2017/12/12

The External Impact of U.S. Tax Policy

The U.S. Senate on Dec. 2nd passed the Republican bill on a party-line vote whose main feature was a drastic tax cut for corporations.
So what China will do to cope with its potential impact
 
image credit: internet

WHAT IS IT?
The bill aims to reduce tax rates from 35 percent to 20, the lowest level in three decades.

Personal income tax will be reduced, the tax system simplified and a one-time tax levied at a lower rate on American companies transferring overseas assets.

The House of Representatives passed its own version of tax reform legislation last month, containing significant differences from the Senate version. Congressional Republicans are now working on an agreement on the final tax legislation before Christmas.

Critics have blasted the tax bill, as the biggest beneficiaries will be the wealthiest individuals and corporations, with average earners seeing their taxes lowered initially, but increasing over the next few years.

"The tax bill is tilted heavily toward wealthy individuals and corporations, so it is not likely to help the middle class that much," Darrell West, a senior fellow at the Washington-based think tank Brookings Institution, told Xinhua.

THE IMPACT
Some economists have warned that a more attractive corporate environment in the U.S. may pose challenges to China's competitive position, at a time when its labor costs are rising.

"[There are] no worries for more enterprises choosing to start business in U.S., as many more factors, including comprehensive cost, other than the tax rate shape the overall U.S. business environment," said Zhou Yuan, managing director of Boston Consulting Group.

The legislation will give U.S. companies a tax cut on repatriating deferred profits held overseas and make dividends received from companies overseas exempt from tax, sparking concern of capital outflow.

"Combined with the effect of lower corporate tax, we believe it will encourage overseas U.S. firms to send back their profit. It may even produce a wave of profit repatriation," said Prof. Zhu Qing with the School of Finance at Renmin University of China.

But analysts noted that the impact would be limited as China's efforts in lowering corporate cost and creating a fair business environment will attract more foreign businesses.

China has rolled out a slew of measures to ease or lift foreign investment restrictions in its financial markets. In its latest move, foreign businesses will be allowed to own up to 51 percent of shares in joint ventures in securities, funds or futures, with the cap phased out over three years.

WHAT TO DO
Zhu Guangyao, vice-minister of finance, said at a forum that China would "take proactive measures" in response to the U.S. tax reform.

Zhu said China should set policies based on coordination with other countries to boost labor productivity and help people become better off.

According to Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, China should continue to carry out its VAT reform in response to the U.S. tax bill.

"One of our current priorities is to deepen VAT reform that targets a more market-oriented scheme for resource allocation and build a fair investment environment for enterprises," Liu said.

As the most significant tax overhaul for two decades, VAT is replacing the business tax, which has been in place for 60 years, streamlining procedures and avoiding repetitive taxes.

"China should further streamline VAT brackets to encourage fair market competition, which in a sense reduces taxes for many enterprises," Liu said.

Though the U.S. bill's impact of the tax overhaul on China is perceived to be quite limited, "The external impact of tax policy change in the world's largest economy cannot be overlooked," the professional said.

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