One of the weapons that emboldened Donald Trump to wage an unbridled trade war on China and other nations is America’s robust economic performance, at least for the time being. With rapid GDP growth, a bullish stock market, low employment rates and strong consumption, Trump is bewitched by the conviction that he is poised to win from a position of strength.
Many may wonder if Trump had a magic wand to create an economic miracle despite his destructive measures such as imposing tariffs on imports of other countries, abolishing trade agreements with other nations and stepping out of international organizations.
The answers are no and yes. No, as from the perspective of economic laws, few of Trump’s moves are original or conducive to the U.S.’ long-term interests. Yes, because it is obvious that the tax cut he pushed for in 2017 has played an essential role in stimulating the current U.S. economic boom.
In November 2017, U.S. Congress passed a law commonly referred to as the Tax Cuts and Jobs Act (TCJA), which amended the Internal Revenue Code of 1986 with major changes including reducing tax rates for businesses and individuals, a personal tax simplification and the elimination of personal exemptions.
Under the law, the corporate tax rate was lowered from 35 percent to 21 percent, and for individual income tax, the standard deduction nearly doubles from US$12,700 to US$24,000 for married couples and from US$6,350 to US$12,000 for single filers.
Like anything else, a tax cut is a double-edged sword. Implementing the act would add an estimated US$2.289 trillion to U.S. national debt over 10 years, or about US$1.891 trillion after taking into account macroeconomic feedback effects, in addition to the US$9.8 trillion increase forecasted under the current policy baseline and the existing US$20 trillion national debt. Trump is probably overdrafting America’s future.
Yet, the immediate effects are apparent. It is expected that under the act, individuals and pass-through entities like partnerships and S corporations (closely held corporations) would receive about US$1.125 trillion in net benefits over 10 years, while corporations would receive around US$320 billion in benefits.
Used wisely and in a timely manner, tax reductions can make a big difference, especially when circumstances call for an earnest tax reduction, as is the case with China now.
On March 5, 2018, when delivering a government work report at the opening meeting of the first session of the 13th National People’s Congress, Premier Li Keqiang proposed that China reduce taxes on businesses and individuals by more than 800 billion yuan (US$116 billion) and cut administrative fees by 300 billion yuan in 2018.
At an executive meeting of the State Council on Aug. 30, Premier Li asked several ministers about the progress of the tax reduction program. He pointed out that, despite the economic downward pressure and pinching fiscal revenues in the past years, China managed to boost market vitality through the reduction of taxes and fees, rather than imposing more taxes. “Only when businesses prosper can the market boom and economy flourish,” he stressed.
By international standards, China’s overall tax levels are rather high. According to criteria by the World Bank, macro tax burden index for an upper-middle-income country with per capita GDP ranging from US$3,956 to US$12,235 should be 21.59 percent and it should be 28.90 percent for a high-income country with per capita GDP exceeding US$12,235. As an upper-middle-income country, China’s macro tax burden index is about 33.9 percent, much higher than that of many high-income countries.
China’s tax-profit ratio is 67.3 percent, among the world’s highest, about 1.7 times that of the United States. Business contribution rate for social security including endowment, medical and unemployment insurances is 43 percent.
In addition to taxes, various administrative fees account for about 16.4 percent of China’s non-tax revenues.
The negative impacts of high tax and fees on the economy and the livelihoods of the people are getting increasingly clear, especially against the backdrop of the trade war.
The Central Government’s resolve to reduce tax and fees is firm and some proactive measures have been taken.
But to achieve comprehensive benefits, more coordinated and supporting measures must be devised and implemented, including legislative and administrative measures.
A tax cut is both a necessity for Chinese economy and a countermeasure against the trade war.
(The author is an English tutor and freelance writer.)