To Boost Tax Take, China Offers Rewards On 'Happy Draw'

SHANGHAI -- Her braces sparkling against bright television studio lights, Pu Jian watched a small ball bounce between numbers on a roulette-like wheel. The 28-year-old was hoping for a bonanza on the "Happy Draw" show.

Directing the silly stunts, loud music and flashing lights were top officials of the Shanghai tax bureau. The contestants were all people who asked for receipts when they made a purchase at a store -- helping tax authorities build a paper trail in this cash-based society.

"Happy Draw" is one example of how China is trying to boost its tax proceeds -- a crucial step to modernizing its economy. Like many emerging economies, China doesn't collect taxes very effectively. It has been easy for small businesses to hide how much they're taking in and evade taxes.

That's important because most of China's $318 billion in national tax revenue last year came from business taxes -- the reverse of the U.S., where the government collected 83% of its revenue last year in the form of personal income taxes. The average Chinese paid just $16 in income tax in 2004.

To help figure out how much revenue restaurants, clothing shops and other small merchants are really making, China is counting on the nation's consumers. It is encouraging them to ask for an official receipt -- known as a "fa-piao" -- whenever they buy something.

The system works like this: Businesses need to buy books of official receipts, each of which has a portion for the customer and a stub retained by the merchant. If asked, the merchant must supply the customer with a receipt. Authorities keep track of which receipt books a business has, and they can check any time how many stubs are in the books. The more stubs, the more the business has sold. It's not a foolproof measure of sales, since many customers don't ask for a receipt, but it gives officials a hint of what a business's true revenues are -- and whether it might be evading taxes.

The key to the system is getting consumers to play along and ask for their receipt. That's why authorities in 90 Chinese cities have turned the customer portion of some kinds of receipts into lottery tickets. In most cases, there's a single scratch-off part that offers the chance to win instant cash. Shanghai adds a second part for the customer that gives the opportunity to compete for big money on television.

"This is an important measure to encourage customers to demand invoices," says an official of the China Tax Bureau. The Beijing municipal tax bureau paid $4.8 million in awards last year while scooping up an additional $120 million in taxes, according to the central government, which shares in the take.

Pu Jian, center, holds a check after her win on the Shanghai tax bureau's 'Happy Draw' show.

Helping tax authorities is a low priority for some. Chen Lian, a Shanghai artist, was able to negotiate a 6% discount on his $4,300 wedding banquet last year by agreeing to pay cash and not request an official fa-piao from the caterer. Many people get discouraged when they repeatedly scratch their receipts and see the message "thank you," meaning they didn't win anything.

Another problem with the system is fake fa-piao. Business people can buy them from street-corner hawkers and continue to understate their revenue even while seeming to oblige customers who ask for a receipt.

But dutiful receipt collectors are thronging to "Happy Draw." At the studio taping of the show, the walls reverberated to whistling screams of "YEE-huh, YEE-huh." Audience members dressed in identical blue rugby shirts with gold collars. Everyone clutched a receipt. People had gotten onto the show by entering their receipt number and mobile-phone number on an official Web site.

Plucked to come forward, Ms. Pu was pitted against an eager car salesman and a retiree who said she had never won anything in her life. During introductions, each contestant was asked the same question: How was the winning receipt obtained? The car salesman answered that his was for a cheap lunch.

"Wow!" exclaimed the male host. "Can you believe, with the invoice for a 10 yuan bowl of noodles, you have a chance at 500,000 [yuan]?" His co-host bulged her eyes in apparent disbelief.

Some prizes went to the winners of a game of chance. When contestants pressed the lever of a box meant to resemble an old-fashioned TNT detonator, a number popped out showing the size of a cash award. Other times it was skill, of a certain kind. Ms. Pu and the others were given oversized red shoes and asked to skip across lighted floor panels. She did it in the fewest steps and moved to the final round.

To keep the festivities honest, a dour government auditor stood in a corner in a crisp tan uniform, complete with golden shoulder crests.

When the program was aired the following week, it included commercials between the game-show action pressing the government's message about fa-piao. A commercial in the style of a documentary, shot in black and white, purported to show a secretary winning $600 from a receipt after a company dinner. A colorful cartoon showed an apartment's walls cracking and a chandelier falling from the ceiling just as the construction workers who had done the shoddy work headed home with their cash. The message: Insist on an official receipt, so you can track down such devious businesspeople.

Ms. Pu moved into the final round for a turn at the glittery "Happy Draw" roulette wheel. The small egg-like ball bounced wildly between the numbers. Finally it settled at 250,000 yuan -- about $30,000. Ms. Pu, who sells coated steel for a living, threw her head back and let her braces shine though in a triumphant smile. A cannon boomed. Confetti showered from the ceiling. Mr. Pu was handed an oversized check, tax-free.

Write to James T. Areddy at james.areddy@wsj.com

Fed Chairman Alan Greenspan raised interest rates for the seventh consecutive time yesterday, and signaled that more aggressive increases may be on the horizon. Although the financial markets shuddered at the prospect, this is actually good news. Raising rates demonstrates a realistic and upbeat assessment of growth prospects not only in the U.S., but around the world. Our economy no longer needs artificially low interest rates that have caused bubbles in both commodity markets and housing prices.

Bond yields surged with the Fed's mention of inflation "pressures," but growth pessimism still enshrouds most bond investors. Last month, the yields on the government 30-year inflation-protected bonds, a favorite investment for retirement savings, fell to a record low of 1.5%, and even after yesterday's increase, they remained below 2%. Yields are still near their lows in both Europe and Japan. It was not long ago, in early 2000, when inflation-adjusted yields were almost 4.5%, three times their current levels. What compels investors today to take such a dim view of the future and lock up their money for 30 years for such puny returns?

Pessimists maintain that these low yields are a justified manifestation of the demographic crisis facing the world's developed economies. In 1950, there were seven potential workers aged 20 through 65 for every retired person in the U.S. By 2050 this ratio is expected to fall to 2.6. In Japan and Europe, the aging of population is far more dramatic -- the number of workers may even fall below the number of retirees. It is sobering to consider that by the middle of this century, the most populated five-year age bracket in Japan and many European countries will be 75 to 79. Aging boomers, embracing the conventional wisdom that growth will slow markedly in the coming decades, are content to secure their savings at whatever rate they can, fearing the worst.

The news media -- dominated by talk of Social Security's insolvency problems -- reinforce this pessimistic view. So do the dismal economic forecasts put forth by our government agencies, such as the Social Security Administration, that predicts that long term GDP and productivity growth in the U.S. will fall below 2%. Projections made for Japan and Europe are equally, if not more gloomy.

But these naysayers are taking a far too narrow view of the world. While growth in Europe and Japan is slowing, growth in the developing world is accelerating. The expansion of China, India and other developing countries will have a huge impact on world capital markets.

The reason is simple. Today's capital markets are global. Capital flows to those countries offering the best returns and away from countries where returns are low. Right now the central banks of China and India are buying large quantities of U.S. government bonds, keeping our yields low. But fast-growing firms in India and China will be increasingly tapping the U.S. capital markets, increasing the demand for our funds and driving our interest rates higher.

Cross-country capital movements are already accelerating. Last year Lenovo, China's top computer producer, acquired IBM's personal computing business. Recently, Lakshmi Mittal of India acquired the assets of Bethlehem Steel and LTV Corp., to form the largest steel company in the world. This is just the beginning of an explosion in global mergers and acquisitions that will draw capital from all parts of the globe.

As these Asian countries grow, their markets will become more liquid and their currencies more convertible. Bondholders in developed countries who are unhappy with the return on their domestic bonds will be drawn to these foreign powerhouses, lifting rates throughout the developed world. Faster productivity growth will in turn increase the return on equity capital and support higher stock prices.

What we see happening in China and India is no blip on the screen. By 2050 China is projected to have about 1.5 billion people, nearly four times the 400 million inhabitants projected in the U.S. If China were to achieve half the per capita income of the U.S. by the middle of this century (putting it on the same relative footing as Portugal and South Korea today), the Chinese economy would be almost twice the size of the U.S. economy.

Is this possible? Most certainly. Over the last 40 years, Japan went from 20% of the U.S. per capita income to 96%, Hong Kong from 16% to 70%, and South Korea from 11% to nearly 50%. China could reach 50% of the U.S. per capita income level by 2050 with a productivity growth rate of 3% a year above the U.S. Over the past 25 years, China has done much better than this, achieving a per capita growth rate almost six percentage points above the U.S. India can attain 50% of the U.S. per capita income by the middle of this century by growing 4% per year faster than the U.S., a rate I believe is well within its reach.

The developed world is already operating at the forefront of the technology frontier, and can, at best, increase long-term productivity to 3% or 3.5% per year. Even attaining this level would be a notable achievement. But the developing world need only replicate existing technology to achieve far more dramatic increases in growth.

Furthermore, the developing countries have a far younger population profile, a key factor that generates the workers needed to increase world output. Only China, as a result of its one-child policy, is threatened with an aging population. But even in that country, there is no labor shortage as millions of workers are being released every year from the state-owned enterprises into the more productive private sector.

Today the developing countries, despite comprising 87% of the world's population, produce less than one-quarter of the world's output measured in dollars. It is likely that by the middle of this century, they will produce over half the world's GDP. Indeed, the growth of these economies will become the dominating factor in the world's capital markets.

Investors should not succumb to the pessimistic forecasts of government agencies and others who bemoan the aging of the U.S. population. Chairman Greenspan is finally showing the markets that our historically low interest rates are unjustified. Those pessimists currently buying bonds to protect themselves against the widely predicted economic downturn will soon be sorry that they bet against growth.

Mr. Siegel, professor of finance at the Wharton School of the University of Pennsylvania, is the author, most recently, of "The Future for Investors," just out from Crown Publishing.