Baucus Goes to China

Just as Nixon shook up the political world by going to Communist China, President Obama has surprised nearly all of us by nominating Senator Max Baucus to be the next ambassador to China. And right in the middle of a flurry of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform proposals by the Senator. What does this mean for tax reform? Well, tax reform could be dead, or tax reform could suddenly get a new perspective, a global perspective. Here are some things U.S. policy makers should know about China and its tax system:

1) China is the fastest growing large country in the world and has been for over 10 years. China also invests more as a share of GDP than any other large country in the world. This is not a coincidence. See the first chart below.

2) China is a low-tax country overall and has particularly low taxes on capital. See the second chart below, and this OECD report.

3) China gets about half its tax revenue from taxes on goods and services (consumed), and a relatively small share is from taxes on income, wages, and profits.

4) China has a corporate tax rate of 25 percent, compared to the U.S. rate of 39 percent.

5) China has no capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. , a dividend tax of 5 to 10 percent, and no tax on interest earned in bank accounts.

6) China has no estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. .

7) China has added about 50 Fortune Global 500 companies since 2000. The U.S. has lost about 50.

8) China is the second largest economy in the world and at current growth rates will soon overtake the U.S.