Date
15 December 2018
If the tax burden is reduced, Chinese companies will invest more, setting the stage for enhanced industry upgrade and innovation, observers say. Photo: Reuters
If the tax burden is reduced, Chinese companies will invest more, setting the stage for enhanced industry upgrade and innovation, observers say. Photo: Reuters

Why China could do with a tax cut

China is said to be mulling an overhaul of the mechanism for collecting social insurance levies, a move that could result in increased financial burden on local businesses. That has become a key concern for market participants.

What China should do is the opposite – tax reduction.

Among Western countries, the US has been the most successful economically. One of its tricks is use government borrowing to support tax reduction, which enhances the corporate sector’s ability and incentive to invest, and leads to wealth creation and eventually higher tax income.

As long as the government can borrow at a much lower rate than return on investment in the private sector, this strategy works well.

When the corporate sector makes good money, it attracts even more entrepreneurs, and the economy becomes more vibrant.

The US government largely leaves the job of economic growth to the market and let people come up with new technology and ideas to create wealth. The state steps in only when the economy has suffered a major recession.

Throughout US economic history, there have been ongoing technological developments. From steam-boat sailing technology, railways, oil exploration and refineries to automobile manufacturing, computers, the internet and smartphones, there has been a continual evolution. Now it’s artificial intelligence, cloud technology and autonomous driving technologies.

America’s well-developed stock market allows its people to participate in waves of technological revolutions and growth of new industries, one after another. One can safely assume this pattern is going to continue.

China should take a leaf from the US.

Generally speaking, Chinese private firms know how to use capital more efficiently than State-owned firms. A tax increase would have negative wealth effect while a tax cut would vitalize the economy and benefit mainland’s stock markets.

China’s economy has great potential, and authorities should cut tax to fully unleash that potential.

The full article appeared in the Hong Kong Economic Journal on Nov 19

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

– Contact us at [email protected]

RC

Columnist at the Hong Kong Economic Journal

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