If the news that US tax revenues have fallen was disturbing, then this may be even worse: China’s tax revenues are expected to grow by 10% in 2009. The increase comes on the heels of a successful 2008 year in China, where tax revenues climbed 18.8% to 5.42 trillion yuan ($792.68 billion).
The “global crisis” is not affecting all nations the same. While it’s true that Chinese tax revenues were not as strong as projected, they still far outpaced US revenues. And it’s a trend that is expected to continue. The Chinese expect to bring in nearly 5.98 trillion yuan ($875.4 billion) next year, an increase of nearly 10%.
Why the increase? For one, Chinese industry is booming again. Industrial sectors are seeing vigorous growth, especially in steel and metals. The Chinese are one of the largest export countries in the world.
As someone who lives near one of the former steel hotbeds of the US, I find this a little sad. AISI (American Iron and Steel Institute) reported earlier this month that the US steel industry was “operating at only 53% capacity utilization and with imports year-to-date taking a quarter of the U.S. market.”
As our steel mills and automotive companies shut down, we’ve become a country that doesn’t make things anymore. Arguably only four of the top ten companies in the US actually “make” things (GM, GE, Ford and Hewlett-Packard as ranked by Fortune). We depend heavily on imports. In my brief survey this morning on twitter, most were unable to think of more than a handful of manufacturers in the US – and the lion’s share of those named were technology companies like Apple and Microsoft, which may be based in the US but actually manufacturer in places like China. (Though, in an ironic turn, I was informed that the world’s largest manufacturer of fortune cookies is located in Brooklyn.)
I have to think that this change of direction from manufacturing and agricultural based to overwhelmingly service based businesses has affected our bottom line, not just in terms of our collective budgets but in terms of taxes. As in the US, taxes account for most of the revenue in China. Value-added (VAT), corporate income and business tax revenues contributed about 70% of the increased revenue, according to the Chinese government.
But how do you tax a shifting economy? As you’ve no doubt noted over the past year, questions in the US about how to tax internet services and sales have become increasingly important. It’s easy to tax a piece of steel made in Bethlehem, but how do you tax a sale of a book when the site of the server is in, say, Japan?
And in an economy heavily dependent on real estate transactions and technology providers, how do we tax? Do we tax on the cost of the transaction (like a VAT), the gain from the transaction (like we do for real estate) or the wages attributable to the transaction (like we largely do now)? If we can move those transactions “off shore”, how does that affect how we tax them?
The point is that our current tax system is based on our “old” economy. We’ve been slow to make changes, to react to differences in our outputs. And it shows.
More “old world” countries like China and Germany have been slow to change their tax systems, too. But interestingly, the backbones of those economies, while evolving, do not seem to have shifted as dramatically as those in the US. Those countries, while adapting to new technologies, are still heavily manufacturer-based, 50% and 30%, respectively. In the US, manufacturer-based businesses now account for less than 20% of the economy – and that number is rapidly shrinking. (Stats by CIA’s World Fact Book)
I’m not suggesting that returning to a manufacturing-based economy is the answer to our current woes. Nor am I suggesting that we model our economy after the Chinese or German economies. But the first thing you learn in business that if something isn’t working, you try something else. We can’t keep plugging along just hoping for change, we need a better plan. We’re wise to heed the words of Winston Churchill who said: There is nothing wrong with change, if it is in the right direction.
[Editor's note: I got an email that a better video clip for this post would have been "Shutting Detroit Down" by John Rich. Believe it or not, I've posted that one before. You can see it here: http://www.taxgirl.com/shutting-detroit-down/]
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