A new report from the Tax Foundation shows that China has a better pro-growth tax system than the U.S., and that any increase in the U.S. corporate tax rate would give China an even greater competitive advantage over the U.S. The report shows how China’s tax system is much more business-friendly than the U.S. tax code, providing greater incentives for investment and growth and lower tax rates on industry sectors that help them compete around the world.
As the report notes, China has lower corporate tax rates than the U.S. corporate tax rate, and provides more generous deductions for capital investment, R&D, and interest expenses. This favorable treatment of investment gives China a significant economic advantage. China also relies more heavily on consumption taxes, which are less harmful for economic growth than taxes on individual and corporate income, which the U.S. relies on.
The U.S. still has the largest economy in the world, though China has grown rapidly over the past several decades and has narrowed the gap with the U.S. China’s economic growth has slowed in recent years, with GDP growth falling to 5–7% annual rates from double-digit rates. However it is still growing much faster than the anemic 2% growth rate the U.S. has averaged the last two decades.
The U.S. response to China competition the last few years has focused on tariffs and industrial policy measures to protect and subsidize U.S. industries. Yet as the Tax Foundation report points out, tax policy has a strong effect on economic growth and competitiveness and should not be ignored as a way to better compete against China.
The first step is to avoid raising the U.S. corporate tax rate, as many in Congress advocate. The current combined U.S. federal-state tax rate is 25.8%, just above the headline China rate of 25%. But the Chinese government provides low corporate rates of 5% to 15% for large segments of their economy.
The 15% rate is applied to industries encouraged by the Chinese government, including high-tech and software sectors, and businesses critical to China’s global supply chain. This rate is 10 percentage points lower than the current U.S. rate.
Raising the rate by even a few points to 25% would result in a combined rate of 29.5%, nearly 15 percentage points higher than the rate China levies on its most important business sectors. This would be a major economic mistake.
As the incoming Trump administration and the new Congress prepare for the 2025 tax debate, a top priority should be maintaining a globally competitive corporate tax rate. The 21% rate has been enormously successful in increasing investment and jobs in America, increasing tax receipts, and making the U.S. more competitive around the world. The best way of make us more competitive with China is to adopt pro-growth tax policies to encourage more investment and economic growth.
China Has More of a Pro-Growth Tax System Than the U.S.
November 29, 2024
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