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Case for tax cuts
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It is absolutely right for the State Administration of Taxation to standardize collection of personal income taxes. But the timing is inopportune, as this comes when more tax incentives are badly needed to boost domestic consumption.

The tax authorities issued a notice on Monday to clear the confusion over implementation of policies concerning personal income taxes.

Such an effort to increase tax collection will not only ensure fairness of taxation but also contribute to the country's fiscal strength.

China has witnessed rapid revenue growth from personal income tax for more than a decade as people earned more and more each year. The total amount of personal income tax collection zoomed from a lowly 7.3 billion yuan ($1.1 billion) in 1994 to 372.2 billion in 2008. And, the proportion of revenue from personal income tax in total tax revenue also increased from 1.4 percent to 6.4 percent.

At a time when the country is fighting a global recession with a pro-active fiscal policy among other stimulus measures, it is fully understandable that the tax officials are eager to see a certain increase in tax revenues to guarantee the government's fiscal sustainability.

However, any effort to raise taxes at this stage, particularly those for individual consumers, appears to be ill-timed as the country is trying hard to move away from its dependence on investment and export for economic growth.

It was reported that the latest move would raise the tax some people have to pay for the so-called "double salary" or the thirteenth month salary as year end bonus.

The increase in personal income tax may be marginal, but it sends a wrong signal which can result in much bigger damage on consumers' enthusiasm to spend than the good it can do.

Chinese officials must have had a taste of the wonders that tax cuts can work to boost domestic consumption.

For instance, by halving the purchase tax on passenger cars to 5 percent for models with engine displacements of less than 1.6 liters in January, Chinese policymakers triggered a boom in sales that has rendered the domestic auto market into the world's biggest one so far this year, to the surprise of all.

Though domestic consumption held up comparatively well in a year when most consumers in rich nations are cutting expenditure, it is still not good enough to fuel a consumer-centric recovery in China.

Under the circumstances that overseas demand is unlikely to rebound soon and investment growth is too fast to sustain, domestic consumption must be further boosted to stoke economic growth.

To that end, the tax authorities should come up with more incentives, not disincentives, for individual consumers to spend.

(China Daily September 2, 2009)

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