Shake up in the United States should serve as a wake-up call to Beijing
“Why is China so worried about the United States’ tax cuts?”
This has become one of the top trending questions on social media in China since US President Donald Trump announced less than two weeks ago what was billed as the biggest tax cut for businesses and individuals in more than three decades.
The ensuing debate has focused on China’s own lopsided and much criticised tax regime, which is out of step and uncompetitive, and has reignited calls for the Chinese government to take more radical steps to overhaul the tax code to help spur economic growth.
Logically, the Chinese authorities should have welcomed the opportunity to help jump-start the issue. In fact, anticipating a new wave of tax cuts by major developed countries such as Britain and France, Premier Li Keqiang (李克強) chaired a State Council meeting in the middle of April to approve a raft of measures resulting in 380 billion yuan (HK$430 billion) in tax cuts, on top of 200 billion yuan in non-tax charges in the first quarter.
Noting that many countries were considering tax cut measures, Li reportedly said China should have the sense to “jump the gun” in the new round of global competition and employ effective measures to bolster the competitive edge of the Chinese firms.
In this context, China’s negative reactions to Trump’s tax cuts are mystifying, to say the least.
The People’s Daily ran a scathing commentary, accusing Washington of starting a “tax war” by proposing to cut the corporate tax from 35 per cent to 15 per cent, and throwing the international tax order into “chaos”. It worried that export-oriented countries would suffer as they were not able to compete in tax reductions.
A senior tax official told an official news portal that Trump’s tax cuts were selfish and unworthy of a responsible major power, adding that “we are firmly and explicitly opposed to competition in taxation” although the interview was soon deleted for reasons unknown.
The official view has attracted widespread ridicule on social media but it has added fuel to the debate with many prominent economists now arguing that China still has ample room for overhauling its tax regime and increasing the redistributive role of fiscal policy.
Over the past few days, state media have started to change tune by playing up that China started to cut taxes and other government charges to help businesses long before Trump’s announcement while citing the American mainstream media as slamming Trump’s tax cuts as unrealistic and aimed at helping the rich.
It is interesting to note the strong whiff of nationalistic sentiment in the negative official reactions to the US tax reform regarding why Beijing should follow Washington’s footsteps when it comes to its own domestic agenda.
Such thinking is counterproductive. China should know better: preferential treatment in the special economic zones, including a 15 per cent corporate tax rate for foreign investors, is one of the major factors which has attracted massive amounts of foreign investment and turned the country into “the world’s factory”.
