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China economy

Calls grow for China to follow Donald Trump’s lead on corporate tax cuts as trade war bites

Well-known economist adds to demands for Beijing to ease tax burden, saying business costs are significantly higher in China than the US

PUBLISHED : Tuesday, 04 September, 2018, 10:33pm
UPDATED : Wednesday, 05 September, 2018, 4:58am

Appeals for the government to enact significant tax cuts for businesses are getting louder as China’s firms and factories are hit by trade-war tariffs and an economic slowdown at home.

While “cutting costs for businesses” has been listed as an economic priority over the last three years and Beijing has rolled out modest moves to cut taxes, China’s tax revenues have been rising at a speed far faster than nominal economic growth or corporate earnings.

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The pain has become more acute for Chinese businesses since US President Donald Trump in December signed into law what he called the “biggest tax cut” in American history.

“If Trump can enact a large tax cut in the US, why does China have to wait and wait for substantial tax cuts?” the well-known economist Ren Zeping wrote in an article comparing tax levels and business costs in China and the US that went viral on Chinese social media this week.

Ren, who used to work for the Development Research Centre of the State Council, China’s cabinet, and is now with Evergrande Group, wrote that “it’s really time now [for China] to cut taxes … because the trade war, in essence, is about competition of reforms”.

According to Ren, China’s overall tax burden has been higher than that of the United States since 2009 and Trump’s tax cuts widened the difference.

At the same time, the cost of electricity for businesses in China is 1.3 times the cost in America, logistics costs are 1.9 times higher, and social security contributions paid by Chinese companies are 43 per cent of wages – significantly more than the 13 per cent US businesses pay, Ren said.

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The economist is not the first to call on Beijing to cut taxes. Trump’s move to slash the US corporate tax rate to about 21 per cent from 35 per cent only added to demands for Beijing to make a similar move.

Debate over the tax burden on businesses was ignited early last year after Li Weiguang, a professor at the Tianjin University of Finance and Economics, described China’s levies on companies as “killer taxes” – meaning they were high enough to destroy businesses.

The tycoon Cao Dewang, who runs auto glass factories in China and the US, had also spoken out about business costs, saying almost all of them, except labour, were higher in China than in America.

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Beijing has answered the calls with tax-cut pledges, though those promises have not yet resulted in any real impact in reducing the burden for business.

Premier Li Keqiang said in the government work report in March that Beijing would cut the corporate tax burden by 800 billion yuan (US$117.16 billion) and administrative fees by another 300 billion yuan this year. In May, Beijing cut the highest value-added tax rate by 1 percentage point, to 16 per cent.

But in the first seven months of this year, China’s tax revenues rose 14 per cent from the same period a year ago to 10.8 trillion yuan – far higher than the 6.8 per cent GDP growth in the first half. Total tax revenues so far this year have already surpassed those for all of 2015.

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Tang Dajie, secretary general of the China Enterprise Institute, a Beijing-based think tank, said that China needed to cut taxes further to help manufacturers weather the slowdown and trade-war headwinds.

“It is evident that [China’s] macro tax burden and corporate burden is very high,” said Tang, who conducts surveys of entrepreneurs at the local level.

A key factor behind China’s tax revenue increases in the last few years is a dramatically improved collection process, facilitated by a technology system known as the Golden Tax Programme that identifies and closes tax evasion loopholes.

“Tax authorities have incentives to collect as much tax as they can” and new technologies have enabled them to maximise tax revenues without changes in the rates, Tang said.

Purchasing manager indexes for August showed that the country’s small businesses and private sector are bearing the brunt of slowing demand and rising costs in raw materials and labour. State-owned firms are doing better in comparison, partly because they control resources.

Analysts warn that the burden on Chinese businesses may rise steeply next year as China shifts the mandatory social security payment collection process to local tax authorities from the social welfare agency, which is expected to reduce firms’ ability to avoid paying their full tax obligation.

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While China requires every employer to contribute 19 per cent of an employee’s salary into the state pension system and 10 per cent for health insurance, collection can often be lax, especially among private businesses.

The tax authority’s takeover of the matter could translate into a hefty rise in actual costs for factories.

Chinese businesses could have to pay an extra 2 trillion yuan in social security payments next year as a result of the new rule, according to research by Guotai Jun’an Securities, headed by chief economist Hua Changchun.

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That change alone “could potentially drag down GDP growth by 1.5 percentage points”, Guotai warned.

According to the World Bank, China’s total tax burden rate – measured by taxes on commercial profits – was 67.3 per cent last year, much higher than the 43.8 per cent in the US and 22.9 per cent in Hong Kong.

“Internationally, China’s tax rate is not competitive,” said Raymond Yeung, chief greater China economist at ANZ Bank in Hong Kong.

Yeung said that while China was not likely to become a tax haven, the government should at least consider testing significant tax cuts for trial periods in some of the country’s free-trade zones.

“This will be essential if China wants to improve its competitiveness and rely more on domestic consumption for growth,” he added.