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The United States Senate theoretical relationship between has approved a bill to rates of taxation and the resulting reduce taxes for businesses levels of government revenue. and the rich as part of the promises US President But the two countries’ tax Donald Trump made during reforms are different. Trump’s his presidential campaign, tax cut is aimed at greatly which will have a big impact on reducing the tax burden of many economies, especially Chi- enterprises and individuals, na’s. while in China, the standard

But given the global trend of rate of income tax for enterprises cooperation and competition, was reduced to 25 China could transform the chal- percent many years ago, lenges created by the US tax cut and high-tech companies into a driving force for the econo- can enjoy a preferential tax my. Through interactions with its rate of 15 percent. And for major trade partners, including the past few years, small the US, Japan and the European and medium-sized enterwin-prises Union, China could promote have been paying 12.5 win development to build a com- percent income tax, and munity of shared future for some local governments have humankind. offered even more preferential

Many economies, including tax rates to attract enterprises. China and the US, use tax cuts as Besides, China raised the a tool to boost the economy. But threshold of individual income the US’ tax cut policy is guided bytax in the last round of individual “Reaganomics”, or the economic income tax reform; in fact, individual policy president Ronald Reagan income tax accounts for followed in the 1980s. China, too, only about 6 percent of China’s used tax cuts to propel reform overall tax revenue, whereas in and opening-up in the 1980s, andthe US it accounts for about 47 they have yielded positive percent of the federal government’s results. total tax income.

Trump wants to make “America Therefore, China has less room great again” by using, among to reduce enterprises’ income tax, other economic tools, tax cuts, and the individual income tax whereas China has cut taxes to reform will focus more on building deepen supply-side structural comprehensive and classified reform in line with its economic tax systems. “new normal”. The world’s two Moreover, unlike in the US largest economies have a common where mainly direct taxes are orientation — they believe imposed, China’s tax revenue that “tax cut leads to inspiration comes mainly from indirect taxes. and further optimizing of economic As China is reforming the operation”, as proved by indirect taxation system, by the Laffer curve, which shows thereplacing business tax with val- ue-added tax, the ratio of direct tax will gradually increase to optimize the taxation system.

This means China’s tax system optimization will be different from the US’, because in China it is important to reduce the various non-tax burdens of enterprises, which are still high in China compared with the international level in general. In this regard, Trump’s tax cut is likely to help China reduce the non-tax burdens of enterprises. For instance, the premiums enterprises pay for their employees’ social insurance and public housing reserve fund could be reduced, and so could other nontax burdens through administrative approval.

So China should not follow the US’ example; instead it should promote reforms in two areas based on its actual condition. The first is to reduce administrative costs and improve administrative efficiency. And the other is to promote public-private partnerships, which are better equipped and more efficient in attracting private capital for the construction and operation of public projects and infrastructure. This in turn may effectively ease the government’s financial burden and help improve people’s livelihoods.

In other words, China is in a position to transform the challenges brought about by the US tax cut into an opportunity to facilitate economic development, in order to expedite the supply-side structural reform and better serve the people. The author is director of the China Academy of New Supply-side Economics, and former director of the Institute for Fiscal Science Research responsible to the Ministry of Finance.

LI MIN / CHINA DAILY