillion UN in liquidity is drained, China's economy will face a comprehensive liquidity crisis leading to immediate collapse. Let's now examine the formula for total liquidity. Total deposits minus total loans minus government deposits. There are two ways to significantly reduce societal liquidity. The first is to increase total loans, encouraging people to borrow more. This is no longer feasible. The real estate market has collapsed and the citizens are no longer borrowing to invest or start businesses. Apart from state-owned enterprises, ordinary people have largely abandoned the loans. This leaves the second method, increasing government deposits through largecale tax increases. By raising taxes and collecting more revenue, the government removes money from citizens hands, significantly boosting its own deposits. In other words, the most effective way to China's economy is to impose massive tax hikes exceeding 2 trillion yen. This would rapidly deplete society's liquidity, driving into economic collapse. The CCP's overarching goal appears to be deliberate economic suppression to stifle industrial progress and preserve authoritarian control. Draining liquidity through tax hikes aligns perfectly with this objective. So, it's no surprise that over the past two years, the regime has implemented numerous measures to intensify tax collection. Let's review them one by one. The first measure is reforming the consumption tax system. Consumption tax in is China's third largest tax following VAT and corporate income tax. In 2024, it generated 1.65 trillion yen or 1.2% of GDP primarily from goods like tobacco, alcohol, high-end cosmetics, cars, and gasoline. Historically, enforcement has been lacks with the government failing to collect all that it's owed. In July 2024, the central committee proposed to optimizing consumption tax collection, gradually shifting it from a central to a local tax and moving the collection point from production to retail. This means taxing every transaction based on its final retail price, ensuring no related consumption escapes scrutiny. The reform's goal is clear. Semi-official research institutions note that consumption taxes in Europe countries account for 2% of GDP and China aims to match that disregarding the fundamental differences in economic structure between China and the Europe. The goal is to raise consumption tax revenue from 1.2% to 2% of GDP. Assuming GDP remains constant, this would increase revenue from 1.65 65 trillion Y to 2.7 trillion Y and additional 1.05 trillion Y. By collecting taxes on every transaction, the government seeks to boost consumption tax revenue by 1 trillion Y. This reforms are already underway. In the first quarter, changes applied only to car sales, but now all relevant goods are taxed at the retail level. Make no mistake about the CCP's tax collection capabilities. The golden tax system phase 4 ensures that not a single pack of cigarettes or bottle of liquor escapes monitoring. Despite widespread complaints that and a sharp decline in consumption of items like tobacco and alcohol in the first half of this year, consumption tax revenue still grew by 1.7%. The second half will likely seen even greater increases driven by the efficiency of collection methods. not actual consumption levels. Even if consumption fails, tax revenue will rise with the trillion yen target may not be fully met. Most estimate an additional 500 billion. I'll use that figure here. The second measure is cracking down on e-commerce tax evasion. According to the National Bureau of Statistics, in 2024, total retail sales of consumer goods reached 48.8 8 trillion Y with online retail accounting for 15.5 trillion Y or 32%. Nearly a third of sales occur online, a significant share. Yet tax compliance in e-commerce has been weak. Until this year, over 90% of small e-commerce businesses, aside from major brands, paid no taxes and often didn't even register for taxation. These small business account for about 40% of online retail sales, meaning roughly 6 trillion yen in sales have evaded the tax system. Since 2023, tax authorities have conducted multiple audits targeting influencers and major e-commerce players, causing many prominent streamers to disappear. By late 2025 uh sorry late 2024 with the golden tax system phase 4 fully operational audits expanded to cover every e-commerce seller. Major platforms like a Taoba and JD.com have shared backend data with tax authorities enabling them to track every transaction. The rules are not clear. All merchants must pay a 1 and a.5% tax on transaction volume upfront. If it's insufficient, they pay more later. If it's excessive, no refunds are issued. This means the 6 trillion yen in previously untaxed online sales now face a 1 and a.5% tax generating 90 billion yen. With the platforms sharing data, every online sales is under scrutiny, making this 90 billion yen unavoidable. Moreover, the tax bureau is retroactively auditing three years of sales if an online store has operated for three years. It owes taxes on both current and past sales. At this moment, the e-commerce tax crackdown has generated a one-time increase of 270 billion yen with an additional 90 billion yen annually, totaling 360 billion yen in one year. The third measure is a stricter enforcement of rental income taxes. Starting September 15 this year, the housing lease regulation will mandate that all central all rental activities pay a rental tax. This isn't a new tax. Since 2008, the rental income has been subject to business tax, property tax, and a personal income tax, collectively known as the housing lease tax. For simplicity, residential rentals are taxed at 4% of the rent, while commercial properties like a office are taxed at 12%. In practice, commercial rentals are typically registered due to business licensing requirements allowing tax authorities to enforce collection. However, the much larger residential rental market often goes untaxed as tenants typically don't register leases unless required for residence permits. The rental market is enormous. According to CIA's 2025 China housing lease industry report, the total rental market in 2024 was worth 3.15 trillion yen with residential rentals comprising 74% or 2.33 trillion yen. This vast residential rental market has largely escaped taxation. The CCP is eager to tap into this revenue source. Taxing 2.33 trillion yen at 4% would generate over 90 billion yen annually, a conservative estimate. Local governments are already conducting comprehensive audits. Online, the golden tax system phase 4 monitors all financial transactions, flagging regular payments as tax leads. Offline community grid workers under the guise of safety inspections are thoroughly investigating rental activities. The combination of online and offline enforcement is formidable. During the 2020 to 2022 pandemic lockdowns, many experienced this firsthand. Coming within 800 meters of someone with a red health code could turn your code red, prompting grit workers to lock your door. Now that lock is replaced with a tax notice. With this inscapable system, compliance is the only option. The fourth measure is a strengthening VAT collection. In December 2024, the National People's Congress passed the new VAT law effective January 1st, 2026. In August 2025, the Ministry of Finance and the State Taxation Administration released a draft of the VAT law implementation regulations. The core principle is simple. Collect every scent owed down to the last transaction. Every transaction nationwide, regardless of the parties or amount, will be monitored by the golden tax system. All taxable activities must issue electronic VAT invoices automatically generated without a business needing to apply. This comprehensive enforcement is expected to increase VAT revenue by at least 10%. In 2024, VAT revenue was 6 and 23 uh trillion yen, meaning the new law could generate at least 667 billion yen, more starting in January 2026. I'll round this to 600 trillion yen. Uh 600 billion yen for simplicity. The fifth measure is the controversial universal uh social security campaign extracting 6 trillion yen from 400 million workers through a social security tax. Two points are critical. First, social security is now effectively a tax a per capita tax requiring every working adult to pay over 10,000 yen annually. Such pole taxes were abolished by Emperor Yung Jung in theQing dynasty. Yet the CCP has reinstated them, arguably making it less just than theQing government. Second, this social security tax campaign is supported by detailed regional plans. For example, in June, 10 Guangong departments issued a joint plan targeting migrant workers, gig workers, and new employment forms with a specific collection measures. These departments include human resource, development and reform, education, public security, civil affairs, justice, housing, agriculture, the labor union, and the People's Bank of China. With their combined efforts, no employer can evade this tax. Additionally, there are miscellaneous tax measures such as retroactively taxing overseas stock trading profits or imposing VAT on bond interest. These are expected to generate an additional 50 billion yen. To summarize, the Chinese government hasn't introduced new taxes but has aggressively intensified existing ones resulting in massive revenue increases over the next year. Projected tax increase include 500 billion yen from consumption tax reform, 360 billion yen from e-commerce tax adults, 90 billion yen from rental tax enforcement, 600 billion yen from VAT enforcement, 6 trillion yen from the universal social security campaign, and 50 billion yen from miscellaneous measures. This totals 7.6 trillion U. To reiterate, 7.6 6 trillion yen as established earlier. Drain two trillion UN in liquidity would cause the economy to collapse. With these six measures, the CCP could drain 6 7.6 trillion yen in a single year. It wouldn't even take a full year. Just one quarter could push the economy to the brink. Deliberate economic suppression appears to be the government's strategy. After collapse, controlling key regions with an iron grip would suffice to sustain the CCP's rule, indifferent to chaos elsewhere or the suffering of the mass. This end of dynasty tax frenzy as seen in history will descend upon China with unrelenting speed. 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