Maybe China wonít take over the world, after all

If you listen to people like Lou Dobbs, you might get the impression that our nationââ?¬â??the flag, apple pie, baseball, everythingââ?¬â??will get swallowed by China. After all, China has lots of people and they’re willing to work cheap. But other foreign threats have come and goneââ?¬â??weren’t we supposed to be property of Japan by now?ââ?¬â??and there are many things wrong with the China-is-taking-over-the-world view. For example:

China’s booming economy and low manufacturing costs have made it one of the world’s most popular foreign investment destinations. Yet the country’s payroll levies–when applied–make it the world’s second-worst spot in terms of tax misery. Moreover, troubles in China’s pension system make it unlikely that relief from this burden will be felt any time soon. High taxes and rising wages will ultimately threaten the country’s competitiveness. … Social-security-driven payroll taxes on employers of as much as 45%, levels well above those of most of Europe’s welfare states, catch executives at the wave of companies investing in China for the first time off guard, says Nora Wu, a partner specializing in pensions in PricewaterhouseCoopers’ Shanghai office. “Such contributions are hidden costs sometimes overlooked by companies during their feasibility studies,” she says. A typical, visible (foreign-owned) manufacturer in coastal China might think it can hire college graduates for $5,000 a year. But to cover his own taxes, the worker will want to get at least $6,000. And the employer will pay north of 40% in payroll tax against that salary, so the effective salary cost for the employer is close to $9,000. For higher-end staff, where China’s 45% top personal income tax rate kicks in even if payroll taxes are capped, there’s a similar accelerator effect. … Whereas China has the dubious distinction of having Asia’s greatest tax misery, rival India has negligible payroll taxation and one of the lightest overall burdens.

It’s worth taking a look at the huge improvements India has made. This was India in the 1970s:

[C]ustoms duties were often above 200 per cent on many products. Excise duties ranged between 2 and 100 per cent spread across 24 different rates, not counting much higher duties on tobacco and petroleum and many specific (that is, per unit) duties. Inputs were routinely taxed and credit on taxation of inputs was rare. So “cascading” of taxes was the norm. Direct taxes were even more bizarre. In 1973-74, the personal income tax boasted eleven different slabs with rates ranging from 10 to 85 per cent. With a surcharge of 15 per cent the top marginal rate was effectively 97.75. Thus, for every additional 100 rupees earned you got to keep just over 2 rupees! Actually since all wealth was also taxed at significant rates, the cumulative incidence of income and wealth taxes frequently exceeded 100 per cent. The predictable result was widespread evasion and avoidance. … Company taxes were typically around 60 per cent and varied across equity holding patterns. Tax administration was equally complex and arbitrary.

Read the whole article to find out how things turned around. And this doesn’t mean that India is taking over the world either. Using the rhetoric of war doesn’t work well for trade, for trade allows for many victors.