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June 20, 2012

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Stable growth calls for new tax designs

A STRUCTURAL reform of the tax system is necessary for China to achieve its goal of stable economic growth in the next few years.

Under a well-designed tax structure, China should lower the tax burden on individual income and small businesses while increasing that on luxury spending and monopoly firms, among other things.

This kind of tax reform will help China boost domestic demand when it faces sluggish external demand as a result of the global economic crisis. A key hurdle for China's lackluster domestic demand has been an inability of the rank-and-file, typically ordinary wage earners, to spend more. They have already succumbed to exorbitant housing prices and low income.

Aside from tax reform to help the low-income class spend more, China can spur its economy with another round of stimulus akin to the 4 trillion yuan (US$629 billion) package in 2009. But a single-minded focus on expanding investment will only lead to industrial overcapacity and inflation as China has yet to power its economy with innovation.



 

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