As Beijing’s zeal for supply-side economics continues, critics are raising concerns about everything from government deficits to reducing inequities.
The Chinese Communist Party has embraced a school of thought more commonly associated with conservatives: supply-side economics.
Beijing announced 2.5 trillion yuan ($393.3 billion) in tax cuts this month—the fifth year of such reductions, which cumulatively add up to more than 9.7 trillion yuan. At the current exchange rate, that’s more than the $1.5 trillion in tax cuts enacted by the Trump administration in 2017.
In a press conference at the close of the annual National People’s Congress on March 11, Premier Li Keqiang called tax cuts the best way to boost growth, likening them to “fertilizer applied directly to the roots” of the economy. “Tax rebates look like reductions but actually are an addition. Today you give back, tomorrow you get more in return,” Li said, alluding to the core supply-side concept that tax cuts beget an increase in overall tax revenue.
Yet just like former President Donald Trump’s cuts, China’s are controversial. Advocates of supply-side economics posit that allowing businesses to keep a larger share of their profits lets them boost investment and expand production. The benefits trickle down to workers and consumers in the form of increased hiring and lower prices. But many economists argue that tax cuts fuel unsustainable debt and often lead to wasteful investments. They say fiscal support would be better targeted at households than at businesses. Which viewpoint is correct will help determine the outlook for the world’s second-largest economy.
In China tax revenue amounted to 21% of gross domestic product in 2021, well below the 34% average for members of the Organization of Economic Cooperation and Development. Taxes on consumption and levies on corporate profits generate the lion’s share of the government’s take, with personal income tax making up only a small share.