China’s new tax plan aims to ease burdens on taxpayers, while a think tank suggests boosting total collections
Unlike developed countries, taxpayers are a comparatively small group in China. This is not good for income distribution. The draft plan has proposed for expenses in education, medical treatment and some other things to be made deductible, while in practice, this would be difficult to achieve, according to a recently released think tank report cited by Caixin.

With China’s parliament having proposed a raft of tax incentives to raise after-tax income of most individuals in the country, a panel of economists led by an academician with a Ministry of Finance-backed research institute has come up with a report with a diverging view, which argues that personal tax collection in China remains “small in its scope and share in the country’s total tax revenues”, so “it should be made bigger”.

The new income tax plan as part of the government efforts to relieve tax levies in order to stimulate consumption is set to be reviewed by the standing committee of the National People’s Congress (NPC), the country’s legislature, by the end of August. Contentious issues to be debated include raising the threshold (above which personal income will be taxable) and deductibles like mortgage interest payments, child-raising expenses, education and medical cost.

It’s against this backdrop that Liu Kegu, a doctoral supervisor, with the Chinese Academy of Fiscal Sciences, and some other researchers have proposed to increase collections from the lowest tax brackets while relieving the levies on high-income earners like researchers and scientists.

The report alerted that with the new tax incentives being implemented, there will be less tax revenue and less people in the country paying personal tax.

If the threshold for taxable monthly income was raised from 3,500 yuan to 5,000 yuan ($735), the number of taxpayers would drop dramatically, the report claimed, citing official data that even at the current threshold, the number of taxpayers in China is 180 million, merely 13 percent of the whole population.

The income tax collections amounted to around 1.2 trillion yuan in 2017, accounting for 8.3 percent of the country’s total tax revenue and 1.45 percent of the GDP, well below the levels in the United States, the report highlighted.

It especially argued against the new tax plan’s suggestion to add more deductibles against individuals’ tax bills, like expenses for treating severe diseases, on-the-job training, mortgage interest payments, and rent payments, while only supporting the plan to make child-raising costs deductible for the reason of “encouraging childbirth”.

“In practice, implementing the deductibles could be quite difficult and even lead to new contradictions,” wrote the report, insisting the plan for deductibles is not mature enough. “The deductions from tax bills tend to benefit those included in the highest tax brackets, instead of those who pay lower tax rates. It’s not fair.”

The report composed by Liu Kegu and the research team under his leadership explicitly lobbied the government to decrease the highest personal tax rate from 45 percent to 40 percent, while implicitly suggesting letting the lowest tax rate of 3 percent to be levied on more low-income earners who don’t need to pay income tax previously.

Liu Kegu formerly worked as the administrative secretary at the Finance Ministry’s tax department. When the NPC proposed the tax threshold to be raised from 3,500 yuan to 5,000 yuan, Liu was widely reported by Chinese media as saying that this policy change would be like “levying tax merely on the country’s rich people”. The remark soon flared up strong response on Chinese social media, with a large group of netizens making biting comments.

The Financial Time (FT) previously reported that, with the new tax plan, China is seeking to reduce excessive rates of savings and investment and generate a higher share of growth from household consumption.

Besides raising the tax threshold, the plan also suggests to expand the three lowest tax brackets—3 percent, 10 percent and 20 percent—to cover millions of taxpayers who previously paid higher rates. Almost all individual taxpayers will receive a tax cut, with those earning between $27,000 and $45,000 enjoying the biggest tax cut. 

“The tax cut will not have a significant impact on China’s fiscal budget because the country relies less on individual income taxes for fiscal revenue than other large economies,” wrote the FT report.

It’s known that China, with a Gini indicator of about 0.40, is defined by the World Bank as a country with “severe inequality”. The plan to cut personal taxes in an across-the-board manner is generally interpreted by foreign media as an effort to boost equality.  


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