Editor's Note: "Lowering enterprise costs calls for more than tax cuts" said Fan Gang, head of the China Development Institute, a Shenzhen-based think tank established in 1989 in Guangdong Province. The following represent his perspective on this topic which he expressed in a recent interview with China.org.cn:

One of the five main tasks of supply-side reform is to lower cost. Lowering tax has always been an important aspect of lowering cost, according to the supply-side economics school, which gives enterprises a bigger incentive to invest and innovate.

In this sense, China certainly has the room to do so, as Chinese enterprises, whatever size they are, have more or less complaints about heavy tax burdens. But in the long run, lowering costs means more than cutting taxes, because of the costs of transactions, land and employee's social securities, which are paid by employers in most cases according to law in China, as well as the difficulties of obtaining government approval.

Apart from the aforementioned costs associated with the government, an important cost for enterprises is increasing labor cost, which not only refers to worker's wages, but also a series of costs arising from relevant institutional designs. If enterprises are not flexible in its employment system, they're wasting a lot of resources. Using a few employees that are of limited value to the employer will also add to the operation cost of an enterprise.

If institutions, including laws, cannot help to reduce the enterprises' comprehensive costs in employment and management, the enterprises' cost will not be low. The high cost problem, which brings down competence, in some Western countries originates from their rigidity in employment systems.

To lower cost involves a lowering of enterprises' burdens in paying employees' social securities. If China's social security system can become more efficient in using funds, enterprises can save a lot of costs. The low efficiency of China's social security system is the reason why individual citizens and employers have to pay that much money.

If the government really wants to lower enterprise costs, it should think more from the angle of the entrepreneurs and make more changes instead of only cutting taxes.

Fan Gang is the director of China Development Institute, secretary-general of China Research Foundation for Economic Reform.

The article was first published in Chinese and translated by Jason Lee.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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