Here's a little turn up for the books. China has just announced a change in its taxation system. A step along the road to what many economists think is a reasonable and sensible taxation system for any country to have. And yet this is happening in what is still nominally at least Communist China and not in the supposedly free market United States. Indeed, recent US tax changes have been moving in the opposite direction, towards a worse taxation system. It does have to be said though that the Chinese change is most unlikely to be as a result of thoughtful and careful economic planning. It's a near panic reaction to the state of the stock market nothing more. But, still, interesting that it is in that free market direction all the same.
Here's one reaction to the announcement:
BBG reports:
China issues notice on differentiated income tax on dividend
Finance ministry says rules to take effect on Sept 8
This has to be the final nail in any illusion on Communism.
Well, yes, it's not really a communist move at all. In more detail here is what is happening:
China said on Monday it would remove personal income tax on dividends for shareholders who hold stocks for more than a year, in a move aimed at encouraging longer-term investment in equities as opposed to short-term speculation.
The government also said it would halve the tax on dividends for those holding shares between a month and a year and that the changes would come into effect on Tuesday.
Full tax payment will be required for shareholders who hold shares for less than a month, the finance ministry said in a statement on its website.
And here's the economic background to this sort of taxation. There's a very large number of economists who think that returns to capital shouldn't be taxed at all. Meaning that interest, dividends, capital gains and so on from investment just shouldn't be taxed at all. True, this is most often stated openly at the free market, possibly even libertarian, end of the political spectrum. The argument is that in the long term it is investment that grows the economy (no, the Keynesian arguments about demand are only short term growth, not long term and yes, Nick Hanauer is indeed wrong on this point that it is demand which grows the economy over anything other than that short term). Thus we like people investing. And since if you tax something you get less of it then we should not tax the returns people make from investing because that will lead to less investment and thus a future that is poorer than it need be.
You will note that dividend taxation rose under Obama, a move in the wrong direction according to this view.
It is also true that despite that basic underlying model there's many economists who would agree with the idea but are uncomfortable with the implications. Which is of course that the rich plutocrats, living off their investments, never pays any tax. This rather brings the equity side of the tax system into conflict with the efficiency side. And there's no way that, in the US at least, such a tax system would be politically viable. Which is how we get to the progressive consumption tax. Essentially, this treats all investments as if they're in a giant IRA. No tax is paid on money saved/invested, and no tax is paid on returns from such investments which are reinvested. However, if you take money out of those savings to consume, whether capital or the returns to it, then you pay income tax in the normal manner. Thus, savings and investment are not taxed but consumption is.
That's pretty much the best blend of efficiency and equity on offer in tax system design at present. And it's also obviously not what the US has at present.
Which is what makes the Chinese move so interesting. We've actually now got a nominally communist country with an investment tax regime more right wing, more free market, than the one in the US.
As above though, this lifting of taxation upon dividends isn't some carefully thought out move to make the tax system more amenable to free market strictures. Rather, it's an attempt to boost the local stock market by making longer term holdings rather than pure speculation more attractive. If the Chinese market wasn't in danger of collapsing it wouldn't have been done. But still, interesting, the contrast in the nominal political allegiances of the two countries and the tax systems, no?
