The tax problem in China

Excess tax? No, that’s not China’s problem, it’s the lack of tax revenue, the people who should be paying aren’t paying. A part comes from tax evasion, but it has more to do with a design issue and other factors.

The lovers of China will say that there is no problem, that through hard work China will get ahead, that nothing is wrong, and the haters will say that China is falling, and they will make all kinds of predictions and say everything that is not going to happen. to be in the future.

So it is convenient to remember that all countries are semi-controlled chaos, and to see complicated social and economic situations, here in the West we have enough problems to come to teach China lessons about what we have not fixed. Clarifying this, I ask the reader to maintain an impartial opinion.

China has a huge economy, but it is mostly informal. Being a huge economy requires spending in a way that would require large tax collection, to provide the physical and logistical infrastructure, to keep the economy running. Surprisingly, China does not have effective tax collection mechanisms.

The banking system is in serious trouble.

State finances based on real estate are in crisis. And now with the COVID quarantines and the exit of foreign companies due to the trade war, even the economy is hit. Capital flight problems, maturing debt, and the debt of the provinces in China. All of this seems apocalyptic as haters lick their mustaches while pointing fingers at China.

But the really serious problem that nobody is looking at is the crisis of the tax system that lacks effective tax collection mechanisms.

The existence of taxes is essentially the nominal margin of maneuver of a government to be able to act. The rest is a debt-financed deficit, and debt is an unnatural concept to which we have grown accustomed, to the point that it doesn’t look bad for the US to pay more in interest today than it does in defense spending. And today everyone is talking about the debt crisis, the bursting of the housing bubble, and all those things that are used to justify destabilizing speculative attacks. But apart from the normal fact that debts grow with interest, and where Xi Jinping has commissioned the new premier Li Qiang to bring debts under control, the collection problem grows in the shadows.

Youtubers Serpentza and Laowhy86, who are usually very critical of China, sometimes to the point of exceptionalist dumping, occasionally say something reasonable. They point out that the Chinese government is very reactive, short-term, and its actions are corrective, not preventive, neither long-term nor proactive. And I am inclined to agree with them on that.

On the other hand, YouTuber Adrián Díaz tells us that authoritarian China is not communist. And in that, he is quite right. Although the Communist party is called that, the economy is a libertarian Lassiez Faire the likes of which has not been seen on the face of the Earth. It is so non-interventionist that most of the economy is informal.

For that dystopian place that the Western media describes to us as being the place where they know everything about you, they would be doing a bad job of seeing how people get their money. Well no, that’s a media fantasy. Today there are indeed cameras everywhere, but they do not have the time or resources to dedicate themselves to spying on everyone as big tech does in the West. as described by Edward Snowden. In the West, we are more dystopian than in China.

That system is complicated and has overlapping duplicate responsibilities that create confusion. So the collection happens in different places with different levels of government. And the money must be remitted to the central government. This creates conflicts between the central government and local governments and there are accusations of local governments do not transfer the taxes collected, or that they use this money to finance local expenses in social programs. This requires balancing national policy, local needs, and tax law enforcement, and it happens in complex ways.Added to all this is the issue of debt. Local governments cannot raise money, so they create front companies that serve to raise money, either to collect the leasing (in China there are no mortgages) of land from citizens living in their jurisdiction or to issue debt bonds to finance projects. Then from moano to hand an elephant is lost. In previous posts, I have already mentioned the problems of local governments.

A Youtuber mentioned:

Chinese debt has been in the news, but local governments also have debt and I have already touched on this problem in past posts.Since the 2008 crisis, government debt has grown as they launched a $586 billion stimulus program to build infrastructure and stimulate the economy. To do this, governments had to borrow from all kinds of sources, including banks and other financial institutions, the “shadow banks.” And the projects where the money was used brought little or no economic benefit. So where is the money going to come from to pay off the debt?

Do you remember that I mentioned that in 1979 they were peasants? They put ex-campesinos to manage bloated budgets. What will they know about which projects stimulate the economy? And probably in some cases, it could have been used in not-so-correct acts.

The result is that you send the army of ex-farmer officials with no culture of corporate excellence to shoot, and they shoot with the aim of Stormtroopers. It’s like herding cats. You give them an order and you don’t know what idea they will have when interpreting the orders.

I understand that Adrián Díaz greatly admires Chinese culture and we know that with hard work they raised their GDP. What happens is that one thing is the private company and quite another is the caste of local officials who went from peasants to officials, without a previous stage of corporate work. Adrián told us that people worked in your company to learn and later found their own. But in local governments, they did not learn from anywhere. You are not going to find experts in macroeconomics with a clear vision of the difference between economic stimulus and waste. And when someone without money suddenly has a lot of money, is he going to be able to spend it well? And there will be no shortage of those who steal money thinking that there is a lot of money anyway.

Am I trashing China? Well no. The operational designs of today’s governments date back to the corporate design of the 1940s. China just copied that. And the Stormtrooper thing is the natural process of taking peasants without corporate training and putting them to work as civil servants.

Added to this problem is the lack of vertical communication in the government structure. If you complain to the government, they lower your social credit rating. So above they don’t realize that there are problems below and everything explodes in Xi Jinping’s face. If vertical communication does not improve if social credit does not stop punishing citizens’ situation reports to high hierarchies, the CCP is going to experience stressful times in the future.

All the problems that China has would not be a problem if it had strong and sufficient tax revenues. But lax laws, informality, and lax policing stem from wanting to maintain popularity. And on the other hand, many taxpayers have been evading taxes for years. This causes the system to be seen as opaque and lacking in results. And without vertical communication from honest citizens and officials directly to the upper echelons of the CCP, things are not going to get better.

It does not help that to finance projects, local governments go to borrow because leasing does not give them enough, and it does not help that the real estate fiasco that destroys the income from leasing has caused a drop in the value of the property and land. Imagine, tax revenue tied to declining market prices.

The “local government financing vehicles” that are the front companies that I had spoken about are legal tools used by local governments to raise money outside of their budget. This is how they issue bonds to finance projects. Thanks to this mechanism, the debt grows without control in a completely decentralized manner. These bonds have a reputation that in the event of default, local governments will come out to pay them.

Local governments have borrowed money for projects that have not been profitable. This forces borrowing to offset losses and to finance new projects. Xi Jinping said about it:

To save face, the CCP’s finance minister has said that local governments are responsible for their own finances and the central government will not come to the rescue. The exact words were:

Compared to the size of its economy, China collects very little tax. It is not like the US where the government spends like there is no tomorrow and where the biggest businesses are those that stick to the breast of state contracts.According to CEIC, tax revenue as a percentage of GDP was 4.3% in March 2023. In December 2022 it was 12.2%. The average of this percentage since 1996 is 14.3%.

Denmark has 35.5%, and the US has 30%. As you can see, the Chinese government is not charging taxes.

The design of the tax system creates “inefficiencies.” Only a small percentage of Chinese have to pay taxes on their income. Companies are not required to pay corporate taxes when they have low-profit margins. That reduces the tax base. Corruption ends up bleeding the system. This happens when there are bribes in tax investigations and the implementation of laws. And since local governments are many and act freely, it is very easy for corrupters to corrupt these governments. All this lowers the collection of taxes and causes contempt and disobedience towards the law that ends up being only painted on the wall. There is no longer even the dilemma between obeying the spirit or the letter of the law.

If you were wondering why the Chinese government wanted CBDCs to control finances, the answer comes from wanting to be able to monitor people’s finances and eliminate tax evasion. It doesn’t help that the law is ambiguous and that there are multiple loopholes for entities and individuals to evade taxes. And as you may have guessed, the rich are the ones who benefit the most from this.

Low taxes are a strategy to attract investment to China. Low tax costs help lower the costs of companies and that makes companies in China more competitive. And they also want to look good with the popular masses.

China raised the tax base, which excludes the most disadvantaged with low incomes from paying taxes. It also lowered taxes on activities such as care for the elderly, school fees, healthcare, and relief for leasing debtors who did not receive their homes due to the infrastructure managerial mess of local governments. 80 million (almost two Spains) Chinese do not pay taxes, and 65% fewer taxpayers (population of France) pay 70% less of their income taxes. this leaves the government in the hands of indirect taxes such as VAT.

With this, I do not mean to criticize the Chinese government. It is rather praiseworthy that they do this, but it is clear that with low tax revenues, this further shrinks the government’s possibilities. And so low tax revenues threaten to wipe out China’s impressive achievements.

What made China competitive was:

With failures and corruption in governments and the financial sector, the solidity of the ecosystem is compromised. The lack of compliance with the law constitutes a virtual deregulation in undesirable aspects that should be regulated and in fact, if people obeyed the law. The use of the yuan as a temporary reserve currency reduces the competitiveness of exports. Are low taxes enough? It’s like when they raise your salary, you get motivated for a month, but then your salary becomes customary. The same with low taxes, having them for a long time is no longer seen as a privilege but as a right.Why then do companies move to other countries? That’s something worth finding out.

But another major problem is added consistency. Laowhy86 pointed out a consistency problem of the Chinese government, which takes exemplary cases to “save face” and show that it does something about it, but those efforts to combat the problem are a flash in the pan. We know of the case of an influencer who was punished for evading millions of dollars in taxes, and so we wonder about the consistency of the process. It is that it is very easy to punish a lonely influencer, but is that exemplary for a multinational or a millionaire?If there is no consistency, consistency will be a future fiscal weakness.

The Roman Empire suffered a fiscal problem that prevented it from continuing to exist. Although the circumstances were different, in the end, the effect of fiscal unsustainability was the same, and the causes were similar: a reduced tax base, few taxpayers, and high spending. You can see the details in the post-2023 is the end of the world, but not for you.

And the other thing that China must change as soon as possible is vertical communication. A report of an anomaly by a citizen must be treated confidentially and without reprisals for the complainant. Social credit needs to be abolished because it promotes China’s problems. Problems that are not known cannot be fixed. Of course, China can not change anything, and continue with corrective, reactive policies. But that makes China vulnerable to its enemies in every way imaginable.

The other thing is formalization. It is not necessary to use a CBDC. What is necessary is that the employment contracts are registered. If you triangulate health insurance data for people with employment, insurance data, and tax data, you start to notice inconsistencies.

There are several levels to this problem:

Does China fall then? Oh, don’t be foolish about that. The US has 65% of its people unable to save a single dollar and have 2 or 3 jobs. Is the US falling? Ah well, now we understand each other.China has things to figure out like many other countries. And no one is seeing the tax collection problem that can still be attacked in a proactive and non-corrective manner.

We know that Schwab from the WEF admires China and its authoritarianism (which I am not going to judge because each country has its own culture). And in the West, the dictator’s apprentices look closely at China and lick their mustaches when they look at draconian measures very typical of a culture foreign to ours. The problem with authoritarianism as a process, without judging the leaders who hold positions today, is that it does not allow for vertical communication. At the time of the beginning of the Opium War, the defeats suffered by the English did not reach the ears of the Emperor. The past teaches.In China, you have the CCP and local government officials, and in the West, we have the elites and politicians of Western governments. It is the same hierarchy model, but in the West, we do not know the elites, we do not know who governs us, and unlike China, we know that the elites are not interested in our well-being.

So in both places, we are susceptible to the same problems. Seeing China and its problems should not serve to point fingers at it, but rather to see the mistakes that we could have because it is clear that the elites want to imitate China. So China takes a look at the future.

China currently bases its economy on exports and real estate. There is no clear outlook for China’s future development model, and its high level of activity in the last 30 years has come from debt, which is equivalent to 200 years of production. It’s very easy to look rich when you spend borrowed money, but then you have to buckle down to pay it off.

The last Chinese imperial dynasty was unique in that by 400 it did not seek to expand but instead dedicated itself to defending its borders. Today’s China neither seeks to expand nor just defend borders, but through small claims, it has not won over its neighbors. And when your only allies are enemies, things don’t look good for the future.

China’s financial fragility has meant that the yuan is not serving as a substitute for the dollar. Russia would be about to sell the yuan to look for currencies that allow buying in other countries.

Some might believe that a devalued yuan means failure, but it serves to relieve exporters, who are currently locked in a trade war, so momentum is limited.

Since there is not much money from taxes, you are already seeing wage cuts for civil servants, and with the trade war, you are seeing layoffs from companies that go to Vietnam where people earn half the salary in China. In manufacturing, you have negative unemployment in terms of experienced technical personnel. Will the unemployed from other sectors want to go to the factory? Will the factories be willing to train them?

And in terms of real estate, the ghost towns, the homeless people who paid for constructions in gray works, are a sign that in China local governments do not finish what they start, because that is how corruption works and the Third Worldisms of peasants who in 40 years they became public officials with large budgets, paid with debt, to waste.

If you ask me if China is wrong, I can tell you how the West is wrong, so that the once attractive countries to carve out a future no longer seem so attractive. It is as if the politicians of the entire world compete to see which country “falls” first.

Why am I talking about China then? In the West, exceptionalism in the Anglo-Saxon world and Eurocentrism in Europe prevent self-criticism. In the US, for example, although things are very bad, you cannot criticize, because the ideologues in power are offended, and also the patriots who oppose them, because you insult their national pride.

And also if we compare the elites of the West and the CCP, what you see is the narcissistic psychopathy of the elites who want people to “have nothing and be happy” and in the CCP what you see is a body that dictates measures with sense, but the poor performance is in the interpretation of the measures at lower levels. What will be better? Don’t know.

And at the center of everything we have the debt, and the impossibility of paying it. In the West they want to play the game of musical chairs and poker of “you will have nothing and you will be happy” while the interests are greater than the defense expenses, and in China, you have a debt with few taxes and bad execution of officials. It is that the debt is cruel even with those who think they can control it.

I estimate that the patience of the citizens of the world will last an average of a year and a half. And meanwhile, the life of the elites will be increasingly stressful until the end of 2024. Before, it was stressful to be an ordinary citizen and they imposed all kinds of things on you that took you out of your comfort zone. Today things are the other way around. Those at the top around the world are maneuvering in ways that increasingly narrow their options.

Economics is not the study of money, but of people and how they manage resources. Macroeconomics has its laws decentralized. In macroeconomics, there is no congress to make laws where you can buy congressmen, nor a court with judges and prosecutors for sale to modify the application of the law, nor a government that can be bribed. Macroeconomics does not have that command center to control everything, and that will be the anguish of obsessive-compulsives who try to control everything. In the process, they may hurt ordinary citizens, but they can’t win.

Sooner or later they will understand that the common good is the best business and that employment is the engine of macroeconomics. Meanwhile, we facepalm those games of geopolitics that seek to hurt others.

If China is our future, I would like the Chinese to have a good present. But China is the same as all other countries throughout history, semi-controlled chaos with a particular culture. This habit of copying each other without asking the essential and basic questions is what I believe will end the patience of the inhabitants of the entire world by the end of 2024.