What did we learn thus far?
- unitary political system—extension of party organization into every part of government (agencies, banks, schools, etc.)
- unusually large state ownership and assets; unusually high barriers
- asset transfer to AMCs
taxation setup
- banks are an arm of the state
- China’s fiscal system based heavily on taxation of enterprises
- VAT on manufacturing: 34%
- corporate income tax: 17%
- social security contributions: 18%
compare that to China
- corporate taxes: US: 4%; China: (^)
- payroll taxes: US: 16%; China 25%
fiscal system
- china: taxes on housholds are only 10-11 percent of revenue
- private wealth, capital gains are not taxed
- no inheritance tax
- 20% or so should pay some income tax, actual number is largely lower
distinct feature
- strongly reliance on enterprises
- heavily VAT-based
- central and local government misalignment
History
Taxation 1.0
- tax farming
- each level given a quota of tax to become the higher levels
- central government thus had a smaller share—localities had too much power
Taxation 2.0
- 1994 tax reform
- no more tax farming
- central government got more revenue
- only Beijing tax: everyone else shared a bit of the revenue and can put into special banks
Adverse Incentives
- even if a company is loosing money, its still paying a lot in taxes which is good for government
- …companies are therefore being propped up just to keep them operational
New Fiscal Source for Localities
- Beijing asserted ownership on land
- use rights sold to developers
- ground rent charged for fees
Impact of 2008
- exports dropped 20%
- tried to turn to domestic sources of wealth; but consumers can’t spend enough
- China instead decided to go New Deal and just stimulate economy by building things
China’s Stimulus
- underfunded local mandates (i.e. “we’ll fund half, and you will match, grow your GDP by n%”)
- bank loans to governments (this is not possible in US because then US collapsed) to match the above
BUT: local governments can’t make new taxes and can’t make bonds; they can’t borrow from banks either; so they make a local state enterprise via a “local government financing vehicle.”
Government Financing Vehicles
Bank loans are typically short term—3 years—and securitized by the projects being built.