Income tax reform must progress in phases

By Yang Zhiyong
0 Comment(s)Print E-mail China Daily, March 9, 2016
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The goal of individual income tax reform is to establish an income tax system that combines classified and comprehensive taxation systems. The current classified individual income tax system levies different kinds of taxes. It is convenient to manage, and it is easy to levy tax as it is deducted at source-for example, an employer deducts an employee's income tax while paying his/her salary.

The problem with the classified income tax system is that different taxes can be imposed on different sources of incomes even if the amounts of incomes are the same. Also, the system doesn't consider the actual burdens of individuals and their families, which may lead to unfair taxation.

Levying income tax based on a family unit makes taxation fairer because it considers the financial condition of the entire family, as opposed to only an individual. Based on China's actual situation, levying income tax based on family incomes would require the tax department to have full information on Chinese families and to process it well. But the government does not have complete information on all families. Besides, processing the information may be a problem for the tax department.

Tax collection and management should be based on cost-benefit analysis. If the tax department requires vast resources to process information on families, it may be unwise to do so, especially because individual income tax accounts for just 6 percent of China's overall taxes.

An easier option, therefore, is to keep levying income tax based on individual incomes while taking individuals' family burdens into consideration and exempting some significant expenditures such as those on education and eldercare from the amount to be taxed. As to which kind of expenditure should be deducted, it should be decided by law.

That individual income tax will gradually adopt the comprehensive taxation system is inevitable. The system of imposing different taxes on people who earn the same amount of money only because of their different income channels should be changed. For instance, salary income and remuneration for labor are both labor incomes, but different amounts are imposed on themas taxes in many cases. This is unfair for people whose only source of income is remuneration for labor.

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