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People's Daily Overseas Edition: US substantial tax cuts in China how to deal with?

December 04, 2017 at 08:36
source: People's Daily overseas edition
edit:Oriental wealth network

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Year after year, Trump finally made a beautiful turnaround.

Local time on the early morning of December 3, in the long-standing game between the parties, the Senate passed the Republican Party's more than 500-page tax reform plan with 51 votes in favor and 49 votes against it.

In the opinion of public opinion in the United States, this not only represents a major victory for Trump and Republican parties, but also the largest adjustment to U.S. tax laws in more than 30 years. Under the recently passed tax reform act, corporate tax rates in the United States will be reduced from 35% to 20%, and personal income tax will also be reduced in different grades.

The United States, the world's largest economy and the core hinterland of the global capital market, its drastic fiscal and tax reforms will undoubtedly have a huge spillover effect on the world economy.


The United States tax reform, the most direct impact on the main, of course, is the U.S. economy.

As we all know, at the present stage, there are mainly two means for the state to carry out macro-control: one is fiscal policy, which can affect the amount of cash in the market by increasing / decreasing taxes so as to restrain overheating or stimulate economic development; secondly, monetary policy , Mainly because the central banks of various countries adjust their economic activity by raising / lowering the exchange rate of their own currencies and affecting the production costs of enterprises and so on.

In Japan, Europe and other long-term zerointerest rateEven negativeinterest rateThe monetary policy of the United States is still difficult to stimulate economic development, the United States this fiscal reform, are high hopes.

The most direct understanding, tax reduction, which means that residents disposable income and business costs of production decline, which will undoubtedly stimulate consumer spending, while increasing corporate profits and promote business reinvestment and enhance economic viability.

The U.S. tax fund estimates that this plan will increase U.S. real GDP by more than 9%, increase real wages by 8% and create at least 2 million new permanent full-time jobs. Trump is even more brazen: "This is a Christmas gift for all Americans this year! To save an average of $ 1,182 on a yearly basis for every American family!"

Of course, the reform of the tax system is very complicated and non-trivial can be said. Overall, the United States this tax reform has so many big things:

First of all, "personal system" has been replaced by "territorial system," meaning that as long as taxes have been paid overseas, it is not necessary for U.S. companies to return to their home countries. The move is widely seen as stimulating the return of U.S. corporate profits.

In addition, tax rates have been greatly simplified, and many tax revenues have been lifted, including estate tax and ATM with alternative minimum tax rates. The same can encourage more economic activity.

At the same time, some voices, including some members of the United States, also believe that tax cuts will bring huge fiscal deficits to the U.S. government. Earlier, the independent tax policy center estimated that the House version of the tax reform bill will increase the U.S. deficit by 1.3 trillion U.S. dollars in the next ten years. There is still a great deal of uncertainty about whether the U.S. government can handle this.

However, these are just some people's judgments. There are also many controversies surrounding these judgments. In fact, the current version is not the final version. There is still some difference between the bill passed by the Senate and the bill passed by the House of Representatives last month. What specific changes will be the future, when the implementation, still need to wait.


It is very important that as the globalization of the world economy accelerates, no country can independently be controlled from the economic activities of other countries. The fiscal and monetary policies of a country will also have a far-reaching impact on other countries' economies. For the United States, a country with a highly open financial market and strong currencies, its impact is even worse.

As the world's second largest economy, with up to 3 trillion US dollarsforeign exchange reservesAs for the country with a high degree of dependence on economy and trade, China is undoubtedly one of the most concerned countries in the sphere of influence of the spillover tax reform of the United States.

Mei Xinyu, a famous economist and researcher at the Institute of International Trade and Economic Cooperation of the Ministry of Commerce, believes that in theory, the tax reform policies of the United States mainly impact on China in two aspects. One is the impact of capital flow and the other is that monetary policy brings Follow-up effect.

First of all, according to its latest tax reform program, corporate income tax in the United States will be reduced from 35% to 20%, which means that the operating pressure of enterprises will drop drastically. This will largely drive the U.S. retention overseas Large-scale return to domestic profits to stimulate US companies to withdraw from the Chinese market. It will have a great potential impact on China's balance of payments, foreign exchange reserves and the exchange rate of RMB.

Second, it must be pointed out that the tax reduction policy of the United States is based on the fiscal policy of "raising interest rates + shrinking the U.S. scale." This combination of punches will undoubtedly affect the base currency of other countries. How to understand? The so-called rate hike is to raise the exchange rate of the U.S. dollar and the appreciation of the U.S. dollar. Then the RMB devalued in disguise. Shrinking principle is similar, that is, the Fed to recover the excessive dollar on the market, in short, so that the already very strong dollar has become more objective, but also objectively devalued the RMB pressure.

In general, this kind of "double kill" of monetary and fiscal policies will have some "austerity" effect on other countries. This double contraction will not only cause great downward pressure on the prices of primary products (raw unprocessed products), but will further exert pressure on capital flight and will have a huge impact on the balance of payments and foreign exchange reserves Impact.

We have to be on guard for this wave of shocks.


Here, everyone must have come up with an idea: in the mid-to-late 1980s, the U.S.-led "Plaza Accord" was considered by many as a shady conspiracy that led to the Japanese economy slumping for decades.

What protocol can be as legendary?

This has to be said back to the United States in the 1980s, when the United States faced the crisis of the excessive exchange rate of the U.S. dollar, the external trade deficit and the growing government deficit. As a result, the trade deficit once accounted forGDP3.6% of the economy is extremely unhealthy. And what about Japan? In 1985, the United States replaced the United States as the largest creditor country in the world and the products it manufactured were flooding the globe and the capital was expanding wildly.

Therefore, in order to boost exports, a voice has emerged in the United States, using administrative measures to reduce the exchange rate of the U.S. dollar and save U.S. exports. Things went smoothly beyond imagination. In 1985, the finance ministers of the United States, Japan, the former Commonwealth of Germany, France and the United Kingdom gathered at the New York Plaza Hotel and reached a conclusion that "the Japanese yen and the drastic appreciation of the mark have redeemed overvalued dollar prices "Agreement.

Since then we all know the history. The yen has risen sharply. From the first quarter of 1985 to the first quarter of 1988, it appreciated by 54%. After that, the huge economic bubble was punctured and the Japanese economy stagnated for decades. It is the famous "lost decades" in economics textbooks.

So, Japan's case with today's China, there is no comparable? This time, when the U.S. tax reform news came out, many people began to cry out, "Winter is coming, the capital is in a shortage, and the end of the day is coming." Is that really the case?

To some extent, as the world's second largest economy, the world's most important exporter of products, China's foreign exchange reserves have risen to No. 1 in the world and the renminbi faces a great upward pressure. This situation is very similar to Japan in the mid-1980s.

But the question is, is this logical?

Not to mention that under the increasingly free market economy today, it is totally unrealistic to hit the economy of other countries with a single administrative force. Even in the case of the Plaza Accord, the biggest impact of exchange rate changes is not the output or input of products, but the flow of capital and the corresponding wealth effect.

Therefore, completely blaming Japan's "lost decades" on the "Plaza Accord" is far-fetched to many economists. It is also wrong to regard the fiscal and taxation policies of the United States as simply a scourge of floods.


Of course, we can not underestimate the U.S. tax reform policy. However, the situation is far from as bad as imagined.

Imagine if the United States drastically cuts taxes to further widen the tax burden gap with other developing countries. Is it possible for other countries to make adjustments to other fiscal and taxation policies such as tax cuts under a series of pressures such as capital flight? In fact, Britain, France and other major developed countries have pushed for tax reduction legislation. And if this vision is truly achieved, this round of global tax-reduction war will undoubtedly reduce the policy effect of the U.S. tax cuts to a certain extent.

In addition, it is very important that the analysis we have made before is based on the common economic judgments. However, the actual economic activities are far more complex and difficult to grasp than the theories.

From the United States domestic point of view, the United States tax cuts will really be one hundred percent to promote the return of multinational corporations it? Not really. The tax rate is only one of the factors that affect the investment of a company. Other factors such as macroeconomic policies, business environment and human resources conditions will all have a great impact.

In the opinion of Mei Xinyu, a single fiscal and taxation policy is also very difficult to boost the U.S. economy and needs to be combined with a series of social reforms such as the following benefits so as to achieve the best possible results. This, naturally, also requires careful consideration of transnational capital.

Mei Xinyu pointed out that it is very important to note that "Trump's visit to China calls China's political system suitable for the Chinese people. To a series of recent moves, he prefers to reduce intervention in the external world and focus on domestic economic reforms , Motivating the production of labor ...... This idea is not a bad thing for China and the outside world. "China and the United States are not enemies. The United States focuses on the domestic economic development and boosts its economy. It is not a bad thing for our country.

In the view of Mei Xinyu, what should be done now in China is still focused on a series of reforms of its own and should not be misled by external actions. The tax reform in the United States may exert some pressure on China, but this can also translate into an opportunity for reform.

The current fiscal and taxation in China there are still some hidden problems, such as higher tax rates, transfer payments and relief too much. If we can take this as an opportunity to some extent to reduce the exemption and transfer payment preferences to reduce unnecessary fiscal expenditures, while reducing the tax rate, then China's fiscal reform will also usher in a vast space.

In this process, it is only the current thinking of China that we should adhere to when we concentrate on our own feet, broaden the tax base, win more fair, secure and sustainable fiscal and taxation policies and revitalize the economic activities of the country and society.

                (Original title: Knight Island: US substantial tax cuts in China how to deal with?)

                (Editor: DF010)

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