Re­form can help ease tax bur­den of firms

China Daily (Hong Kong) - - VIEWS -

Cao De­wang, chair­man and founder of Fuyao Glass In­dus­try Group in South­east China’s Fu­jian prov­ince, re­cently com­plained that the tax rates in China are higher than in the United States. The dif­fer­ence in cor­po­rate taxes in China and the US is ow­ing to their dif­fer­ent tax­a­tion struc­tures. China’s tax­a­tion mainly con­sists of in­di­rect taxes on en­ter­prises, while the US gets its tax rev­enues mainly from di­rect taxes im­posed on in­di­vid­u­als. That’s why en­ter­prises feel the tax bur­den in China is heav­ier.

Many have ac­cused Cao of “run­ning away” from the coun­try. But since many Chi­nese en­ter­prises have in­vested in for­eign coun­tries (or are pre­par­ing to do so), it is un­fair to de­scribe Cao’s for­eign in­vest­ment abroad as an act of “run­ning away” from the coun­try, es­pe­cially 65 per­cent of his com­pany’s mar­ket is in China.

Cao has men­tioned the com­par­a­tively low tax­a­tion in the US, but he has also said the cost of hu­man re­sources is higher in the US. The la­bor cost in China may still be rel­a­tively low but it is in­creas­ing, and the coun­try faces the chal­lenge of an ag­ing pop­u­la­tion, which is ex­pected to in­ten­sify in the fu­ture. This means China’s de­mo­graphic div­i­dends are di­min­ish­ing. Cao’s com­plaint should there­fore prompt the author­i­ties to deepen the tax­a­tion struc­ture re­form.

Yet it is an ex­ag­ger­a­tion to say China im­poses a very high tax rate which makes en­ter­prises dif- ficu lt to sur­vive with­out evad­ing taxes. It is dif­fi­cult to say whether a cer­tain rate of tax is high or low. Even if the macro­scopic tax bur­den is only 1 per­cent, one can hardly say it is low if the tax­a­tion author­i­ties fail to pro­vide cor­re­spond­ing public ser­vices. Con­versely, even if the macro­scopic tax bur­den is 40 per­cent or more, one can­not say it is heavy if the govern­ment pro­vides a sound so­cial se­cu­rity sys­tem and high-qual­ity public ser­vices. By sim­ply com­par­ing the tax rates in China and the US, with­out tak­ing public ser­vices into ac­count, we can only show the rel­a­tive tax lev­els, not whether the public ac­cepts them.

Gen­er­ally speak­ing, peo­ple tend to ac­cept high-level tax­a­tion if a healthy per­cent­age of the tax rev­enues is used to strengthen or im­prove public ser­vices. But oth- er fac­tors, too, in­flu­ence the macro­scopic tax­a­tion level, such as a coun­try’s eth­nic com­po­si­tion, his­tory and tra­di­tion.

In 2014, China’s cap­i­tal ex­port ex­ceeded cap­i­tal im­port, mak­ing it a net ex­porter of cap­i­tal. Fuyao Glass went global about two decades ago, which is more sen­si­tive to the tax dif­fer­ences be­tween China and other coun­tries. And since the in­ter­na­tional tax com­pe­ti­tion is ex­pected to fur­ther in­ten­sify, China should re­view its tax struc­ture from an in­ter­na­tional per­spec­tive.

The World Bank and Price­wa­ter­house­Coop­ers re­cently is­sued a re­port, ti­tled Pay­ing Tax 2017, say­ing China’s over­all tax rate is com­par­a­tively high among the 190 sur­veyed economies based on sta­tis­tics till 2014. Be­sides, US Pres­i­dent-elect Don­ald Trump is likely to cut taxes af­ter tak­ing of­fice on Jan 20. So China should have a cor­re­spond­ing pol­icy to cope with this change.

Al­though China has im­ple­mented a se­ries of mea­sures over the past two years to cut taxes, it needs to fur­ther re­duce levies and ad­min­is­tra­tive charges to ease the bur­den of en­ter­prises, which can­not be done by only chang­ing the tax­a­tion struc­ture.

Re­duc­ing the ra­tio of in­di­rect taxes will help en­ter­prises de­velop in China, but tax­a­tion is not the only im­por­tant fac­tor for en­ter­prises. For en­ter­prises, the most sig­nif­i­cant fac­tor is the af­ter-tax re­turn on in­vest­ment, which is in­flu­enced not only by tax­a­tion, but also the mar­ket, pro­duc­tion cost and other fac­tors. This should re­mind the author­i­ties to im­prove public ser­vices, as it will help im­prove China’s busi­ness en­vi­ron­ment.

The au­thor is a re­search fel­low at the Na­tional Academy of Eco­nomic Strat­egy affiliated to the Chi­nese Academy of So­cial Sci­ences.


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