China Business Tax Cuts Led to Lower Deficit
Once again we see the Laffer Curve, originated by my friend Arthur Laffer (Tip of the hat, via Ford Scudder). China did a little stimulus last year, but in general China’s policy was towards tighter money and lower taxes, which the Keynesians would predict would lead to low growth, higher inflation, and worsening deficits. Instead China got higher than consensus growth (though not higher than our models were predicting), low inflation, surging tax revenues and plunging deficits. The principles of supply-side economics are not western principles, they’re human principles. When Japan got on the wrong side of the Laffer Curve in the early 90s, they ended up losing two decades.
From the (not normally supply-side) Wall Street Journal news (as opposed to op/ed) team:
“A brief mini stimulus policy of spending on rail and subways as well as business tax breaks helped push growth higher in the second half.
The deficit came in at 1.06 trillion yuan ($174 billion), about 1.86% of gross domestic product last year, according to calculations by The Wall Street Journal based on government data. China had projected a fiscal deficit of 1.2 trillion yuan, or about 2% of gross domestic product, in its budget.
“The central government’s revenue growth began to pick up in the second half of the year as economic growth gradually warmed up and trade conditions improved,” the finance ministry said on its website Thursday.”
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