Should China cut taxes? In discussing 2007's macroeconomic policy there has already been much talk of moderately reducing taxes in order to decrease the burden on businesses and maintain an attractive investment environment.
At the beginning of the new year, the State Council approved the forgiveness of pre-1997 overdue taxes for businesses in northeastern China. This is important to base industries with a historically heavy burden as it will help them continue to reform and reorganize. And before this, businesses in the northeast already enjoyed a value-added tax that effectively cut taxes.
The move to a value-added tax along with other recent tax adjustments together amount to a reduction in taxes. We believe that a comprehensive and inclusive tax break should have a place in this year's macroeconomic policy agenda, extending these benefits to other regions.
Why should taxes be reduced? One reason is that China's firms are currently facing a formidable tax burden. A World Bank survey published last year revealed that China has some of the highest corporate taxes in the world. In the past few years, China's average GDP growth rate has been above 10 percent, while tax revenues have increased 20 percent. Though there are other factors to be considered, it is unjust for an increase in tax revenues to exceed growth to such a degree.
This year, China's economy will experience even more pressure to slow down. Although this will result in more stable growth, it will trickle down to firms who will be pressed to avoid overproduction. A reduction in taxes would help temper this volatility in the businesses environment.
Some scholars believe that because government spending targets are so numerous it will be difficult for them to find a way to decrease taxes. But if policymakers keep tax cuts in mind while making budgetary calculations, they will be more considerate with where their hard-earned funds go.
We believe that in most cases China's tax policies should be incorporated into the tax system itself. For example, if during this year the above-mentioned tax forgiveness policy were extended to the entire country, it would serve as a tax cut.
The goals of tax reform are simplification, inclusion, adherence, and reduction. In the past few years, tax revenues have increased due to an increasing tax-base that is more strictly administered. But tax cuts have not been ideal, and in revisiting the issue, policymakers have labeled 2003's tax cuts a special response to crisis conditions. In 2007 we should actively consider more tax cuts for the future.
