The Killer Tax Forcing Manufacturers Abroad
In 2015, worried about the outlook for business in China, Hong Kong property tycoon Li Ka-shing sold off his real estate holdings on the mainland and shifted many of his assets to the U.K. He was bombarded by both official and social media outlets for his supposedly “unpatriotic” act of departure. Later comments took a more lighthearted tone, asserting that most top companies are choosing to remain in China and that Li would regret his decision.
This year, Chairman Cao Dewang of Fuyao Glass Industry Group, the largest automotive-glass supplier in the world, followed Li’s example. In a TV interview, Cao said he had invested $600 million to build an automotive-glass manufacturing plant in Moraine, Ohio. The local U.S. government subsidized his venture with at least $15 million in what has become the largest Chinese investment in Ohio’s history.
Most people would argue that higher labor costs in the U.S. would make glass manufacturing less competitive. For factories in the U.S., salary and employee benefits constitute around 40 percent of the total costs. American blue-collar workers earn around eight times more than their Chinese counterparts, and white-collar workers twice as much as Chinese white-collars.
Yet Cao spotted why the U.S. is still a lucrative option. Overall tax for manufacturers is 35 percent higher in China than in America. This is because while the U.S. government mainly taxes profit, Chinese enterprises are subject to hefty business taxes, value-added taxes, social-welfare payouts, urban-infrastructure levies, and worker-education levies. Additionally, energy costs for businesses are cheaper in America: Electricity is one-third the price of China’s, natural gas one-fifth, and water an even smaller fraction of the cost.
Cao is a highly respected philanthropist in China, having given around 7 billion yuan (over $1 billion) of his personal wealth to charity over the course of 33 years in the glass business. He also holds political clout as a member of the National Committee of the Chinese People’s Political Consultative Conference. Despite his strong ties to his home country, he is still outsourcing his manufacturing businesses to places outside of the erstwhile workshop of the world. This does not make him rash and unpatriotic, but canny and calculating.
In an interview with China Business Network, Cao broke down the cost of producing laminated glass, a specialized product made by his company. His conclusion was that despite cheaper labor in China, his company makes 10 percent more money if it operates on the other side of the Pacific — a commercial no-brainer.
Cao is not alone in complaining about the burdensome tax regime in China. At a recent NetEase economists’ forum, Zong Qinghou, the chairman of Wahaha Group, China’s largest beverage company, said government efforts to replace business tax with value-added tax last year — a reform intended to relieve some of the tax burden on growing enterprises — had only resulted in an excessively complex system of deductions which actually increased the amounts many companies owed.
For 30 years, a vast supply of cheap labor has kept Chinese industry at the forefront of the nation’s economic development. However, this alone is no longer enough to maintain the country’s reputation as the best destination in the world for manufacturers. This is partially because, as China develops, the cost of wage labor is increasing. However, manufacturers both large and small are also struggling under excessive tax regulations. Today, most manufacturers are more troubled by tax than by labor costs.
Professor Zhou Tianyong of the Central Party School, an institution in Beijing specifically geared toward training the highest ranks of party officials, has developed a data set showing how serious the effects of taxation have become for businesses. In 1995, the sum of all tax paid to the government from corporations represented 16.5 percent of the companies’ income. By 2015, that figure had risen to nearly 37 percent.
The Chinese manufacturing sector was at its strongest before 2005, when corporate tax was relatively low. Tax rates spiked as the economy slowed to single-digit annual growth and lost global competitiveness. Now, Chinese economists are warning against the imposition of “fatal tax” on local manufacturers. Their argument is that taxation levels are growing so high that companies will be driven to the brink of bankruptcy if they are forced to fulfill all of their tax requirements.
Soaring land costs are another reason why manufacturers are fleeing to foreign shores. To cite Cao’s example, the land for the new Fuyao Glass factory in Ohio was virtually free, as its value was covered by initial government subsidies. Industrial land near China’s large cities would cost around 10 times more — the equivalent of about $4 million per hectare. As water, electricity, and gas come under state monopolies in China, overcharging for utilities is a common issue as well, not to mention the laborious process of obtaining official approval for a site.
Since the mid-2000s, we’ve lamented the slumping investment in China’s private sector and the nation’s acute need to revitalize manufacturing. Yet with killer taxes keeping profit margins so low, it’s a wonder many businesses survive at all. With the barriers to growth so high, who is going to take a chance and invest in manufacturing?
To truly revitalize China’s manufacturing sector, we must get serious about tax reduction and decrease the overall tax burden on companies, ensuring that they remain profitable enough to provide long-term returns for the public purse. Otherwise, we will continue forcing our manufacturers out of the country, while those that remain will look to shake off the straitjacket of industry taxes by turning to the real estate, stock, or financial sectors. Such behavior, if it comes to pass, will only prove a hindrance — not a boon — to the national economy.
(Header image: A superviser stands on the observation platform at a factory in Dongguan, Guangdong province, Dec. 24, 2015. Liu Xingzhe/Sixth Tone)