Ever since Jin Renqing, director of the State Administration of Taxation, disclosed in early 2000 that the state is considering raising the income tax threshold by expanding the tax-free section, the issue has become an increasingly heated topic in society.
According to the Individual Income Taxation Law of China, promulgated in the early 1980s, the threshold for income tax was 400 yuan a month. In the taxation reform of 1994, a comparatively complete taxation system was established, with income tax threshold rising from 400 yuan to 800 yuan a month.
The recent years have witnessed rapid advancement in the collection of individual income tax. In Beijing and other economically developed areas, the individual income tax has become the second largest source of tax revenue, next only to the business tax, and covers all walks of life.
The plan of the taxation reform is expected to be mapped out and delivered to the National People’s Congress for examination and approval this year.
Income tax threshold
According to a recent survey of 900 permanent residents in the cities of Beijing, Wuhan and Xi’an conducted by the State Economic Monitoring and Analysis Center of the National Bureau of Statistics, 36.3 percent of the surveyed believe the threshold for collecting individual income tax should be 2,000 yuan; 27.4 percent say it should be 1,500 yuan; 21.6 percent say 1,200 yuan and just 4.2 percent say 800 yuan.
Xia Jiechang, Director of the Economics and Trade Research Institute of the Chinese Academy of Social Sciences: China’s current policy was worked out in 1994. During the seven years from 1994 to the present, the incomes of urban residents have increased by 6-7 percent every year, and that of people living in rural areas by 3-5 percent. During these seven years, people’s income has doubled before taking into consideration the factor of inflation. In this situation, it is unfair to retain 800 yuan as the starting point for individual income tax. Eight hundred yuan, which once was considered a relatively high income, now can only support an individual’s basic livelihood in economically developed cities such as Shenzhen, Shanghai and Beijing.
Prof. Yang Weihua, director of the Finance and Tax Department of Lingnan Institute, Zhongshan University: In recent years, residents’ expenses for housing, medical care, education and social security have increased rapidly, so the original criteria for individual income tax collection should be changed.
In Shenzhen, the threshold for income tax is 1,500 yuan, in Guangzhou it is 1,260 yuan, in Shanghai 1,200 yuan and in Beijing 1,000 yuan. The State Administration of Taxation has not yet expressed its attitude about raising the tax threshold, and although appeals to raise it have appeared, they have not been strong.
An Online Commentator: Tax should be levied on every yuan because it is income, and it is necessary for everyone to establish the sense of paying tax, no matter how much he or she earns.
Liu Huanfu, deputy director of the Macro-Economic Control Research Institute under the State Development Planning Commission: I don’t agree that there is a starting point for income tax. I believe people should pay their tax for every yuan, and by the principle of progressive rates, the higher the income one has, the more tax he/she pays. By doing so, those who want to evade income tax by dividing their income into sections will be restrained. For this purpose, the distribution system should be streamlined with everyone setting a tax number.
It was impossible to raise the tax threshold now because of the wide gap in incomes in different areas. For instance, an 800-yuan threshold is a bit low for large cities like Beijing, but not for other medium-sized cities. In addition, a monthly wage of 800 yuan puts an individual in the lowest tax bracket with a rate of 5 percent. A person whose monthly wage is 1,000 yuan only needs to pay 10 yuan, which is a small number. When one’s tax rate reaches 10 or 15 percent, income is considerable. Compared with other countries with an economic development level similar to China’s, China’s current income tax is suitable.
Others worry that raising the income tax threshold would lead to a drop in state revenues. In response, experts suggest expanding tax collection to prevent a decrease in the volume of total revenues.
Prof. Ji Jinbiao at the Central University of Finance and Economics: China’s pending entry into the World Trade Organization requires it to readjust the income tax system. Currently, a great gap exists between the tax threshold of Chinese people and expatriates working in China, with the former’s being 800 yuan and the latter’s being 4,000 yuan. However, according to WTO requirements, the criteria for both should be the same, just as Chinese people working abroad must pay income tax at the same rate as everyone else in the country concerned.
Experts point out that different notions about the goal and effectiveness of tax collection are the main reasons for the debate on the tax threshold issue, but the criteria will be determined by State policy.
Who Will Pay Tax?
Statistics from the State Administration of Taxation show that in the year 2000, the country collected about 60 billion yuan in individual income tax. Of this total, 90 percent came from wage-earners and self-employed people.
According to a survey of 40,000 families in cities nationwide conducted by the National Bureau of Statistics, 20 percent of high-income people control 42.5 percent of the country’s wealth. Under such circumstances, many people believe individual income tax should play a role in narrowing the large income gap.
Yang Weihua: The following six categories of high-paid people should be the main targets for income tax collection:
• Private entrepreneurs, individual business people;
• Actors/actresses, athletes, project-contractors, and other nouveau riche;
• Lawyers, accountants, project-appraisers, and people who trade stocks for institutions;
• Intellectuals engaged in high-tech business, such as those selling products produced with high technology, and highly paid moonlighters;
• Expatriates; and
• Highly paid wage-earners.
Prof. Hu Yijian at the Shanghai University of Finance and Economics: Paying income tax is not only the obligation of the rich, but of every citizen. With tax revenue, the state provides public products and services, such as national defense, environmental protection, social security, cultural facilities, transportation construction and various other services. Hu also believes that individual income tax balances the rich and poor, so higher income tax should be levied from the rich to help the poor, but that the provision of public services should take priority over income redistribution.
Chen Huai, director of the Market Economy Research Institute of the Development Research Center under the State Council: It is wrong to narrow the function of income tax collection simply to deprive rich people of their economic superiority. In the market economy, the income gap plays an important role in arousing people’s enthusiasm for work and raising efficiency. The international practice of balancing incomes between the rich and the poor does not depend just on income tax, but a series of related taxes, such as property tax, gift tax and inheritance tax. Many countries that are more tolerant of the rich in terms of income tax give full play to inheritance and gift taxes. In China, readjusting the income tax should be combined with inheritance and gift taxes, Chen added.
Reform should be undertaken in several aspects with the objective of displaying fairness and narrowing the income gap, and rich people should pay a higher income tax rate, Yang said.
Prof. Qian Sheng at the Renmin University of China: High income tax rates are not practical. In other countries, income tax rates are quite low, especially the top bracket. The United States has reduced income taxes through reform, the result being a great influx of capital and talented people. In addition, high income tax rates may cause more people to try to evade tax. Worse still, high rates may cool the people’s enthusiasm for work, thus reducing the accumulation of social wealth.
Other experts point out that the current unfair income distribution cannot be solved simply by raising income tax rates because the situation was caused by the economic dominance of certain groups, the incomplete market system and inadequate laws.
How to Levy Income Tax
Some people feel it’s “unfair” for individuals with the same income but different responsibilities, such as supporting old people or siblings studying at school, to pay the same amount of tax. The current tax policy does not take this element into consideration.
Qian Sheng: People’s capacity to pay should be considered when collecting income tax. To be specific, people capable of paying more should pay more, and people capable of paying less should pay less, and those without the ability to pay need not pay at all. Therefore, when readjusting the income tax system, the following factors should be considered: living expenses, inflation, reform of the system that covers housing, medical care, unemployment, pension and education; and finally, the income gap between different regions.
According to a survey conducted by the China Economic Monitoring and Analysis Center of the National Bureau of Statistics, most people hold the same attitude as Qian.
Former Legend Managing Vice-President Li Qin: Chinese enterprises are in an unfavorable position regarding international competition for talented personnel. One of the major reasons is the heavy tax burden and low tax threshold. The current starting point for income tax in Beijing is only 1,000 yuan, equal to a little bit more than US$100, which is unimaginable in other countries. In spite of this, many countries have reduced or exempted taxes for those who have to support children and seniors or pay for housing. In this case, some people who have a monthly income of US$10,000 are below the income tax threshold.
Liu Huanfu: It would lead to a situation where those who have more children pay less income tax, which would contradict the State’s cardinal policies of family planning and population control. It also would be unfair to those who abide by those policies. As for supporting the elderly, Liu said this problem should be solved by improving the social security system rather than reducing or exempting income tax because the amount that can be reduced or exempted is limited.
Some experts warn that under current conditions, an overly complex tax filing system would be a burden both to taxpayers and collectors because of the amount of time required to calculate how much tax should be paid and to fill out a great number of forms. On the other hand, incomplete policies and regulations will cause unfairness and corruption.
(Beijing Review 06/22/2001)