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December 19, 2017

Chinese View of US Tax Cut

Certainly the tax bill, which is now close to becoming law, is far from perfect. Just as certainly it has some things in it that needed to be done like lowering the industrialized world’s highest corporate tax rate, doubling the standard deduction for individuals, and wiping out many (but not enough) loopholes. It will increase the deficit if there is not enough growth stimulated to offset the lower rates.

So is the bill as whole a good thing for the US economy?

In China they are asking, of course, what is the effect on China. Here’s some answers from China’s Global Times.

“…some Chinese companies may consider moving to the US, where the corporate tax rate will be 20 percent [nb. Since raised to 21%]…while China may inhibit the momentum of capital and manufacturing outflow through policy adjustments, such changes could have an impact on the domestic economy and taxation system….

“Second, as a result of the US tax cuts and the anticipated interest rate hikes by the Federal Reserve, global capital will be attracted to the US, pushing up the value of the US dollar….

“Third, the US tax plan also involves individual income tax. When the tax cut is combined with US immigration reform, the country may be able to attract high-technology talent from other countries. China should guard against the possibility of a brain drain…. [nb. I’m not sure what they mean by immigration reform]

“Last but not least, tax cuts in the world's largest economy will have a global spillover effect. While stimulating the US' economic growth and attracting capital inflows, the tax reduction plan may set off a wave of similar cuts across the world, intensifying economic competition and prompting countries to move toward a taxation and legal environment that is favorable for the most dynamic companies.

“The UK, France and other European countries are reportedly working on tax-cut programs. If other developing countries also cut their corporate tax rates, China's manufacturing cost advantages will be eroded and the nation may experience outflows of high-technology talent and intellectual property. The Chinese government needs to be prepared and have comprehensive plans for all potential scenarios.”

Note that the tightly-controlled Chinese press are not fans of President Trump. Nevertheless he would probably be pleased to read Chinese fears that the tax changes will MAGA.

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