China economy

What should Beijing do to cope with Donald Trump’s tax cut? Chinese experts give their views

Economists warn that burden imposed on Chinese companies is stifling competitiveness

PUBLISHED : Thursday, 07 December, 2017, 9:11pm
UPDATED : Thursday, 07 December, 2017, 10:34pm

Beijing has been urged to respond to Donald Trump’s plans to cut taxes by improving the domestic business environment, open its markets wider and initiate fiscal reforms.

The US tax cut bill that was passed by the Senate this week would be the biggest reductions in three decades and could create an irresistible trend for other countries to follow suit – as happened in the 1980s.

Economists have said that could put pressure on China which is trying hard to woo investors and to stop domestic capitalists from fleeing the county.

If implemented, the US plan will see America’s corporate tax rate falling from 35 per cent to 20 per cent – compared with a standard corporate tax rate of 25 per cent plus a value-added tax of 17 per cent in China.

Meanwhile, the reduction of a one-off levy on overseas profits, coupled with rising interest rates could lure back more US companies.

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As British Prime Minister Theresa May considers plans to cut corporate income tax from 20 per cent to 15 per cent and Japan also mulls over tax breaks, the pressure will only grow on Beijing – especially as foreign investors’ dissatisfaction has become more obvious and entrepreneurs’ complaints about taxes have become louder in recent years.

Xu Hongcai, deputy chief economist of the China Centre for International Economic Exchange, a government think tank, said the Chinese government needed to evaluate the potential impact of US tax cuts and take countermeasures.

“It’s startling to compare China’s income level and tax burden against the United States. [China’s burden] is apparently against the international trend and it should be lowered,” he said.

The global competitiveness report released by the World Economic Forum in September showed China’s overall tax burden was 68 per cent, which put it 132nd among the 137 economies studied. The rate was 44 per cent in the United States, 48.9 per cent in Germany, 30.9 per cent in the UK and 19.1 per cent in Singapore.

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“We will face greater pressure and can’t win the global competition until our fiscal and tax system is reformed and our tax rates … are lowered,” Xu said.

He called for the modernisation of the national governance system and said cutting the tax burden on individuals was a must.

Beijing has imposed a 15 per cent preferential income tax for hi-tech firms and it also made some piecemeal tax cuts for small firms.

However, its macro tax burden, calculated by measuring the level overall expenditure against gross domestic product, was forecast to reach almost 40 per cent – a level that could kill off businesses – by the Beijing-based Unirule Institute of Economics to reach nearly 40 per cent, a high level enough to kill businesses.

Premier Li Keqiang promised in March to cut the burden on corporations by 1 trillion yuan (US$150 billion) this year, through value added tax reform, fee reduction and tax waiver.

Nevertheless, national tax revenues increased 11.9 per cent year on year to 12.7 trillion yuan in the first 10 months, while fiscal revenue jumped 9.2 per cent to 15 trillion yuan in the same period.

Tang Beijie, deputy secretary general of the Centre for China and Globalisation, a Beijing-based research group, said China had a limited capacity for tax cuts considering the problems of its ageing population.

“The expenditure on public services and social security will rise continuously and accordingly squeeze the room for tax reduction,” she said.

At the same time, Li Daokui, a professor at the Tsinghua University and a former adviser to the central bank, said China should not “overreact” to Trump’s tax cut.

“China and the US have totally different tax structures and economic growth models,” Li said.

“The relationship between the Chinese government and corporations is like a parent and son – when the son is a small baby, [the government] feeds the son. When it grows up, [the company] takes care of the elderly.”

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Chinese private manufacturers, whose profits are being squeezed by rising wage and material costs, have long complained about the burden of taxes, which include a 25 per cent corporation tax, value added tax of up to 17 per cent, social security contributions equivalent to 40 per cent of worker salaries and a variety of administrative fees.

Auto glass tycoon Cao Dewang opened a plant in Ohio last year and has argued the overall labour costs in America are lower than those in China.

In August Foxconn, which makes iPhone and iPads for Apple, opened a US$10 billion in Wisconsin after being given tax incentives to do so.

Huo Jianguo, a former head of the commerce ministry’s research institute, said it was hard for Beijing to lower corporate tax rates, but it could largely offset the impact of US tax cuts by fulfilling its existing policy promises, greatly improving the business environment and opening up its markets.

China still has lots of catching up to do in these areas, he said.

“For instance, can we solicit public opinion half a year before the implementation? Can we absorb public opinion and amend government directives accordingly? Can we make it more standard, open, transparent, stable and orderly?” he said.

To reverse the trend of foreign investors remitting their profits back to their homelands rather than re-investing them, he proposed that the manufacturing and services sector needed to open up further.

He Ning, a former Chinese counsellor of economic and commercial affairs to the United States, said the high domestic institutional transaction costs had forced many businesses to move to the United States.

“There are many invisible [restrictions]. The sanitation, work safety, fire, police and quarantine departments carry out frequent checks and sometimes order production to be halted for unclear reasons,” he said.

The government also needed to open its markets wider to lure foreign investment and increase imports as a way to weaken the US tax cut impact in certain degree, he said.