For the people of China, there’s good news and bad news.
The good news, as illustrated by the chart, is that economic freedom has increased dramatically since 1980. 
This liberalization has lifted hundreds of millions from abject poverty.
The bad news is that China still has a long way to go if it wants to become a rich, market-oriented nation. Notwithstanding big gains since 1980, it still ranks in the lower-third of nations for economic freedom.
Yes, there’s been impressive growth, but it started from a very low level. As a result, per-capita economic output is still just a fraction of American levels.
So let’s examine what’s needed to boost Chinese prosperity.
If you look at the Fraser Institute’s Economic Freedom of the World, there are five major policy categories. As you can see from this table, China’s weakest category is “size of government.” I’ve circled the most relevant data point.
The bottom line is that China could – and should – boost its overall ranking by improving its size-of-government score. And that means reducing the burden of government spending and lowering tax rates.
With this in mind, I was very interested to see that the International Monetary Fund just published a study entitled, “China: How Can Revenue Reforms Contribute to Inclusive and Sustainable Growth.”
Did this mean the IMF was recommending pro-growth tax reform? After reading the following sentence, I was hopeful.
We highlight tax policies that can facilitate economic transition to high income status, promote fiscal sustainability and make growth more inclusive.
After all, surely you make the “transition to high income status” with low tax rates rather than high tax rates, right?
Moreover, the study also acknowledged that China’s tax burden already is fairly substantial.
Tax revenue has accounted for about 22 percent of GDP in 2013…the overall tax burden is similar to the tax-to-GDP ratio for other Asian economies such as Australia, Japan, and Korea.
So what did the IMF recommend? A flat tax? Elimination of certain taxes? Reductions in double taxation? Lowering the overall tax burden?
Hardly.
The bureaucrats actually want China to become more like France and Greece.
I’m not joking. The IMF study actually wants people to believe that making the income tax more punitive will somehow boost prosperity.
Increasing the de facto progressivity of the individual income tax would promote more inclusive growth.
Amazingly, the IMF wants more “progressivity” even though the folks in the top 20 percent are the only ones who pay any income tax under the current system.
…around 80 percent of urban wage earners are not subject to the individual income tax because of the high basic personal allowance.
But a more punitive income tax is just the beginning. The IMF wants further tax hikes.
Broadening the base and unifying rates would increase VAT revenue considerably. …tax based on fossil fuel carbon emission rates can be introduced. …the current levies on local air pollutants such as SO2 and NOX emissions and small particulates could be significantly increased.
What’s especially discouraging is that the IMF explicitly wants a higher tax burden to finance an increase in the burden of government spending.
According to the proposed reform scenario, China could potentially aim to increase public expenditures by around 1 percent of GDP for education, 2‒3 percent of GDP for health care,
and another 3–4 percent of GDP to fully finance the basic old-age pension and to gradually meet the legacy costs of current obligations. These would add up to additional social expenditures of around 7‒8 percent of GDP by 2030… The size of additional social spending is large but affordable as part of a package of fiscal reforms.
Indeed, the study explicitly says China should become more like the failed European welfare states that dominate the OECD.
Compared to OECD economies, China has considerable scope to increase the redistributive role of fiscal policy. …These revenue reforms serve as a key part of a package of reforms to boost social spending.
You won’t be surprised to learn, by the way, that the study contains zero evidence (because there isn’t any) to back up the assertion that a more punitive tax system will lead to more growth. Likewise, there’s zero evidence (because there isn’t any) to support the claim that a higher burden of government spending will boost prosperity.
No wonder the IMF is sometimes referred to as the Dr. Kevorkian of the global economy.
P.S. If you want to learn lessons from East Asia, look at the strong performance of Hong Kong, Taiwan, Singapore, and South Korea, all of which provide very impressive examples of sustained growth enabled by small government and free markets.
P.P.S. I was greatly amused when the head of China’s sovereign wealth fund mocked the Europeans for destructive welfare state policies.
P.P.P.S. Click here if you want some morbid humor about China’s pseudo-communist regime.
P.P.P.P.S. Though I give China credit for trimming at least one of the special privileges provided to government bureaucrats.
International Liberty 
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Things could unfold and disintegrate very quickly once the vicious cycle accelerates. There in no entity capable of bailing out the US. VAT and other destructive policies could come and be voted into law overnight in a crisis. Then America will be firmly in the grip of the vicious cycle. The uncontrolled slide may be still ahead.
It is hard to predict how the decline will manifest, just like it’s difficult to predict how a pot will boil (where the fist bubble will appear and how it will interact with its environment to create other bubbles) but one can be sure that the boil is coming sooner or later because there is a heat equilibrium. And making effort-reward curves as flat as their are in Europe can only bring decline. Other, more motivated nations and electorates will take over the demotivated welfare nations.
When? Where? How exactly?
Those who like to live dangerously can try to predict. They can also claim that a pot set on the stove will never boil since no one seems to be able to predict where and how the first bubble will form.
Excluding short term perturbations and transitory phenomena, there seems to be and equilibrium long term economic freedom vs steady state prosperity.
Countries that are far from that equilibrium, ie countries that have even modest economic freedom but are still poor (like China) are thus growing very fast. They are naturally moving towards their equilibrium point.
Conversely, countries that became wealthy in past freer times but whose current economic freedom levels are out of line with their higher prosperity grow very slow (eg France) and are thus in structural decline. They too are naturally and swiftly converging towards their lower prosperity vs economic freedom ranking equilibrium.
Even at its modest economic freedom levels China still has a lot of growth catch up to do before it reaches its economic freedom vs prosperity equilibrium. And catching up indeed it is. The “disappointing” growth of seven percent that China is experiencing is something European lemmings can only dream of. Increasingly this is becoming the situation for American lemmings too, as expected, of course, since Europe seems to have become the moral model continent for a majority of America’s elite.
The western world will continue to submerge into the rising tide of three billion or more people experiencing great leaps in their relative economic freedom. At the same time, most of the western world has either stalled or regressed on its economic freedom, as voter lemmings in the developed world succumb to the innate totalitarian human tendency of one day achieving collective control over all economic activity.
A China where per capita income eventually rises to just half its US equivalent will be an economy more than twice the size of the US. That will be a very different world to once lucky American voter lemmings who once rode the prosperity ladder in the top five percent. The same potential has India and other emerging world peoples.
But the world’s top five percent (the American middle class) has declared war on the world’s top one percent (the more productive amongst Americans). Unappreciative of the worldwide notorious American “selfishness” that put them in the world’s top five percent in the first place, they will be worthy of their fate in systemic relative national decline. They will have made their own beds, … like Argentina, Greece, Italy, Spain, France, and eventually all of Europe if it keeps insisting on the demotivating flatter effort reward curves; the demotivation of welfare comfort.
On a personal level however, one would be wise to look for a salvage boat now, while the American Titanic is still floating.
the Chinese aren’t stupid… and the IMF is no longer the respected institution it once was… China seems determined to make it’s own place in the world… the Asia infrastructure investment bank is cookin… [in spite of the clown show’s best efforts to dash it on the rocks…] a Chinese-led economic institution with global support? who ever heard of such a thing? and trade? one belt/one road [the new maritime and land based “silk road” effort] is projected to yield 2.5 trillion in trade between china and other silk road nations over the next decade… China is building infrastructure world- wide at a blinding pace… new port facilities… modern high speed rail… and improved [more secure] communications are all part of the equation… at this point in their history the Chinese are a pragmatic… and results oriented people… they will be polite… respectful and reserved… but it is doubtful they much give a hoot what the IMF thinks…
This is not the IMF of even a couple of decades ago. It has now been thoroughly hijacked by representatives of the slow growth European nations.
Support from a new America that now holds Europe as its modern model continent is also not lacking within the ranks of the IMF.
For more on Singapore and China vs. the US, I just finished a thought provoking book, “The Fourth Revolution”. The author claims to be pro-capitalism, but likes a lot of big government programs. Well worth a read.