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China Economy

Are China's taxes killing its competitiveness?

Businesses claim they are being ‘taxed to death’ and losing their advantage over countries such as the United States

PUBLISHED : Saturday, 24 December, 2016, 12:16am
UPDATED : Saturday, 24 December, 2016, 12:27am

Businesses on the mainland say they are being taxed to death, with the country becoming a less competitive manufacturing base than the United States.

Owners of private businesses, joined by a number of researchers, say Beijing must cut the burdens of tax and quasi taxes, including mandatory social pension contributions. But the government insists its tax rates are still too low compared to rich countries.

Fuel has been added to the debate with US president-elect Donald Trump promising tax cuts for US businesses and British Prime Minister Teresa May vowing British businesses would get the lowest corporate tax rate of the world’s 20 biggest economies.

Chinese billionaire Cao Dewang, founder of Fuyao Glass, stepped into the fray this week, explaining his US$1 billion investment in America by telling mainland media that the tax burden in the US was much lower than that in China.

Zong Qinghou, founder of soft drink group Wahaha, said at a recent forum the country must cut taxes to give businesses breathing room.

“Trump announced shortly after his election win that he plans to cut the corporate tax burden to 15 per cent from 35 per cent – he is trying to help the real economy,” Zong told the 2017 annual meeting hosted by news portal 163.com.

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“It’s impossible to have a rich and powerful country without a strong real economy. If the government is short of money, it can collect more from companies, but what will happen if businesses are squeezed to death – where should the government turn then?”

Li Weiguang, a professor of fiscal science at Tianjin University of Finance and Economics, coined the phrase “tax of death” after he helped interview more than 100 private enterprises for a survey earlier this year.

The Unirule Institute of Economics, an independent think tank in Beijing that sponsored the survey, calculated the country’s “macro tax burden”, which is the ratio of government income, including taxes, fees and social security contributions, to its gross domestic product, is close to 40 per cent, a level on a par with countries such as Denmark, Sweden and Norway with the world’s best welfare systems.

“China relies on government spending, mainly through projects carried out by state-owned enterprises, to stabilise the economy,” said Zhang Lin, a researcher at Unirule. “Large tax cuts are unlikely if China does not change that model.”

Why China should follow Trump’s example and cut taxes

Beijing has recognised the problem and listed “cutting costs” as a top economic priority, alongside reducing overcapacity and debt levels. However, much is being said while little appears to be done.

Entrepreneurs feel little tax relief despite the government having said a change to value-added tax from business tax would lower the burden on businesses by 500 billion yuan (HK$558 billion) this year.

Other complaints include strict tax collection by local governments and proposed taxes on e-commerce, an area of robust growth but low tax rates.

“We have not seen meaningful tax cuts,” said Tang Dajie, secretary general of the China Enterprise Institute, a Beijing-based think tank.

Tang warned that mainland manufacturing would lose its competitiveness even more quickly if Trump did cut taxes for American businesses.