“Tax less, spend less” policy could help China

January 9, 2012

By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Beijing takes too big a share of the economic pie for the country’s own good. Fiscal revenue grew by a quarter in 2011, almost three times as fast as GDP. Giving some back to its people should help spur consumption. The government may have to cut spending on things like infrastructure, but that’s not so bad.

The central government is rich, but the cost is underdeveloped consumption and unbalanced local governments. Beijing’s fiscal revenue growth has outpaced that of the economy in the past decade and now amounts to 25 percent of GDP, up from 15 percent 10 years ago. Despite fast rises in salaries, disposable income as a percentage of GDP has been falling steadily. Local authorities were responsible for 80 percent of revenue expenditure in 2010, but got only 44 percent of tax receipts.

Lowering taxes for the poor and consumers will make China’s people feel richer, and spend more. More consumption is necessary to offset sluggish investment and exports in 2012. Beijing lifted the threshold for paying income tax in June, but could offer bigger concessions to tax-payers. Personal income tax revenue has risen about 30 percent in 2011, three times as fast as income growth. High consumption taxes, especially on imported goods, deter spending at home and send shoppers abroad.

Tax cuts mean spending cuts, but that’s not a disaster. Beijing spent an excessive $95 billion on internal security in 2011, more than it spent on the army. A 10 percent cut in the personal tax take would mean shaving that security budget by just 11 percent. Government-led investment on infrastructure can also afford to fall, to help reduce overall fixed asset investment growth from its current level of 24 percent to something more in line with GDP growth.

Besides, China has room to raise taxes elsewhere, to keep the budget deficit from widening. A national roll-out of a property holding tax already trialled in some cities, a new capital gains tax, and levies on mining would help make up for the shortfalls, and even allow faster increases on welfare spending. If Beijing is serious about sustainable growth, giving the people a bigger share is a good way to show it.

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