China tax reform

Interesting editorial in Caing yesterday: Tax Relief Time for Strained Manufacturers
The editorial argues that China needs tax reform because corporate taxes are now as high or higher than some developed nations.

Besides taxes, all kinds of fees add burden to Chinese companies. Through the decade ending in 2008, the percentage of government income from all sources including taxes and fees rose to 32.2 percent of national income from about 20 percent. As a result, this ratio in China now exceeds what's found in many other countries including the United States, South Korea and Switzerland. And it comes close to the 36.6 percent average for all OECD countries.

A World Bank report said tax rates in low-income countries where per capita GDP is around US$ 750 should be about 20 percent. In countries with a per capita GDP of US$ 2,000, it said, tax rates should be around 23 percent. And in countries with a per capita GDP of US$ 10,000, tax rates can be 30 percent.

China's per capita GDP in 2008 was more than US$ 3,000, but government income levels exceeded those of developed countries. Clearly, the tax level is beyond China's development stage and adjustments are needed.

In order to help China maintain economic development and social stability, value-added tax, corporate income and operational taxes should be lowered first.

What piqued my interest was this paragraph:

Vice Premier Li Keqiang recently wrote an article for the Qiu Shi Journal, a publication of the Central Committee of the Communist Party, that made the case for "positive and steady strides in tax system reform" as well as "reducing (government) fees and balancing the tax burden." There are also discussions within National People's Congress Financial and Economic Affairs Committee to "lower the (tax) burden and raise wages."

Li Keqiang (李克强) is regarded as a potential successor to Premier Wen Jiabao in 2013. If he's spearheading a push for tax reform, it's likely going to come to pass. First up is a resource tax:

On June 1, China unveiled its first resource tax, to be imposed at a rate of 5 per cent on fossil fuels in Xinjiang, as a means of retaining some of the region's mineral wealth in local hands.

Since then Vice-Premier Li Keqiang has advocated a national resources tax in a speech published in Seeking Truth, the Communist Party's leading theory magazine.

And then there's the property tax:

The simmering scandal behind China's rapid development has been the treatment of the 100m-150m migrant workers. Deprived of the right to become permanent residents in the cities, they are often denied access to subsidised schools and other social benefits. Chinese reformers bemoan the fate of "second-class citizens" and talk of "apartheid". Li Keqiang, forecast to be China's next premier, said this month that reforming the system was a priority.

However, attempts at reform have always been stalled by the fragile finances of the local governments that would have to provide these benefits. Those finances have got weaker in the past year as cities and provinces have borrowed to fund spending on infrastructure.

Indeed, if China's post-crisis boom has an Achilles heel, it is the hidden levels of local government debt. A property tax would eventually help provide local governments with the resources to begin paying migrant workers their due.

The spill-over effects do not end there. With more stable income sources, local governments would not need to be so aggressive about selling land to developers, one of their main sources of revenue and the cause of endless social tension as residents or farmers are displaced. Such a tax would also increase the pressure on local governments to be more transparent in their spending. As Li Daokui, an adviser to the Chinese central bank, put it , local governments would have to "report back to the homeowners how they have used this money. In other words, the tax can be used as an instrument to improve local government management."

And then there's rising minimum wages:

The Chinese government is deliberating to re-divide the cake of national wealth among businesses, workers and its own revenues with a move to raise salaries and cut taxes, as a round of minimum-wage hikes kicks off this year.

The Beijing Bureau of Human Resources and Social Security announced Thursday that, from July 1, the city's minimum wage will rise by 160 yuan ($23.50), or 20 percent, from the current 800 yuan ($117.30) per month.

The capital city has set a minimum wage since 1994, and the average annual increase rate is 10.02 percent, according to the bureau, which estimates 100,000 people in the capital will benefit from the increase.

Beijing is one of about 30 provinces or municipalities that have raised or will raise their minimum wage this year, according to figures released by the Ministry of Human Resources and Social Security.

After recent raises, Shanghai currently has the highest minimum wage across the country - 1,120 yuan per month ($164.20) - and Guangdong Province claims the crown for the highest minimum wage per hour, which stands at 9.9 yuan ($1.44).

...Vice Premier Li Keqiang noted in an article published Tuesday by Qiushi magazine that the government will try to increase the proportion of the middle-income group and create an "olive type" wealth distribution system.

After looking at the original Chinese, the word for olive turns out to be the same word for an American football, which obviously has a middle bulge. In addition to tax reforms, a large middle class will grow out of rising wages in China and Andy Xie's latest article is hitting on the theme again.

今后十年大幅上涨的是工资，而不是利率 He says wages, not interest rates, will rise greatly in the next ten years. An English version may or may not become available, here's a link to the Google translated version. He also says inflation could reach double digits, the rise in wages could eventually lead to yuan depreciation, and he's sticking to his target date of 2012 for a potential real estate bubble burst and economic hard landing.