China’s tax-cut success story

July 27, 2009

Chinese and American officials meet today in the latest edition of the “strategic dialogue” between the two nations. Here is an interesting 1998 take from Alvin Rabushka of the Hoover Institution about the role of tax policy in China’s economic ascent.

In 1978, the late Chinese leader Deng Xiaoping launched economic reforms that set China on a path of rapid growth. … Deng’s reform package included the establishment of coastal economic zones, increased investment by foreigners, liberalized trade, and a free market in agriculture. But the application of supply-side tax policy was the main component. In 1978, total government revenue consumed about 31 percent of GDP. Deng’s policies reduced China’s tax burden relentlessly, year in and year out. By the end of 1995, the tax burden had fallen to 10.7 percent of GDP, a cut of more than 20 percentage points, or two-thirds in relative terms.

Tax cuts fueled the privatization of the economy. Deng’s policy of massive tax reduction shifted one-fifth of all resources from government hands to the emerging town and village enterprises and private firms, which productively used those resources. The private sector grew faster than the country’s 10 percent annual average. Since the government didn’t tax away the private sector’s prosperity, the fruits of growth were plowed back into expanded activity. This had a snowballing effect, speeding the transformation toward private ownership.

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You are forgetting something very important; in opening agriculture to the free market, China has essentially impoverished the vast majority of its rural populace… we’re talking about 700m (out of 900m) living in third world conditions. While it’s true, the boom in major cities like Shang’hai is staggering, it has come at an equally staggering price of basic humanity. And I think that is the fundamental problem with conservative thinking… the overall economic bottom line is more important than overall standards of living. There needs to be balance between the two – that’s the whole basis of society! – and China, and America, certainly are not striking a proper balance now. Yes, taxes are high, but if not for the high taxes it is very possible to imagine starving masses in the street seeking ‘justice’ re: French Revolution. I don’t want to sound so nihilistic, but there I think it’s closer than a lot of us like to believe. Leave taxes, trim fat, shut down lobbying, and pay off debts – THAT is a longterm solution, not cutting taxes to nearly nothing and hoping for the best.

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