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Expert backs preferential tax policy

By Bing Lan (China Daily)
Updated: 2006-07-06 09:44

Despite the popular argument that China should have a single corporate tax rate, a leading expert in the United States said the country should maintain preferential tax rates for overseas investors.

Alan Auerbach, a professor at the University of California at Berkeley, said favourable tax rates for foreigners were an easy target for those arguing for equal treatment for all enterprises.

However, from an economic perspective it makes sense, he said in an interview with China Daily.

Auerbach said that foreign investment was very sensitive to local tax rates.

As long as a country is keen to compete with others for inbound investment, preferential tax rates for foreign investment were justified.

It can be justified not only as an interim measure, but also as a long-term one, he said.

"That's true for different kinds of countries, not just for less developed countries," he said.

But he added that such policies can be unpopular.

In the United States, he said, people get very upset if the country adopts a system that gives lower tax rates to foreign investors.

"People will say it is unfair," he said. "But from an economic perspective, it is not a bad idea."

In his speech at a conference on China's finances in Beijing, Auerbach said he believed governments should try to expand the consumption tax's share of total revenue.