The debate over whether China should cut taxes is heating up as the nation pushes supply-side reform.
Generally, you arrive at a country’s macro tax burden ratio by dividing tax revenue by gross domestic product (GDP).
It’s estimated that its macro tax burden ratio was 37 percent in 2014.
For purposes of comparison, we look at the ratio of total fiscal revenue to GDP.
IMF data shows the ratio is 29.1 percent in the US, 48.1 percent in Japan, 46.7 percent in France, 51.6 percent in Sweden, 32.8 percent in Australia, 23.7 percent in Thailand, 34.2 percent in Mongolia, 24.1 percent in Egypt, 32.4 percent in Tunisia, 37.6 percent in Brazil, 23.7 percent in Chile, 43.9 percent in Russia and 34.5 percent in Romania.
It’s obvious that China’s macro tax burden ratio is higher than those of most developing nations and those of some developed countries including the US.
China is ranked 80th in per capita GDP.
It is a developing economy, so its tax burden ratio is excessively high.
As a new emerging economy, China should have a lower tax burden ratio.
Also, competition between US and Chinese companies are set to escalate.
The tax burden will be one of the determining factors of their respective competitiveness.
China’s macro tax burden ratio is 8 percentage points higher than that of the US which has a macro tax burden ratio of 29.1 percent.
In the medium term, tax cuts will be part of efforts to push supply-side reform aimed at improving efficiency.
At present, China is facing overcapacity. The solution to this is efficiency.
Supply-side reform was adopted by former US president Ronald Reagan and former British prime minister Margaret Thatcher.
Both took tax cuts as major measures.
China’s excessively high macro tax burden affects the supply efficiency of companies.
The country is in the middle of mass entrepreneurship and innovation.
The success of these initiatives will determine whether China can avoid the middle-income trap, a point at which the economy stops growing after achieving a certain level of development.
High tax rate will stifle innovation and creation.
The authorities should reduce tax from a supply-side and innovation perspective.
In addition, tax cuts are critical to stable economic growth.
China’s economy continues to slow, albeit at a modest pace.
It grew 7 percent in the first two quarters of 2015, 6.9 percent in the third quarter and 6.8 percent in the fourth.
The government is seeking to double per capita GDP by 2020.
It has to ensure growth at 6.5-7 percent in the next five years and maintain loose macro economic policy to achieve that.
China cut interest rates five times and banks’ reserve requirement ratio four times last year.
By contrast, there has been little movement on the fiscal policy front.
Fiscal stimulus may not be enough given that the property market has dropped dramatically.
China’s property investment accounts for 20 percent of fixed-asset investment, which contributes 45 percent of GDP.
Property investment had been running above 20 percent before 2013, slowing to 10.5 percent in 2014 and 1 percent last year.
Overall property investment may post negative growth, with some second-tier and lower tier cities grappling with high inventory.
Accelerating infrastructure investment may not be enough to stabilize growth either.
The government has introduced structural tax cut in recent years but the scale and coverage have been limited.
A large-scale tax cut, which could benefit most companies, is more suitable.
It should address the needs of startups and traditional industries struggling with overcapacity.
This article appeared in the Hong Kong Economic Journal on March 2.
Translation by Julie Zhu
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