COLUMN - A tale of two countries: David Cay Johnston

Fri Aug 12, 2011 6:48pm IST

A Chinese 100 yuan banknote is placed under a $100 banknote (top) in this photo illustration taken in Beijing in this November 7, 2010 file photo. REUTERS/Petar Kujundzic/Files

A Chinese 100 yuan banknote is placed under a $100 banknote (top) in this photo illustration taken in Beijing in this November 7, 2010 file photo.

Credit: Reuters/Petar Kujundzic/Files

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The author is a Reuters columnist. The opinions expressed are his own.

By David Cay Johnston

MACAU (Reuters) - In China it is among the best of times, in America it is among the worst of times, the age of wisdom in one country, the age of foolishness in the other when it comes to taxes and economic growth.

Here is some news about the idea that the path to prosperity is paved with lower taxes and reduced government spending.

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.

ECONOMIC POLICY THAT WORKS

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.

In America, a drive is on to cut teacher pay while potholes ensure brisk business for alignment, shock absorber and tire shops and people whose guaranteed pensions were replaced with 401(k) plans learn the meaning of a 201(k).

What the Chinese know, and Americans have forgotten, is this: all private wealth is built on a foundation of commonwealth. And that commonwealth is financed with taxes.

Build skyscrapers on a foundation of sand and they will eventually fall over, wiping out investments and causing lasting damage to those hit by the debris.

But build on a foundation of granite as the Chinese are doing and the sky is the limit, even when the economy is constrained by Communist Party minders and a host of laws that dampen the human desire to be free.

HARD FACTS

The hard facts are these:

Since 2003, China's tax revenue has grown a fifth faster than its gross domestic product. The Chinese economy grew at a 16.6 percent compound annual rate over those seven years while tax revenues grew at a hair under 20 percent.

During those same years in America the economy grew at a compound annual growth rate of just under 4 percent while taxes grew at just 2.8 percent.

Neither the Chinese nor American figures are adjusted for inflation, as is the norm in this column, because it is the relative growth of taxes and the economy that matters. And the relative and relevant facts are that as taxes become a growing share of the Chinese economy it keeps growing, while as taxes become a shrinking share of the U.S. economy it sputters along.

The Chinese are so confident of their economic growth that they just cut individual income taxes by removing 60 million low-income workers from the income tax rolls and lowering rates on the 24 million workers still on the tax rolls.

Contrast this with the United States, where the Tea Party wants to raise taxes on the lowest income Americans, adding to the 2011 tax increase that President Obama acquiesced to last December on every working American who earns less than $20,000 ($40,000 for married couples).

Unlike the Tea Partiers, the Chinese get the ancient, time-tested and therefore (in the classic meaning of the word) profoundly conservative idea that the greater your economic gain the greater your tax burden. They also grasp the teachings of Adam Smith that taxing the incomes of the poor just raises the general labor price level and of John Locke that there is no tax to be had from the poor.

But as Charles Dickens taught us long ago this is the season of light, the season of darkness; the spring of hope, the winter of despair; we have everything before us, we have nothing before us; we are all going direct to heaven, we were all going direct the other way. In short, the period of the Tale of Two Cities was like the present period between China and America.

(Editing by Howard Goller)

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