Why China Fears Trump Tax Cuts

By Trefor Moss Features Dow Jones Newswires

U.S. President Donald Trump's plan to slash business taxes is having a domino effect on a major American economic competitor: China.

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Like Mr. Trump, many Chinese executives say corporate taxes are too high, with some calling it the "death tax."

"We pay a lot to feed the civil servants," said Zhou Dewen, director of the Zhejiang Private Investment Enterprise Association, a business lobbying group.

China has tried for years to reduce business costs. Now, Chinese officials and executives worry that the tax proposal Mr. Trump announced last week will set back China's global competitiveness and spur companies to invest in America instead of China.

In anticipation of the U.S. tax move, the State Council, China's cabinet, said earlier this month the government will reduce corporate taxes by over $55 billion to "improve business conditions." The Communist Party's newspaper, People's Daily, warned on Friday that the new U.S. plan could trigger a "tax war" if countries start competing to offer the lowest rates.

Despite China's reputation as an export and manufacturing juggernaut, rising labor and land costs and slowing economic growth are eroding its edge. Officials and businesses seek lowering taxes as key to countering that trend.

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"China is losing its competitive advantage," said Liu Huan, a professor of the Central University of Finance and Economics and an adviser to the State Council. "There is no dispute now that Chinese companies' tax burdens are relatively large."

While U.S. companies pay a higher national income-tax rate--35% versus 25% in China--Chinese companies face a welter of other taxes and fees their U.S. counterparts don't, including a 17% value-added tax. And while Chinese firms don't pay state taxes, as U.S. companies do, Chinese employers pay far higher payroll taxes. Welfare and social insurance taxes cost between 40% and 100% of a paycheck in China.

World Bank figures for 2016 show that total tax burden on Chinese businesses are among the highest of major economies: 68% of profits, compared with 44% in the U.S. and 40.6% on average world-wide. The figures include national and local income taxes, value-added or sales taxes, and any mandatory employer contributions for welfare and social security.

In practice, tax experts say, Chinese companies typically pay taxes on about 40% to 50% of their profits after various deductions. Tax experts say the average U.S. rate after deductions is lower than that, though a precise estimate wasn't available, and will fall even further if Mr. Trump fulfills his aim of more than halving the income-tax rate to 15%.

Many Chinese companies also use government incentives to limit their outlays, say tax experts. Some, especially state-owned enterprises, further benefit from easy access to cheap capital, a subsidy that helps offset tax demands.

But Beijing is even squeezing state companies as economic growth slows and tax revenue slows. In recent months, Beijing has imposed capital controls, blocking proposed overseas investments by Chinese companies that it deemed nonstrategic and potentially making it harder for Chinese firms to take advantage of lower tax rates in foreign jurisdictions.

With costs rising and profit margins shrinking, companies complain that a high tax burden is harder to bear. "It's like a person who used to be able to carry a heavy load on his shoulder: When he gets sick he just can't shoulder the same pressure anymore," said He Jun, an economist at Beijing Anbound Information Co., a private think tank.

Chinese auto glassmaker Fuyao Glass Industry Group recently crystallized the concerns of some businesses and officials. In an interview late last year with China Business News, its chairman Cho Tak Wong cited excessive taxation as a reason for investing $1 billion to revive a former General Motors factory in Moraine, Ohio rather than start a new plant in China. Mr. Cho and Fuyao didn't respond to requests for comment.

Officials in Beijing say Fuyao's American gambit could be just the beginning if U.S. tax rates drop drastically. Mr. Liu, the tax-policy expert, said Beijing is serious about lowering taxes, but can't act too quickly because changes take time--and because it needs the revenue.

For China's legions of smaller manufacturers, Mr. Cho's blunt comments about excessive taxation were a welcome intervention. Smaller, private businesses provide most of the jobs, but struggle to get access to tax breaks and lower interest loans, which generally go to larger state-owned companies and tech firms.

In a November survey conducted by the Beijing-based Unirule Institute of Economics, 87% of the 113 private companies polled said their tax burden was either very high or relatively high.

The tax reductions China announced this month aim to address some of those complaints by increasing the tax threshold for small businesses and reducing the value-added tax rates on certain items, such as agricultural products.

But smaller companies, tax experts and officials say more changes are needed. The value-added tax--which was expanded to all businesses in recent years and was supposed to be an improvement. Unlike the business tax it replaced, it levies taxes incrementally at each stage of production and is deductible.

But it has resulted in higher taxes for some companies, tax experts say. And the paperwork to claim the deductions is onerous for smaller companies who often can't obtain the receipts needed from their suppliers, these people add.

The overall tax burden "is a crisis for enterprises," said Mr. Zhou of the Zhejiang private business association, which represents over 100 private companies in eastern China. "I've heard a lot of complaints from small to medium-size enterprises. It's really very difficult for them to survive."

Liyan Qi in Beijing contributed to this article.

Write to Trefor Moss at Trefor.Moss@wsj.com

(END) Dow Jones Newswires

May 02, 2017 07:56 ET (11:56 GMT)