Personal income tax evasion has become a serious issue in China with many in private enterprises and on high incomes not paying their taxes.
As a result, the average rates of tax actually collected from city dwellers are not only lower than the nominal rates, but are also lower than those for rural areas. Of the total income tax revenues collected, most are raised out of the incomes of salaried employees and bank account interest. Taxes paid by the private business and service sectors account for only a small proportion. Most non-salaried income tax is just not paid in full. Income inequality widens where any income tax system fails in its role in the redistribution of income.
Professor Hu Angang of Tsinghua University has proposed measures to strengthen the work of income tax collection. Hu describes Chinaís personal income tax rates as among the lowest in the world. The past few years have seen rapid increases in personal income tax. However, the average real tax rates for city residents and for those with high-incomes are only 0.58 and 0.59 percent respectively, almost the lowest internationally. To enhance personal income tax collection, the arrangements for collection and the tax system itself are in need of reform. The costs and risks of tax evasion should be increased. Hu has offered some specific suggestions.
He advocates the introduction of a consolidated approach. Currently, income tax is calculated according to tax banding and collected on a monthly basis. His new consolidated approach would mean the introduction of a new annual reconciliation. This would involve recalculating tax liability over the year as a whole and then refunding any overpayment or requiring supplementary payment when reconciled with the month-by-month tally. In line with common international practice, basic allowances would be applied to reduce the taxable amount.
He proposes to strengthen identification procedures. Individuals would be recognised by name and tracked in the system through their ID card number. This would provide the point of reference for earned income, deposit account income and calculation of tax liability. Citizensí tax records would be set up and managed by reference to nationally unified codes.
Computerisation would facilitate monitoring especially in those areas, industries and groups needing special cares. The system would be enhanced through the introduction of an online service.
He would increase both the frequency of tax checks and the penalties for tax evasion. Punishment for tax evasion would be extended to include both increased financial penalties and public exposure that should be particularly significant to public figures. Records would identify an individualís standing with the tax authorities and blacklists would be introduced.
Every country needs to levy taxes and a modern taxation system is crucial for any modern country. Hu said that in peacetime a fair, unified and effective tax system might reasonably be thought to be even more important than a modern army, police and legal institutions.
He added that China with its socialist market economy also needed to strengthen the various relationships involved. These include those between the citizen who pays and the government that levies the taxes, those between the consumer and the supplier and those between the officials responsible for overseeing public expenditure and those who are overseen.
(china.org.cn by Feng Yikun, August 2, 2002)