Part 1 - AL-Tax

Chapter 11Figure 11.2 shows the shift in tax happiness as income level rises.Flannery (2005) provided some insight about China’s long-term public financeproblem. Although it has a booming economy and relatively cheap labor costs, itshigh payroll taxes put it at a competitive disadvantage. High taxes, rising wages, anda pension funding system that can only get worse will cause China to be increasinglyless competitive as the years pass. Its population is aging and its pension systemis basically a pay as you go system, which means that people who are still workingwill have to pay for the pensions of people who are retired. Local officials whomust find the cash to pay retirees are under pressure to take funds out of individualaccounts, which increases unfunded liabilities. Flannery speculates that it will bemostly the foreign corporations that invest in China that will pay this tax, which isup to 45% of payroll. This rate is higher than even some of the bloated welfare statesin Western Europe.Other Asian countries also face long-term pension funding problems as theirpopulation ages while birth rates decline. One way to reduce the pressure on thepension system is immigration. Allowing a flood of young immigrants into thecountry would increase the pool of people paying into the pension system. However,loosening immigration requirements might cause other problems, depending on thefacts and circumstances.Another way to eliminate the problem would be to privatize the pension system.Privatization would end the redistributive aspects of government-managed pensionfunds as individuals would take responsibility for their own retirement funding.But privatization would not solve the transition problems, since the pensions ofcurrent retirees would still have to be funded.Rank €50,000 Rank €100,000 Rank €200,00050403020100Hong KongTaiwanSingaporeJapanSouth KoreaThailandChinaIndonesiaMalaysiaAustraliaTurkeyIndiaFigure 11.2Shift in tax happiness281