Proposed Tax Cuts to Push Chinese Economy into New Growth Cycle
The Chinese government is trying to grasp the chance to extend tax cuts in hopes to improve efficiency of financial supply that will improve orderliness of land supply, labor supply and reduce management costs. The overall tax cut serves as the impetus of the reform in the supply system and would initiate China’s economy into a new growth cycle. Leading macroeconomic indicators already shown signs of stabilizing as series of supporting measures are gradually taking effect after five years of economic downturn.
But due to strains brought by the lack of power to form and expand new supply, the economy is in need of a momentum that will lead to a rebound as given the circumstances the government takes no forceful measures, the Chinese economy might face a problem despite with a periodical trough which leaves a series of potential risk that accompanies deflation and local recession. To ensure a healthy and stable economic growth along with a quick recovery from the bottom, which is the most effective measures to expand tax cuts and offset fiscal gap by issuing bonds. This is the only way business investment and consumption can be stimulated and meanwhile spare social funds can be used effectively.
Statistics shown that in 2013, the total government revenue was 20.87 trillion yuan or 36.7 percent of the Gross Domestic Product. Then in 2014, revenues hit 23.67 trillion yuan or 37.2 percent of the Gross Domestic Product. The said macroscopic tax burden is slightly more compared to developed countries and average 10 percent higher that of developing countries. After placing taxation, governmental funds, social security payments and various fess into consideration, the enterprises tax burden is 40 percent and above compared to the average of OECD countries. Having more than 60 months of economic downturn, the high tax burden along with increase in labor, rent and financing costs significantly eroded the profits of enterprises which seriously dampened the enthusiasm but forced million of entrepreneurs into breaking even.
In the past two years efforts for lightening the burden on enterprises were made by the central government by introducing a series of preferential tax policies for small micro enterprises while carrying out structural tax cut measures that was represented by replacing business tax with VAT. Based on official figures by the end of 2014, taxes on small micro enterprises will be reduced by 61.2 billion yuan, but compared with the 23.67 trillion government revenue, the said tax cut seems insignificant and far from enough to stimulate business investments and encourage entrepreneurship. Therefore the tax cut is almost negligible for the macro economy.
If Chinese enterprises can feel the lightening of the tax burden and citizens can feel their income increasing after tax cuts, the investments and consumption will be stimulated. Instead of cutting tax by margin, authorities should introduce a across the board rate cut earlier on the principal taxes such as enterprise income tax, business tax, individual income tax and VAT. A tax cut of 5 trillion yan is possible in a year, meaning that to cut enterprise income tax by 1 trillion yuan, VAT by 1 trillion yuan and business and individual income tax by 0.5 trillion respectively, tax burden will be lightened significantly.
And for the fiscal revenue, 3 trillion yuan accounts for 12.67 percent of the total government revenue and 28.90 percent of the whole tax revenue. It is more important that he fiscal gap that will result from the tax cut plan can be fully filled by issuing the same amount of bonds.