The Senate tax plan has China concerned. Beijing’s Contingency Plan includes higher interest rates and stronger capital controls.
As the U.S. prepares to take China to task over trade imbalances, economic mandarins in Beijing are focusing on a potentially more immediate threat from Washington— Donald Trump’s tax overhaul.
In the Beijing leadership compound of Zhongnanhai, officials are putting in place a contingency plan to combat consequences for China of U.S. tax changes as well as expected interest-rate increases by the Federal Reserve, according to people with knowledge of the matter. What they fear is a double whammy sapping money out of China by making the U.S. a more attractive place to invest.
Under the plan, the people say, the People’s Bank of China stands ready to deploy a combination of tools—higher interest rates, tighter capital controls and more-frequent currency intervention—to keep money at home and support the yuan.
An official involved in Beijing’s deliberations called Washington’s tax plan a “gray rhino” an obvious danger in China’s economy that shouldn’t be ignored. “We’ll likely have some tough battles in the first quarter,” the official said.
Central to officials’ fear is the yuan, which has just regained its footing after enormous government efforts to prop it up. Should the yuan lose steam again, the thinking goes, it could further exacerbate capital outflows in a vicious cycle.
Tax Rates US vs. China
China’s capital flight concerns stem from 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 worldwide.
I don’t buy the notion that growth in the US is about to take off. Rather, I am in the “Fake Math ” camp.
However, since China thinks tax cuts will spur growth, instead of placing more capital controls, why doesn’t China cut taxes?
Mike “Mish” Shedlock
Realist,
How can competition to attract global capital by reducing corporate taxes cause a race to the bottom? A race to the bottom occurs due to tariff’s/trade wars, currency wars, and other false beliefs that protect the establishment.
Increasing taxes reduces what is taxed, just as increasing the tax on cigarettes is intended to reduce smoking. The govt creates nothing, waste more than anything ever created, and is the source of fraud and corruption. If absolute power corrupts absolutely, why does it not make sense that govt power should be reduced?
Deficit spending should be outlawed, with strict punishment being the choice of public hanging or forced viewing of MSNBC. Income tax should be eliminated, and govt should literally print interest-free money to run the govt. After all over 50% of our accumulated debt is from accumulated interest that goes to the banksters. However, short term-limits must come first, as career politicians will never fire their biggest donors?
History has proven that lowering taxes increases GDP. Kennedy understood this basic concept (https://www.jfklibrary.org/Asset-Viewer/Archives/JFKWHA-148.aspx), which along with his anti-war posture on Vietnam, got him assasinated by the establishment. But then again, even a monkey understands the power of incentives – https://www.armstrongeconomics.com/international-news/politics/monekys-marxism/.
China shows some transparency. I am impressed
Since a vibrant economy requires freedom, confidence, and the equal enforcement of the rule of law, our economy will never get unstuck from the swamp until it is drained, and it will not be drained proactively. Short term-limits are a necessary first step. Otherwise, expect increased civil unrest and likely a civil war as govt reduces NET income for consumers to protect their perks and power.
China does understand these key factors and will move closer to the HK/Singapore model, but it will take another 15 years. In the meantime, cryptos will dis-intermediate corrupt/inefficient businesses, and hopefully pull the plug on the swamp.
So, we are concerned that lowering corporate taxes will benefit corporations.
Apparently “we” reject free markets, and accept the notion of fairness is only possible through government intervention.
Corporate taxes, as with all expenses, are paid for by the corporation’s customers….or government “generosity”.
All of this supports the ignorance of a population that persists in the belief that we can have it all, paid for by someone else….something for nothing, and worse still that our “freedoms” can only be ensured by GOVERNMENT, …….that entity that our CONSTITUTION was created to protect us FROM.
FREEDOM is only sustained by truth, transparency, and accountability……those things our government and the corporation’s that own it fight every day to destroy or obscure in their unending desire to “protect us”.
If you read between the lines, what China is really concerned about is the US running bigger deficits. Bigger deficits means a lower dollar. Something China clearly doesn’t want. There’s no way China gives a rats patootie about investment dollars going to the US rather than China.
No way China could grow as fast as it has with the highest tax rates in world. Right? Those rates are like the US in then1950’s and 1960’s.
No wonder Chinese companies are struggling: 68% tax on fake profits. The math says this doesn’t end well.
In order to cut corporate tax rates without running up debt, China would have to slow their military expansion from its current rate. As you can see, the Chinese government prefers any alternative.