Now's A Great Time For China To Slash Its Taxes And Destroy Any Cost Competitiveness America Thinks It Will Win Back

Few would argue that the long-term direction is up for both the Chinese yuan and Chinese labor costs, which means that Chinese companies accustomed to cost advantages are now encountering substantial headwinds on the costs front, which aren't likely to abate any time soon.

Caixin:

During the upcoming period that will span the twelfth Five-Year Plan (2011-2015), China's labor supply growth will plateau. And market forces will drive labor costs higher.

As the government gradually increases the value of the yuan vs. the dollar, and allows higher wages for Chinese workers, they'll have to compensate China's vast manufacturing sector concurrently, else far too many companies could go bust too quickly.

So where can China ease the pain? Taxes. They're way too high for companies, according to Caixin.

Through the decade ending in 2008, the percentage of government income from all sources including taxes and fees rose to 32.2 percent of national income from about 20 percent. As a result, this ratio in China now exceeds what's found in many other countries including the United States, South Korea and Switzerland. And it comes close to the 36.6 percent average for all OECD countries.

A World Bank report said tax rates in low-income countries where per capita GDP is around US$ 750 should be about 20 percent. In countries with a per capita GDP of US$ 2,000, it said, tax rates should be around 23 percent. And in countries with a per capita GDP of US$ 10,000, tax rates can be 30 percent.

China's per capita GDP in 2008 was more than US$ 3,000, but government income levels exceeded those of developed countries. Clearly, the tax level is beyond China's development stage and adjustments are needed.

Thus it now should be tax cut time, and luckily China has a lot of room to slash given how high its effective tax rate is currently. If China can slash while the U.S. is increasing costs for U.S. companies (assuming it happens), then perhaps China could even off-set much of any yuan-hike's effect on relative cost competitiveness between the two nations.

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