Geez – Even the Commies Get It

While the President-elect trots out his New New Deal, which smacks more of Soviet style planning than free market recovery, Communist China is taking an alternate course:

CHINA may soon cut business tax as part of its efforts to prop up the slowing economy amid the global financial crisis, state media reported on Tuesday.

The government is ‘very likely’ to soon cut the business tax for enterprises by one percentage point, the China Daily said, citing an unnamed source close to policymakers.

China’s current business tax varies from three to 20 per cent, boosting government revenue by 600 billion yuan (S$131 billion) last year, according to the paper.

The news follows other state press reports last week that Beijing was planning to cut business tax for commercial banks – possibly to three percent from the current five percent, to help improve their capital adequacy.

Beijing has launched a number of tax measures aimed at maintaining growth as the global meltdown’s impact on the Chinese economy becomes increasingly pronounced.

It has increased export tax rebates on various items from textile to steel products and has announced plans to lower export tariffs on agricultural goods by up to 30 per cent.

You just have to shake your head when you see things like this. What part of this doesn’t an American administration get? Why are we addressing “public works” when the most immediate way to impact the private sector economy – you know the one which creates growth, jobs and investment? – is to cut business taxes?

As for the great public works that Obama plans, even his new budget chief knows it isn’t going to do what Obama thinks it will do. When Peter Orszag ran the Congressional Budget Office, he had this to say about Obama-like programs:

“Practically speaking, however, public works involve long start-up lags. Large-scale construction projects of any type require years of planning and preparation. Even those that are “on the shelf” generally cannot be undertaken quickly enough to provide timely stimulus to the economy. For major infrastructure projects supported by the federal government, such as highway construction and activities of the Army Corps of Engineers, initial outlays usually total less than 25 percent of the funding provided in a given year. For large projects, the initial rate of spending can be significantly lower than 25 percent.

Some of the candidates for public works, such as grant-funded initiatives to develop alternative energy sources, are totally impractical for countercyclical policy, regardless of whatever other merits they may have. In general, many if not most of these projects could end up making the economic situation worse because they would stimulate the economy at the time that expansion was already well under way.”

The CBO says the principles which should drive fiscal stimulus plans are clear:

The most effective fiscal stimulus policies share two common features:

— They focus on the time period when stimulus is most likely to be needed, and

— They are designed to increase economic activity as much as possible for a given budgetary cost.

The most effective way to do that?

The most effective types of fiscal stimulus (delivered either through tax cuts or increased spending on transfer payments) are those that direct money to people who are most likely to quickly spend the bulk of any additional funds provided to them.

And tax cuts for business will do what?

Tax cuts for businesses may also take two forms. They may be general, such as reducing the corporate tax rate, or they may apply only to new investment, such as the investment tax credit. That distinction materially influences the effectiveness of the proposed approaches. Although a general business tax cut may leave a corporation with higher cash flow, which can affect investment decisions in some cases, its stimulative effect comes principally from how much it increases the attractiveness of new investment.

Etc., etc.

Timing is everything in economic stimulus and programs that take 2, 3, 4 or 5 years to get rolling don’t do what is necessary when it is necessary.

Funny isn’t it – looking at Communist China’s move to stimulate its economy and comparing it to this coming attempt by the incoming administration and wondering if you haven’t awakened in some parallel universe where “communist” actually means “capitalist.”

Given the apparent US course, Paul Krugman may be right for once when he says:

‘We could easily be talking about a world economy that is depressed into 2011 and even beyond,’ the Princeton University professor and New York Times columnist told reporters in Stockholm, where he will receive his Nobel prize this week.

Yes we could.

[Crossposted at QandO]

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