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China and the Libertarian Argument for Income Taxes

China will come close to eliminating income taxes (Chinese) as of September 1st 2011. According to new laws people will only have to pay income taxes if they earn over Rmb4545 (US$700) a month, and only a negligible amount up to Rmb10,000. By the taxation bureau’s own count there are only 24 million people in China with earnings over Rmb3,500 a month. It’s a popular move in a country where wages are rushing to keep up with inflation.

How does China have the money to cut income taxes to next to nothing? China’s tax revenue increased 30% last year on the back of inordinately high consumption taxes. China puts a 17% VAT on the majority of goods sold in the country. Additional taxes often bring the total price up further, with taxes on cars often reaching as high as 40%. Taxes on gas reaching 50% (ostensibly for environmental reasons). The government’s import duties on cosmetics and watches, currently have tariffs of 50% and 30% respectively, though those should be cut soon. The country has an expansive tariff system put in place to protect its state owned industries (also large tax payers). China for instance recently put a tariff on imported dairy products (pdf), which have become much more popular in the wake of 2008′s melamine scandal.

For a country fighting off the twin specters of inflation and over-investment the decision to strengthen the country’s consumption driven taxation structure is a baffling one. The antipathy towards inflation is such in China that the government occasionally goes so far as to put price caps on things like oil (which is distributed by state owned companies and taxed at 50%, for an extra degree of bafflement). The drop in import tariffs on cosmetics and watches only came about when the government realized that they were on the wrong side of the laffer curve – most luxury goods buyers were getting their products either on trips to Hong Kong or through smuggling networks from Hong Kong.

But consumption taxes have the benefit of being invisible. There have been numerous studies providing evidence that taxation provides a key impetus towards demanding more accountability from government, a lesson which China seems to have learned well. It can publicly take a stand against the high price of oil, while hiding how much of those prices come from taxes. It can make claims to only taxing the rich while getting a large amount of its revenue from things bought by the poor.

The Chinese taxation system is likely to change considerably over the next 10 years. Hopefully by then it will be clear what exactly people are paying taxes for.

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Emre Deliveli The Kapali Carsi

Emre Deliveli is a freelance consultant, part-time lecturer in economics and columnist. Previously, Emre worked as economist for Citi Istanbul, covering Turkey and the Balkans. He was previously Director of Economic Studies at the Economic Policy Research Foundation of Turkey in Ankara and has has also worked at the World Bank, OECD, McKinsey and the Central Bank of Turkey. Emre holds a B.A., summa cum laude, from Yale University and undertook his PhD studies at Harvard University, in Economics.

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