Buried in yesterday’s news was an announcement by the Chinese government that they would be increasing the Value Added Tax rebate for exports leaving China starting June 1.
Why is this important? China has a relatively complex tax system that requires a 17% tax on goods sold business to business in China. Instead of a sales tax, they collect their money this way. For exports, they offer a rebate to encourage foreign trade. A few years ago, the rebate was 13%. They moved it down to about 8% for furniture products. Now, it’s 15%. That is a 7% direct tax credit for goods being exported from China.
Assuming internal raw materials account for 70% of the cost of an item coming from China, the 7% credit represents a 5% decrease in the cost of goods being exported from China.
With very Ronald Reagan type thinking, the Chinese are looking to expand their economy by taking in less tax money per transaction, but creating more transactions. If this move is revenue neutral, the Chinese win because they have fewer people receiving public aid and they grow their economy. They also receive more income tax.
It seems like the Chinese are better at this capitalism thing than we are. Whodathunkit?