By SHENG Hong, Director, Unirule Institute of Economics;
Translated by MA Junjie, Project Researcher, Unirule Institute of Economics.
When it comes to the survival and development of private enterprises, we often talk about the environment. Here, the environment refers to something external that preexists. However, in the social sense, an environment is not something natural and preexisting, but it is a result of the social economic structure.
When an entrepreneur complains about the malevolent environment, what he’s essentially saying is that the environment is already bad and he could do little to change it, or there’s no point of trying to improve the environment. When we talk about the environment for the survival and development of private enterprises, we have to ask, can we improve the environment by complaining about it?
All the entrepreneurs are faced with an external order that’s related to the interaction with other people. Therefore, the entrepreneurs are commissioned to do something to the environment, to influence the environment, or even to change it to a better one that suits the development and innovation of entrepreneurs. This is a very important issue, and it’s been overlooked. Why so? To understand this, we need to take a quick look at the survival and development environment for all Chinese private entrepreneurs, even the common residents, and the state-owned enterprises.
Last year, a research team was commissioned to undertake a research in the microeconomic environment for the tax burden directed under Professor LI Weiguang. The research finds that the tax burden is very heavy, and Professor LI coined a term to describe this, the Death Tax Rate. It made quite a stir but soon it was repressed. Later, I estimated according to the macroeconomic statistics that the tax rate accounts to about 45.6%, which means for every RMB 100 you make, you’ll have to pay RMB 45 for tax.
Our research soon caught the attention of the decision-makers from the top government, which led them to promise a tax cut. However, the tax authorities clarified that “the tax rate is not high, but the burden of social securities are high, and what’s need to be done is to lower the social securities.” After all the clarifications and promises from the government, everything was settled, and nothing changed. The tax rate is still high, and the social securities are as before. It misleads people to believe that tax rate is no longer high, which is not the case.
Now that we have a very high tax rate, with the economic development slowing down and fiscal revenue of local governments plummeting, a highly possible scenario is that many local governments will levy next years taxes this year. It’s no different than draining the pond to fish, which will destroy more enterprises.
Why so? It is a systematic result of China’s modern political and fiscal structure. For the past few decades, the government levies taxes not to provide the optimal amount of public goods, but believe that the tax revenue was for the government and officials to spare. In the period of rapid development, there was enormous tax revenue for the government to spend. As our research shows, there is no restraint on the fiscal expenditure of the government. What we can see is that the expenditure of the government exceeds greatly that budget, which is a systematic problem, and a nationwide one.
Among these expenditures, the government thought their expenses were the most justifiable, and there is no effective limits. We can imagine that more radical measures will be taken to levy taxes beforehand in the period of slower economic growth.
In addition, the resource prices are high thanks to monopolies. For example, the Central Bank announced two years ago that it was not to “regulate the ceiling of deposit interest rate, and the floor of the loan interest rate.” However, there is a constant gap of up to 3% between the interest rates for deposits and loans in China, which is a big gap. The interest rate is the price of deposits and loans, and the gap of interest rates is the price of composite products of banks. In a fully competitive market, this gap is normally between 1.5% and 2%. In terms of prices, the gap of interest rate in China constitutes a monopoly price that’s 50%~100% higher than that in a market economy.
Ever since the marketization of interest rates, we observed that the cartel among several big national banks is not broken. The self-determined interest rates among these banks remained the same to form a de facto monopoly. And the gap remained 2.75%, which is a little lower than before and holding.
Even though the monopoly for crude oil import has been cancelled, and quotas for private enterprises have been increasing, the end oil products produced by the private enterprises are not allowed to compete with their state-owned opponents. The price for end oil products is still heavily regulated and monopolized. According to our 2013 research, the pre-tax price for end oil products in China was 31% higher than that in other main oil consuming countries. If we put in the macro tax rate, the bank loan interest rate, and the end oil product price, we come to the conclusion that the survival and development of private enterprises is on the brink, the tax burden is high and the cost of main resources is high. All this spells out a further slowdown of the economy.
What caused this is the fact that the government is not a subject that plays by the principle of justice when it comes to the economic environment. It embodies the interest of the interest groups. I observed that many were criticizing the term Death Tax Rate, and one thing in common among these criticizers is that they were all government officials or state-owned enterprise executives who spend tax payers’ money. And they determine the economic environment after all. We don’t have a very good political structure to limit these decision-makers, to constrain them from twisting the policies, including the tax rate and interest rate, to benefit themselves.
Is this economic environment somehow “natural”? What should entrepreneurs do? It is not enough just to survive in the current environment. We should aspire to influence the government to follow the principle of justice. For entrepreneurs, the principle of fairness is followed because no deals can be made without doing so. In the national level, it applies the same.
Entrepreneurs should influence public decision-making. Some think we are too insignificant to project our influence. One way to influence the macroeconomic policies is to speak out, to engage, and to communicate with the government to bring about changes. What principles should we follow? The principle of “consent”, that is a decision is made not unilaterally by those who collect taxes but are not limited by restrictions. The principle of consent is the principle of the market, which is also the principle of a modern state.
Entrepreneurs should not attribute the hardship of innovation to the malevolent environment. They should come to see that no great innovation is born in an ideal environment. The French Impressionism is one the most successful school of arts in modern times. Was it born in a totally free environment? No. Back when it was created, the French government controlled all the art salons. When one of Monet’s work was on display, it was put close to the ceiling to avoid getting much attention. Later, the Impressionist artist organized their own salon. Little by little, their salon became more and more popular. Therefore, the achievement of the Impressionist artists is not only about their art, but also about the environment they created for themselves. They had their own salon to facilitate their success.
Therefore, all of our entrepreneurs should release that they are not only capable of technological and business model innovation, but also responsible for improving the survival and development environment. Only by doing so, to act to change the environment, can they achieve real development.