Do higher taxes help explain China’s success?

David Cay Johnston appears to think the answer is yes:

In China, tax revenues since 2003 have grown a fifth faster than the booming economy.

In America, tax revenues are growing a quarter slower than the sputtering economy.

The result is that tax revenues are up 22 percent as a share of the Chinese economy, but down 7 percent as a share of the American economy.

In China, jobs are everywhere. In America, joblessness is everywhere.

There is a lesson here and it goes to the heart of why America, stuck for a decade in the economic doldrums, risks foundering on the shoals of economic ruin not because it taxes too much, but because it has adopted unsound and profoundly anti-market economic rules while Communist-led China sails into the future ever more prosperous even though its tax burdens are rising.

While China sees growth and taxes as circulatory economics each needing the other, America imagines taxes as bleeding the economy.


What the Chinese grasp is that it matters where tax money is spent. So they spend it on education, infrastructure and pensions to get older workers out and younger ones in.

In urban China — where half the people live — wide, smooth roads mark the land, the stretch marks of a growing economy. Storm sewers are being built to deal with chronic flooding along the low-lying coast and electric generating plants are coming on line as fast as the now ubiquitous air conditioners that make life in this humid region pleasant.

A few observations:

1.  I’ve had many opportunities to experience the “pleasant” Chinese living standards.

2.  The Chinese people seem to spend their money much more wisely than the Chinese government.

3.  China is poorer than Mexico.

4.  China is growing fast, as you’d expect of a country filled with 1.3 billion people whose culture reveres education, hard work, and entrepreneurship, and who has been moving away from the madness and starvation of Maoism.

5.  I have no doubt that if the US moved some of its vast spending on social programs to highway construction we too could have big new smooth roads.

6.  Taxes normally grow as a share of GDP as countries get more developed, and easier to tax.

7.  The East Asian countries that actually are pretty rich (Singapore, Hong Kong, Taiwan, South Korea and Japan) tend to have tax rates that are well below the average of western countries.

8.  Despite taxes that are much lower than in the US, Singapore has lots of nice roads and new infrastructure.

If we want to find an East Asian model to emulate, I’d suggest looking to low tax, rich, efficient Singapore, not poor and inefficient China.

I do agree with Mr. Johnston that we need to move away from our “anti-market” policies.

HT:  Adam Ozimek



28 Responses to “Do higher taxes help explain China’s success?”

  1. Gravatar of Charlie Charlie
    12. August 2011 at 09:02

    There’s some reverse causation too. Revenues are down, because the economy is sputtering. Since the U.S. tax code is filled with automatic stabilizers, people and firms with lower incomes end up taying lower average tax rates, which lowers revenue as a share of the economy.

  2. Gravatar of Hyena Hyena
    12. August 2011 at 09:04

    The main reason China has smooth roads is that the government is willing to simply rip up roads at will.

    So, unlike the US, it’s perfectly possible to do a 50 mile resurfacing (or, in their case, surfacing) while here you’d be fighting off armed hordes of home-bound commuters. Well, you would, but since they can’t actually make it to downtown, you’re safe. For now.

    I think that Johnston may be putting the cart before the horse, though: it’s plausible that Chinese revenues are rising because the economy is expanding, pushing more people up against taxes and fees once paid by the minority. The US equivalent is AMT creep.

  3. Gravatar of Tuzanor Tuzanor
    12. August 2011 at 09:13

    “A new broom always sweeps clean”

    What will China look like in 30 years? Still smooth streets and new infrastructure?

  4. Gravatar of Benjamin Cole Benjamin Cole
    12. August 2011 at 09:32

    Actually, I am surprised to see Scott Sumner even go down this road. Shame on you, Scott!

    According to the Hong Kong Monetary Authority, China’s monetary policy is expansionist–that is, if they have tension between inflation and growth targets, they “err” on the side of growth.

    I think HKMA calls that the China central bank’s “revealed preference” or some fancy language like that. (And we wonder we economists do not get listened to, except when they are backing up someone’s biases)

    In contrast, the Bank of Japan chooses to “err” on the side of deflation.

    See China, see Japan, for last 20 years. One is dying, one is booming.

    Sure, there is more to the story, the aforementioned work ethic, and for sure punitive taxes will suffocate an economy.

    But the story to tell today, over and over again, is that of China’s monetary policy vs. that of Japan’s.

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. August 2011 at 09:40

    Johnston’s piece is only the second most ridiculous thing I’ve read this morning. Top honers go to Bruce Bartlett for discovering that Nixon’s the One (not OBama):

    s Barack Obama struggles to find his Presidential footing in the face of a weakening economy, tinderbox stock market, and hard-headed opposition, it is instructive to consider this: On August 15, 1971, Richard Nixon implemented the most radical economic program in American history. And it was all done over a single weekend in secrecy worthy of the atomic bomb project during World War II.

    While ultimately unsuccessful, the Nixon program showed what a forceful president can do to completely change the nation’s course if he is willing to push the limit of his power.

    Doesn’t matter what the policy is, or what its consequences; be bold and get re-elected.

  6. Gravatar of Bababooey Bababooey
    12. August 2011 at 10:23

    From what I understand of the way GDP is calculated on government and private spending, we could immediately increase GDP by taxing gross income at 100% and having the government spend it all digging a grand canyon in Nebraska, transporting the dirt to Arizona and filling up the Grand Canyon.

  7. Gravatar of Bababooey Bababooey
    12. August 2011 at 10:37

    Oops, forgot to close the Italic hash tag.

    India and China’s growth is led by special economic zones with reduced business taxes, or at least it used to be. David Cay (not Jay) Johnston is a known hack in the tax world, notorious for sketchy work in furtherance of political objectives.

  8. Gravatar of cassander cassander
    12. August 2011 at 10:41

    The fact that tax revenues both rise and fall faster than GDP does can never be emphasized enough. I am getting very tired of explaining that the bush tax cuts didn’t actually reduce revenue very much, that the Clinton surpluses the result of the dotcom boom, and that taxes aren’t really as low as they seem right now.

  9. Gravatar of StatsGuy StatsGuy
    12. August 2011 at 11:05

    Scott, here’s a challenge for you:

    Try, for an entire month, to make your arguments about small government without citing Singapore as an example. First, Singapore has many hidden revenue sources and expenditures. Second, you have your causation backwards. Taxes are low because government is efficient, not vice versa, and it’s a trade hub with significant flow of goods/services, and doesn’t have multiple layers of “federalized” government. Maybe try hard to focus on another couple cases for a month. Repeated citing the same data point weakens the argument (implying that’s the only data point there is).

  10. Gravatar of dtoh dtoh
    12. August 2011 at 11:31

    Just to echo what Bababooey says. Johnston (Cay not Jay) is redistrubtionist and will say anything to further that agenda. I have exchanged correspondence with him in the past, and his chief line of argument is “I wrote it, ergo it must be right.” The guy is a total shill.

  11. Gravatar of TheNumeraire TheNumeraire
    12. August 2011 at 11:47

    “Revenues are down, because the economy is sputtering. Since the U.S. tax code is filled with automatic stabilizers, people and firms with lower incomes end up taying lower average tax rates, which lowers revenue as a share of the economy.”

    Yes, that explains why tax collections are down, but the reason tax collection remain at a lower plateau is because of the gimmicky nature of some of the tax cuts.

    A lot of what is defined as tax cuts in recent years is actually social welfare spending via the tax code. Another portion of the tax cuts are demand-side with no supply-side incentive. That includes the Republicans with their refundable kiddie tax credit and the Bush tax rebate cheques. The Obama tax cuts are almost all social welfare or Keynesian — Making Work pay credit, exempting the first $2400 of UI income from federal tax in 2009 and the employee payroll tax break in 2011.

    If instead, the gov’t had simply eliminated or not initiated these credits and deductions, and instead made taxpayers first pay the full amount of tax and then cut them a monthly welfare cheque equal to the value of the “tax cuts”, tax revenues to GDP would be higher, spending would be higher and the deficit would be unchanged.

    There has probably been more gimmicky tax cuts in the past decade than during the entire history of the republic. Hence, more deadweight revenue loss.

    Progressive complain loudly as to how much the Bush tax cuts “cost” but misidentify why they likely cost so much. The largest revenue loss from the Bush tax cuts is from the decline in the lowest bracket to 10% from 15% (it effects nearly everyone but provides no real supply-side incentive) and the refundable kiddie credit (which might even have a slightly negative supply-side effect because of the phase-out nature of the credit).

  12. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    12. August 2011 at 12:01

    Dear StatsGuy, please start a blog, the Internet needs people like you.

  13. Gravatar of Jim Glass Jim Glass
    12. August 2011 at 13:10

    If this proves correct will David Cay give the credit to high taxes?

    One thing that puzzles me is how many people give so much praise and credit to China’s one-party govt for directing investment equal to more than half of its GDP and accounting for more than *all* its famous GDP growth.

    I mean, isn’t it in the textbooks that command direction of massive resources like this by politicians (especially one-party politicians) tends to result in large-scale misallocation and comparably big losses later?

    Is this another thing that people have forgotten from their textbooks-reading days?

    Or is it really true that one-party authoritarian govt command allocation of resources is the superior economic model after all? Khrushchev just bungled the execution?

  14. Gravatar of E. Barandiaran E. Barandiaran
    12. August 2011 at 15:42

    Before discussing China, I suggest to read at least the latest IMF and WB reports. They are free:

    Maybe they are not good, but likely they are much better than most reports published this year.

    I’m not surprised that Mr. Johnston, a journalist, knows little about the Chinese economy, but I’d have expected that Scott had pointed that the Chinese government controls the economy through PBC and the state banks.

  15. Gravatar of John John
    12. August 2011 at 20:15

    I can’t understand why people are so obsessed with infrastructure spending. Is a shiny new road really contributing so much more to economic growth than one with a few cracks in it? Government roads are gonna be a disaster no matter what. Since they don’t run off of voluntary contributions, there is absolutely no way to determine whether infrastructure spending is actually economically efficient and therefore making society richer or poorer. Having too much infrastructure spending (as I suspect China has) can be just as wasteful as too little. Thanks for taking on that dumb obsession with shiny roads Scott.

  16. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. August 2011 at 20:45

    China is growing fast, as you’d expect of a country filled with 1.3 billion people whose culture reveres education, hard work, and entrepreneurship, and who has been moving away from the madness and starvation of Maoism. Pause here for a Lew Kuan Yew story. The then PM of Singapore is visiting Beijing in the 1970s. He looking at the streets of Beijing with great interest. Finally, he turns to the Chinese leaders accompanying him and says
    “I would like to congratulate you”
    “Really, what for Prime Minister?”
    “Doing something no one else has ever achieved”
    “And what is that Prime Minister?” the very pleased leaders ask
    “Making the Chinese lazy”.

  17. Gravatar of Morgan Warstler Morgan Warstler
    12. August 2011 at 22:29

    “I can’t understand why people are so obsessed with infrastructure spending.”

    Because there was a time when the deciders (the owners of hard assets / the payers of the taxes)… willingly paid taxes so the sniveling public employees could go build them something with the force of law – fast, easy, and cheap.

    Liberals don’t understand that “fast, easy, and cheap” is the operable phrase, they are so dumb, they think the thing to say is “infrastructure.”

    But frankly, almost ANYTHING liberals could build fast, easy, and cheap – would have a good chance of getting done.

    And ONLY defense has historically been able to be slow, hard, and expensive – and get support from the deciders.

  18. Gravatar of cassander cassander
    12. August 2011 at 23:29

    John> 3 reasons I think. First, infrastructure is highly visible, which appeals to our vanity and makes for good politics. Second, infrastructure seems inherently useful. Everyone would like less traffic, wider roads, faster trains, etc, especially when they don’t have to pay for them directly. This sentiment is pretty universal, which is why you see places like China and Japan pouring too much concrete, or the USSR obsessing over heavy industry and overproducing capital goods. Third is tribal memories of the New Deal. Big projects, particularly hydroelectric dams, were the ultimate symbols of New Deal Progressivism, and for good reasons. In 1933, infrastructure projects were cutting edge technology, and were both economically efficient and a reasonable form of fiscal stimulus. The country was underdeveloped, construction required large amounts of unskilled labor, and projects could be started quickly. Today, none of these things are the case, but tribal memories die hard.

    Different people have different quantities of each reason. Krugman, for example, doesn’t seem to care about building big things out of concrete, but clearly has a giant hardon for the New Deal. But wherever you see infrastructure lust, you can usually find at least traces of all three, even among conservatives.

  19. Gravatar of John Sevic John Sevic
    13. August 2011 at 01:54

    Living and working in China, I’ve seldom seen so much nonsense written about China, and especially taxes. The vast majority of national spending in China, if not all, is designed to protect hegemony of the CPC over the people of China. Little attention is paid to resultant ROI’s on projects of a national scale, and at the provincial level, fear of repercussions from above drive governmental units to manufacture statistics that have no connection with reality.

    As for David’s advancement of roads and sewers as the basis for government effectiveness in China, again this could not be further from the truth. First, infrastructure in China, with the exception of a few coastal cities, is decades behind the developed world. There’s nothing exceptional about a government spending money on roads and sewers, and to use this as the basis of an argument that the Chinese government’s tax policy is more efficient than that in the US is off the mark. David, sadly, misses two additional key points in advancing his theory: the resultant stimulant effect on investment and rule-of-law.

    Much of the investment in China is under-performing, and the the percentage of non-performing loans in China would render them technically insolvent by western standards. Continual capital infusions are necessary to maintain central bank capital reserve ratios requirements. Rule-of-law is non-existent in China. If the government wants a road built, it’s built, with no regard for consequences.

    The US is not perfect, and with both major parties being controlled by their extremist elements, leaving the middle ground floundering, we seem lost. But I would never trade our way of life for what passes as so-called tax efficiency in China.

  20. Gravatar of mbk mbk
    13. August 2011 at 02:03


    re: Singapore, Amen. Plus, if comparisons be made, it would be fairer to compare this or other citystates to cities, not whole huge countries.

  21. Gravatar of David Cay Johnston David Cay Johnston
    13. August 2011 at 08:56

    Singapore is NOT as a low-tax jurisdiction; indeed it imposes an implicit 79% tax on some capital incomes as I revealed a week ago:–david-cay-johnston

  22. Gravatar of Scott Sumner Scott Sumner
    13. August 2011 at 10:19

    Charlie, That’s right.

    Hyena, Yes, for various reasons the Chinese can build an entire interstate highway system for about the time Boston takes to redo one expressway interchange. And of course they build highways far more cheaply that we do.

    Tuzanor, Chinese construction tends to age very fast–but they are getting better at it.

    Ben, I agree, but you don’t get 10% growth from easy money alone–you need to be underdeveloped, but have lots of industrious people who are being transitioned into the modern world.

    Patrick, Yes, Nixon’s policy didn’t work out too well. I do understand why people want boldness, but actually what he needed to do was put more people on the Fed several years ago. It’s too late for fiscal boldness, and it probably wouldn’t even work.

    Bababooey, That’s right. In fairness, despite the wasteful projects China really is getting much better fast. I just don’t think this has any lessons for US taxes.

    There’s no doubt in my mind that China’s success is nothing more than moving away from communism. It’s nice that the government is slightly more competent than some other third world countries–but the move toward capitalism is the big factor.

    Cassander, That’s right.

    Statsguy, I don’t agree about Singapore, but in any case didn’t I point out that ALL 5 of the East Asian success stories have below average taxes as a share of GDP?

    Singapore’s government spends less than 2% of GDP on health care, and they have universal coverage. Our government spends about 9% and have 45 million uninsured. That’s part of the story.

    dtoh, Thanks, I corrected the spelling.

    The Numeraire, I totally agree.

    Tomasz, I agree, Statsguy would be a great blogger–as long as he never attacked me. 🙂

    Jim Glass, I agree there is lots of waste. The most successful parts of China are places like Guangdong, Jiangsu, and Zhejiang provinces, where the private sector is the leading force in development.

    E. Barandairan, I agree they control a significant (but diminishing) amount of the economy–I was focused on other issues.

    John, I agree.

    Lorenzo, Great story. PJ O’Rourke once said only communism could take a nation of 20 million Germans and make it inefficient, or something like that.

    Morgan, It would be interesting to study if certain aspects of modern liberalism explain why places like NY and California find it so hard to build big infrastructure anymore. NIMBY? Unions? Environmental laws? Lawyers? Wherever you look, it seems liberals are their own worse enemies. They want all this neat infrastructure, but forgot how to “git er done.” Fortunately you Texans still remember how.

    John Sevic, I’m actually slightly more upbeat that you about the recent Chinese infrastructure–but you make some very good points.

    mbk, Does that mean I can’t use HK either?

    David, Thanks for commenting. You said in that article:

    “Little or no tax applies to capital incomes and earnings abroad.”

    I agree.

    I can find over 100% implicit MTRs on some capital income in America, like TIPS. In any case you are moving the goal posts by citing this MTR data–it’s taxes/GDP that are unusually low in the US, not the combined state and federal top MTRs on personal and corporate incomes. And what is the share of GDP raised through taxes in Singapore?

    The casino example doesn’t have much bearing on the debate, as they are quite new, and Singapore was a big success even before the casinos.

    I’m not saying everything they do is perfect, but I’d favor a high forced saving regime over a high tax regime.

    Having said that, I’m not opposed to taxes–I favor a progressive payroll tax, a VAT, a carbon tax, and a land tax. And I’m certainly not opposed to infrastructure. I’d like to see more built and operated by the private sector.

  23. Gravatar of mbk mbk
    13. August 2011 at 22:19

    Scott, as you know small states with in-out fluxes that are very large compared to local assets or production, and / or city states without hinterland, are problematic to compare directly with more balanced countries, IMO. Their statistics don’t include many external components that makes these places live.

    And yes, HK is just as problematic in that it is also a city state. Same for Monaco etc. Or say Cayman Islands etc. for different reasons of imbalance. Of course you can use all these for comparisons and inspiration but it’s very hard to make these comparisons fair and correct.

    An additional problem comes in when some policies are picked out without considering the larger context. For instance you have said before (I paraphrase heavily) that you like SG economic policies but not SG politics. Well, I don’t think you can have one without the other.

    I agree that SG’s casinos are not directly relevant to the tax debate. Indirectly though, they are. As hinted at in David Cay’s article large parts of government incomes may not be labelled as taxes but are paid by citizens nonetheless. There are so many things in SG that work differently from the way they work in the West that comparing same-to-same based on how it’s labeled (tax, government…) can be very misleading. This is what the Johnston article points out. But anyhow. I hope you come to SG some time and I can show you around, that will make more sense than long indirect arguments on the blog.

    David Cay: bold article. Would these assertions hold up in a court of law? 😉

  24. Gravatar of Scott Sumner Scott Sumner
    14. August 2011 at 07:43

    mbk, You said;

    “An additional problem comes in when some policies are picked out without considering the larger context. For instance you have said before (I paraphrase heavily) that you like SG economic policies but not SG politics. Well, I don’t think you can have one without the other.”

    I must have heard this 100 times, and it’s still seems beside the point. If we can only do what’s politically feasible at this moment, there’s no point in even having a blogosphere to discuss ideas. All policies are politically impossible until they are actually adopted. We’ve heard this again and again, only to see policies that were supposedly impossible actually get adopted. There is no reason why we can’t have carbon taxes, or land taxes, or consumption taxes, or HSAs, or fully funded pensions, or free trade and investment flows, etc, etc. Lots of countries do these sorts of things, democratic and non-democratic. The Singaporean voters are perfectly capable of doing protest votes if they are unhappy–40% did in the last election. I don’t see any evidence that the Singapore policies are too politically unpopular for a democracy.

    The other problem with this argument is that the very same people who make this claim about Singapore, will tell me the US should follow Sweden, or France, or some other place that is totally unlike the US.

    Everyone said the Chilean model wouldn’t work in Latin America, because only a dictatorship could do those policies. The same policies have now been done for 20 years by a democracy–funny how you don’t see those arguments anymore.

    Singapore has about the same population as Denmark, The percent urban/suburban is slightly higher in Singapore. Both are very open economies. Both have substantial immigration. Is the Danish model also useless? BTW, when I say we should adopt the Sinfgpore model, I understand that means we should break up into 50 countries. I’ve advocated that as well.

    The country most similar in population to the US is Indonesia–is that who we should be looking at?

    I do know that the government gets non-tax revenue, especially from land sales. But I still think government spending is a low percentage of GDP. Is that wrong?

    Thanks for the offer to show me around. I hope to return someday–I’ve been there before.

  25. Gravatar of mbk mbk
    14. August 2011 at 08:31


    I wasn’t trying to be as one sided as you make me sound. Some things can be transposed and can work, and some are highly unlikely to pass in a different historical and social context. The problem with inspiration models comes in when the model country depends heavily on those elements that can’t be transported elsewhere so easily.

    Say, Singapore has a 7% VAT. I see no reason why the US couldn’t adopt such a VAT. Retirement, I see no special reason why 401ks couldn’t be expanded so much that they become a SG-CPF-like retirement savings account. Income taxes, I see no reason why the US tax code couldn’t be vastly simplified, SG style.

    But, SG is very heavily influenced by elements that I do not think would fly in the US. Random examples, overwhelmingly public land ownership generating various fees and recurring 99 year lease agreements (that’s like a roughly 50% inheritance tax per generation if you assume one appartment lease is owned 2×49.5 years per generation until the lease expires). 100% sales tax on cars and (currently) additional ca. $50,000 fee for a 10 year license plate. Immigration amounting to ca. +20% of the population in the 5 years of 2005-2010.

    If you take away the elements that are not transposable (say, implicit/indirect tax income by car and real estate taxes and fees, GDP growth by means of immigration; opposition to a VAT in the US seems to be quasi religious) then the technically transposable elements (simpler, lower income taxes) can’t be done either. That was the gist of my argument. So, it all depends.

    Re: government revenue and government spending, as pointed out many times by others, it is very hard to give a definitive answer to this due to the many shareholdings by the SG government, up to and above 50% in semi-privatized very large conglomerates, and in fully owned investment branches. What counts as income of government? What counts as spending by government? Depending on how narrowly you define government you could get very different answers. I would not dare to suggest a number here.

  26. Gravatar of ssumner ssumner
    15. August 2011 at 10:26

    mbk, If we can’t talk about total government spending, can we agree that Singapore government spending in specific areas like health care is extremely low?

    Your argument also implies that the US cannot have national health care. That’s because no country in the world does so without a consumption tax. Is that right?

    The Japanese were also extremely hostile to a national consumption tax–but they got one in the 1990s.

  27. Gravatar of mbk mbk
    16. August 2011 at 01:42

    Scott, I don’t understand your link between consumption taxes and national health care, I never attempted to link the two. I also don’t understand the visceral opposition to a VAT in the US when there are already sales taxes, a VAT is smarter than a straight up sales tax.

    I don’t dispute the statistics per se (health care share of GDP is low in SG and high in the US), but I often wonder what exactly goes into the statistics and whether they’re comparable. Say, does the US figure include medical research grants? The US does a lot of the world’s medical research. That could inflate its “health care” figure. Does the US figure include Medicare/Medicaid as gov health care expense? Those are transfer payments which is a bit different from direct medical expenses. SG also subsidizes needy families with large medical bills because usually the HSAs are inadequate for catastrophic cases. Are these direct subsidies included in the SG gov health care stats? I don’t know. Etc.

    So once you get down to the nitty gritty a proper comparison becomes a research project in itself.

  28. Gravatar of ssumner ssumner
    16. August 2011 at 07:26

    mbk, I was just arguing that the US opposition to VAT has lots of implications. One of which is no national health care.

    I favor the VAT, but not added on to the income tax, rather a replacement to the personal and corp income tax. I also favor a progressive payroll tax.

    Maybe the VAT is opposed in America because no one is saying “add a VAT and eliminate the income tax.” I think that would be highly popular.

    The medical reserach spending is far too tiny to distort the data–we really do spend much more on health care. The data for both countries counts the subsidies you described.

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