Tax cut will move Chinese economy into new growth cycle

The 2015 Chengdu Motor show opens in the capital city of Sichuan province on Sept 5. With the launch of 71 new vehicles by 106 companies, it is the largest auto show in western China. [Photo/CFP]

Chinese government should grasp the chance to extend tax cuts to improve efficiency of financial supply, to improve orderliness of land supply as well as labor supply, and reduce management cost. Overall tax-cut will serve as the impetus of the reform in supply system, and initiate China's economy into a new growth cycle.

Some leading macroeconomic indicators have already shown signs of stabilizing, as a series of supportive measures have gradually taken effects after five years of economic downturn. However, strained by the lack of power to form and expand new supply, China's economy is in need of a momentum to lead the rebound. Given the circumstances, should Chinese government take no forceful measures, the economy might face an L-shaped prospect despite a periodical trough, leaving a series of potential risks accompanying deflation and local recession.

To ensure a healthy and stable economic growth and a quick recovery from the bottom, the most effective measures are to expand tax cut and offset fiscal gap by issuing bonds. Only in this way can business investments and consumption be stimulated and meanwhile can the social spare funds be effectively put into use.

Eighty percent of the enterprises are expecting tax-cut

Some statistics indicate that in 2013, the Chinese total government revenue was 20.87 trillion yuan, accounting for 36.7 percent of GDP, while in 2014, it reached 23.67 trillion yuan, accounting for 37.2 percent of GDP. The above macroscopic tax burden is slightly more than that of developed countries and averagely 10 percent higher than that of developing countries. After putting taxation, governmental funds, various fees and social security payments into consideration, the enterprise tax burden is 40 percent or so, above the average of OECD countries.

With more than 60 months of economic downturn, the already high tax burden, together with increasing labor cost, financing cost and rent cost, has significantly eroded the profits of the enterprises, which not only seriously dampened the entrepreneurship enthusiasm, but also forced millions of entrepreneurs into the verge of breaking even.

In the past two years, a lot of efforts for lightening the burden on enterprises have been made by Chinese central government, such as introducing a series of preferential tax policies for small micro enterprises and carrying out some structural tax cut measures represented by replacing the business tax with VAT. According to official figures, by the end of 2014, the tax on small micro enterprises has been reduced by 61.2 billion yuan. The tax cut resulted from "replacing the business tax with VAT" totaled 191.8 billion yuan. However, compared with 23.67 trillion government revenue, the above tax cut seems very insignificant and is far from enough to stimulate business investments, encourage the entrepreneurship and the innovations of the public. Therefore, the tax cut was almost negligible for the macro economy. To make things worse, on the contrary, it turned out to be the structural tax increase for a few service industries.

A sampling survey of entrepreneurs indicates that among the measures for stabilizing economy, tax cut is the most favorable one for Chinese entrepreneurs, of which 80 percent have put forward such an appeal.

China is capable to expand tax cut and issue bonds under the low-deficit condition

If Chinese enterprises can actually feel the lightening of tax burden and Chinese citizens can feel income increasing after tax cut, the investments and consumption will inevitably be stimulated. For such an aim, instead of cutting tax by a margin, the authorities should introduce an across-the-board rate cut as early as possible on the principal taxes such as enterprise income tax, VAT, business tax and individual income tax and so on.

In 2014, the total government revenue was 23.67 trillion yuan, of which the general public revenue was 14.04 trillion yuan and tax revenue 10.38 trillion yuan. In contrast to the above numbers, the main taxation for Chinese enterprises and citizens was as follows: 2.46 trillion yuan enterprise income tax, 3.09 trillion yuan VAT, 1.78 trillion yuan business tax and 73.8 million yuan individual income tax.

If a tax cut of 3 trillion yuan is possible in one year, which means to cut the enterprise income tax by one trillion yuan, VAT by one trillion yuan, business tax and individual income tax respectively by 0.5 trillion yuan, the tax burden on the enterprises and citizens will be lightened significantly.

As for the fiscal revenue, 3 trillion yuan only accounts for 12.67 percent of the total government revenue and 28.90 percent of the whole tax revenue. Furthermore, if such tax cut plan is split within two years, 3 trillion yuan means 15 percent tax cut in one year.

It is more important that the fiscal gap resulted from the tax cut plan can be fully filled up by issuing the same amount of bonds. Under the condition of low deficit at present, it is completely feasible for china to increase bonds by 3 trillion yuan.

At present, the fiscal deficit of Chinese government is only 2.4 percent, far lower than that of developed countries. The debt at the end of the year is 56 percent of GDP of the same year, much lower than the US with 100 percent liability ratio and Japan with 250 percent.

In times of economic downturn, it is completely feasible to fill up the fiscal gap resulted from a massive tax cut by 3 trillion yuan while at the same increasing 3 trillion yuan bond issuance in order to actually lighten the burden of the enterprises and increase the citizens' incomes.

In the future, it can kill three birds with one stone by tax cut and bond issuance.

First, a massive tax cut can stimulate the increase of investments and consumption tremendously and revoke the sustainable power for the economic recovery. In modern history, the largest tax cut is carried out by the Reagan administration. He not only cut the individual income tax by 23 percent within 33 months, but also cut the interest rate and dividend tax rate by 20 percent. Besides, he cut the enterprise income tax on a large scale and shortened taxable asset depreciation period. Stimulated by the above tax -cutting measures, the American economy rapidly increased by 6.5 percent in 1983 from the negative growth in 1982, with the economic growth in several quarters attained 8 percent.

It was rare to see such a rapid recovery in the history of recent decades. The panacea is tax cut. With the tax cut for the enterprises, the investment will increase again. The consumption will also be boosted, releasing multiplying effects and the economy will thus enter a positive cycle.

Second, it is predictable that china's economy will face the risks of overheating and inflation in the future. Therefore, the adjustment in tax can help to iron out economic fluctuation, which will not only be good for the recovery of the economy in downturn, but also can avoid the next overheating round.

As for the government, tax-cut can stimulate the recovery of china's economy and therefore help to boost the fiscal revenue. In this aspect, the US is a good example. Faced a new round of economic recession in 60s, American president Kennedy once carried out many massive tax cut programs. According to the prediction from United States Department of the Treasury before reform, tax-cut programs might lead to a large reduction in fiscal revenue within five years, but interestingly, it turned out to be on the increase.

Third, at present, there is a shortage of asset allocation in financial market. Given the circumstances, bond issuance can effectively absorb the social spare funds, avoid financial bubble and improve the operational efficiency of the whole economy.

In a nutshell, five years of economic downturn have made millions of entrepreneurs struggle at the edge of breaking even and a lot of small and medium enterprises are in the danger of bankruptcy. If the national average tax cost is decreased by one percentage point, hundreds of thousands or even millions of enterprises will turn losses into gains and hence even can show great vitality.

Therefore, Chinese government should grasp the good chance to extend tax cut. To deepen the reform, it should improve the efficiency of financial supply to reduce the capital cost, improve the orderliness of land supply to reduce the cost of resources, improve the efficiency of labor supply to reduce labor cost, improve the system management to reduce management cost. With the across-the-board tax cut as the first step, the series of reforms will initiate Chinese economy into a new round of an upward growth cycle.

Teng Tai, author of this article, is chairman of of Huambo Brothers Asset Management Company and director of Huambo Economic Research Institution. The article is translated by Wu Hong.