Tax reform aims to fuel consumption

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China has tinkered with its tax system in the past as incomes rise. The individual income tax threshold was raised from 800 yuan to 1,600 yuan in 2006, and further notched up to 2,000 yuan in 2008.

The 800 yuan minimum was set up in 1980, when earning this amount a month was only a dream for most people.

Living standards have been rising with economic growth. Thirty years ago, owning a color television was considered a luxury. Today fancy cars, exotic holidays, Gucci handbags and Tiffany jewelry have become the hallmarks of a higher standard of living.

"In the past 30 years, China's reform has made tremendous progress," said Joyce Xu, a Deloitte tax partner. "China is now the world's second-biggest economy. It is the appropriate time to consider improving the existing individual income tax system to better distribute wealth."

China is now trying to rebalance its economy and shift emphasis from exports to domestic consumption as a principal driver of economic growth.

Ernst & Young's Bu said a tax cut would help lower-income families by putting more money in their pockets at a time when rising prices are eroding disposable income.

China's consumer price index, the main gauge of inflation, rose 4.9 percent in February from a year earlier, stabilizing at the January rate. The data are more alarming when one looks at food prices. They soared 11 percent last month. Food accounts for an estimated 30 percent of the average household budget in China.

Guo Yue, a 26-year old white-collar worker who earns 4,700 yuan a month, said she would spend more on clothing or entertainment if she got a tax break.

"I don't need to worry about housing because my parents have bought me an apartment," she said.

Sun Xiaobu, another white-collar worker in Shanghai, shrugged off the prospects of any tax break that might save her several hundred yuan.

"Of course it's better than nothing," the 29-year-old marketing manager said. "But it won't affect my life deeply."

Sun, who is single and earns 13,000 yuan a month before taxes, lives with her mother. She is among the emerging middle class in China - the generation that received higher education and benefited from China's economic boom. But it's a generation with growing pains.

"I am still hoping, after a decade of hard work, that I can buy a decent home someday in Shanghai," Sun said. "The extra money I could save with a tax break would definitely help me put a foot higher on the ladder, but I still have a long way to go."

January's new home prices rose annually in 68 out of the 70 major cities monitored across the country, with 10 of them reporting a hike of more than 10 percent, the National Bureau of Statistics said.

There are no data available on the national average home prices. In Shanghai, new home prices dropped 10 percent in January to 20,625 yuan per square meter as the government tightened screws on home buying.

China's housing bubble, fueled by speculators, has been a stubborn problem. The government has imposed higher down payments, limits on the number of homes a person can buy, higher interest rates and even a pilot property tax trial.

While housing prices are showing some signs of starting to ease off, buying an apartment still remains unaffordable to many young couples.

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