I understand that Chinese companies are suffering the death tax rate?

Editor's Note : On January 2nd, Professor Zhang Jun, Dean of the School of Economics of Fudan University published an article on the Project SyndiCATe website: Are Chinese Enterprises Being Taxed to Death? The newspaper project Syndicate is known as "the world's most intelligent column", authors from the world's top economists, Nobel Prize winners, political leaders. Professor Zhang Jun published an article discussing the “death rate” of Chinese companies.

The following is an article published by Professor Zhang Jun:
In mid-December, a statement about the “death rate” of Chinese companies sparked widespread debate. The cause stems from the fact that Mr. Cao Dewang, a well-known entrepreneur and philanthropist who has always been low-key, is facing the media. His Fuyao Glass recently invested $600 million in the US to open a factory (Fuyao Glass America) and is preparing to gradually transfer its investment overseas. It is said that Mr. Cao’s reason for “going away” from the United States is the cost difference between the real economy such as land price, energy and labor. He told reporters that “the tax burden of Chinese manufacturing is 35% higher than that of the United States”. This statement by Mr. Cao was quickly spread by the media and triggered another debate about whether China’s tax burden was too high – no doubt this is not a new topic.
For a long time, the debate surrounding the tax burden of Chinese companies has been endless. How high is the tax burden of doing business in China? Is it getting higher and higher? This question is too complicated to give a straightforward answer.
In general terms, if the total tax burden is measured by the proportion of government revenue in GDP, the figure in China is about 30%. According to the Government Finance Statistics Manual developed by the IMF, China’s total tax burden in 2015 was 29.1%, 10 percentage points lower than the world average. The government's fiscal revenue here does not include the income from the transfer of state-owned land use rights, but includes the revenue from state-owned capital management and the income from social insurance funds. If the government's land sales income is included, but the compensatory cost is removed accordingly, that is, only the net income from land sales is considered, and the total tax burden is increased by about 1 percentage point.
Another way to measure the overall tax burden is to simply calculate the ratio of the sum of tax revenue and social security contributions to GDP. Based on this calibre, China's average tax burden for 20122-015 is 23.4%, which is about 12 percentage points lower than that of OECD countries. Of course, if we only look at the proportion of tax revenue to GDP, China is only about 18%, and it has been declining year by year. In contrast, the tax revenue of developed countries in 2013 was about 26% of GDP, and that of developing countries was about 20%.
However, the above indicators and international comparisons have failed to prevent Chinese entrepreneurs and investors from complaining about China's tax burden too much in the past 10 years. In fact, the World Bank’s recently released report said that the average corporate tax rate of Chinese companies reached 68%, ranking 12th in the world. This seems to be in line with the perceived burden of enterprises and investors. Mr. Cao said that the tax burden of Chinese manufacturing industry The level is 35% higher than the US, perhaps based on this. It is not clear what the World Bank estimates for this average total tax rate and how it is measured. But even if the World Bank estimates are taken into account, it is still necessary to simply analyze why the tax burden felt by entrepreneurs is higher than the calculated total tax burden.
The main reason comes from two aspects. The first reason is that compared with most advanced economies, China's tax is mainly borne by producers, and the proportion of households as consumers is surprisingly small. Another reason is that the burden that companies and investors feel is actually a burden beyond taxation. These non-tax burdens refer not only to the actual prices paid for access to resources, land and financing, but also to the numerous surcharges that the government collects from companies.
Perhaps due to the long-term implementation of the planned economy, China is still a country that relies mainly on taxation of producers. The government mainly collects income tax and value-added tax from enterprises. Although the corporate income tax rate stipulated in the Income Tax Law of the People's Republic of China is 25%, it also stipulates the conditions for meeting various tax incentives. For example, for high-tech enterprises that are supported by the government, the income tax rate can be reduced to 15%. For those small and profit-making enterprises that meet the requirements, income tax is usually levied at a rate of 20%. Therefore, I estimate that the median of the corporate income tax rate is about 20%.
China's current producers' VAT rate is generally 17%, and there are 13%, 11% and 6% low-grade tax rates, and in some cases the lowest is only 3%. Compared with those countries that implement VAT, China's VAT rate is similar to them. However, compared with Japan, South Korea, Singapore, etc., on average, the tax rate is significantly higher. Moreover, because the value-added tax is imposed on the producers in the production process, whether it is paid or not, it not only makes the company increase the tax in the production process, but also feels the greater tax burden in the economic downturn. This is very different from the US sales tax imposed on the final sale. According to Li Wanzhen, director of the Taxation Research Institute of the State Administration of Taxation of China, Chinese companies actually bear more than 90% of various taxes and fees, and the proportion of taxes and fees that individuals bear is less than 10%. In comparison, the personal income tax and social insurance tax (fees) of Western countries account for a relatively high proportion, and the taxes and fees directly borne by enterprises are not high.
In addition to paying income tax and value-added tax, many companies in China still have to pay at least 13% of the surcharge, which includes 7% of urban maintenance and construction fees, 5% of education surcharges and 1% of flood protection fees. It should be pointed out that for enterprises, the fees paid to local governments cannot be passed on to consumers, and they are paid from profits. According to Li Dongsheng, chairman of TCL, the average profit margin of China's manufacturing industry in recent years has been less than 2%. Industrial construction, education surcharges and other manufacturing surcharges account for nearly 0.5% of sales revenue, accounting for about a quarter of the average profit. This puts pressure on manufacturing companies with lower profits. The difference between a company's turnover tax and fees is that most of the taxes on the production chain will be passed on to the consumers. This is part of the reason why Chinese-made products are much cheaper overseas than in mainland China.
In the end, there are multiple tax burdens for Chinese companies? In addition to the data given by Cao Dewang of Fuyao Glass, I collected data on the two famous Chinese companies, Gree Electric Appliances and Kangli Elevator, which were compiled by a newspaper reporter in Beijing.
According to the 2015 Social Responsibility Report released by Gree Electric Appliances, in 2015, the company paid a total of 14.816 billion yuan of various taxes, the total revenue of the year was 100.564 billion yuan, the net profit was 12.532 billion yuan, and the tax accounted for 14.7% of Gree's operating income. This is equivalent to 1.18 times the net profit. The annual report of Kangli Elevator disclosed that the company's taxes and fees paid to the state in 2015 were 336 million yuan, which is equivalent to 10.27% of the company's total revenue of 3.27 billion yuan in the year, 68.8% of the total net profit of 488 million yuan. .
The above case shows an excessive corporate tax burden. But it is unclear whether they are widely representative. Chinese local governments often have preferential policies such as tax rebates, tax rebates, tax reductions and exemptions for local enterprises, which makes corporate tax burdens very different in different regions, different industries and different enterprises. Therefore, at the enterprise level, not only estimating the tax burden is a rather complicated task. And estimating the average tax burden is not significant.
But even then, China’s move towards a simpler, more direct and transparent tax system is still necessary. This means that China needs to adjust the overall tax rate of the country to the same direction as the tax burden felt by the company. In the case of continued downward economic pressure, in order to stabilize economic growth, China is considering the structural reduction of taxes and the substantial reduction of fees for enterprises, and China does have room for tax reduction and fee reduction. But besides that, more importantly, as the burdens of Mr. Cao Dewang complained by Fuyao Glass are too heavy, many Chinese companies, especially private companies, have paid more than state-owned companies because of unfair opportunities. Higher costs to obtain land and financing, etc., increase the cost of the enterprise. Moreover, because some upstream basic industries (such as electricity, communications, and energy) are still monopolized by state-owned enterprises, their operational efficiency is too low, resulting in excessively high cost for downstream competitive manufacturing. This is the real cost burden that Mr. Cao Dewang of Fuyao Glass complained about, and over time, these may shake the comparative advantage of China's manufacturing industry. (Author: Zhang Jun, dean of the Department of Fudan University School of Economics)

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