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Tax cuts working

(China Daily)
Updated: 2009-04-15 07:50

While pundits are trying hard to read signs of an early recovery from a slowed decline in fiscal revenue, some tax cuts have already worked their magic in boosting domestic consumption.

If Chinese policymakers are to step up efforts to fight the economic downturn, more tax cuts for consumers will be a good start.

Statistics from the Ministry of Finance showed that the country's fiscal revenue fell 8.3 percent year-on-year to 1.46 trillion yuan ($214 billion) in the first quarter, while tax revenue shrank 10.3 percent to 1.3 trillion yuan ($190 billion).

After soaring on the back of years of double-digit economic growth, China's fiscal revenue recently fell as the economic downturn hurt corporate profits and recent tax cuts took effect.

The dip in fiscal revenue might have worried some officials who expect government revenue to grow 8 percent this year, after climbing 18.8 percent last year and 32.4 percent in 2007.

Fortunately, the fall of monthly fiscal revenue over the same period last year has been significantly narrowed from 17.1 percent in January to 0.3 percent last month.

Some regard this positive change as evidence that the Chinese economy might have bottomed out. But others are less optimistic, attributing it to the higher base in the first two months last year.

Compared with such uncertainty over the implication of slower fiscal revenue growth, the country's tax cuts have yielded a lot of tangible and better-than-expected results.

For example, China halved the purchase tax on cars with engine displacements of less than 1.6 liters on Jan 20, and revenue from that tax was down 7.6 percent in the first quarter.

Meanwhile, China's auto sales hit a monthly record of 1.11 million vehicles in March, exceeding US sales for the third month in a row.

It is obvious that tax cuts and rebates for small car purchases have successfully helped lure buyers back into showrooms.

This is certainly good news for automakers at home and abroad when conditions are deteriorating in most other major markets.

More importantly, it makes a compelling case for more consumer tax cuts.

In spite of many government measures to boost domestic consumption, Chinese consumers have not loosened their purse strings much in the past.

Yet, the recent case shows how well-targeted tax cuts can effectively persuade Chinese consumers to change their minds.

To further boost domestic consumption, it seems that policymakers should first check their box of taxation tools again.

(China Daily 04/15/2009 page8)