Inflation soaring, Chinese want more tax cuts

Updated: 2011-04-25 10:48
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BEIJING - As rising inflation and high housing prices erode incomes and add to living costs, residents in large Chinese cities hope to see larger cuts in personal income tax than being considered by the country's legislators.

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The Standing Committee of the National People's Congress (NPC), China's top legislature, reviewed a draft amendment to the Personal Income Tax Law during a three-day bimonthly session that ended Friday, in a move to narrow the income gap and offset the effect of rising living costs.

The draft increases the minimum threshold for personal income tax from 2,000 yuan ($307) per month to 3,000 yuan, and cuts the number of income tax brackets from nine to seven.

The draft amendment, which was submitted to the session for the first time, did not receive approval after lawmakers put forward suggestions, and also many urban citizens called for larger cuts in their tax burden.

Wu Bangguo, chairman of the NPC Standing Committee, said the amendment would be made public to solicit feedback and be put to a vote at the top legislature as soon as possible after it undergoes further revisions based upon public opinion.

A survey of 282,000 Internet users conducted by showed 98.1 percent supported lifting the threshold, as they believe the tax burden for low- and middle-income earners are both heavy and unreasonable.

"The urban living costs are rising fast," said Ding Li, a resident in Guangzhou, capital of south China's manufacturing hub of Guangdong. "Raising the threshold can directly cut the burden of average citizens."

About 85.6 percent of the respondents, however, said the 3,000-yuan threshold was unacceptable and suggested it be increased to 5,000 yuan.

Many other people even said the threshold should track consumer inflation rises and be raised to match local housing prices.

China's consumer price index (CPI), a main gauge of inflation, rose 5.4 percent in March from one year ago, a 32-month high, as food prices surged 11 percent year on year.

Cai Yingtong, who works at a multinational company in Shanghai, said the proposed threshold increase might mean more to people in other less developed regions, but could be unsuitable in Shanghai, the country's financial and business center.

The 26-year-old earns a pre-tax monthly salary of 14,000 yuan, an income likely envied by many at his same age in most other parts of the country.

He now pays 700 yuan in personal income tax per month, more than half of his rent. "If the tax can be adjusted, I'll certainly have more money in my hands," he said.

But he pays a rent of 1,300 yuan and spends 2,000 to 3,000 yuan on other living expenses each month. In addition, he faces huge economic burdens, as he plans to buy an apartment in the city where housing prices average over 23,000 yuan per square meter.

The amendment was hailed by many as a step forward in the country's personal income tax reform as, for the first time, it attempts to adjust the tax rates.

China began to collect personal income taxes in 1980 with a threshold of 800 yuan, about 20 times the average income for urban workers. This threshold doubled in 2006 and raised again in 2008 to 2000 yuan.

China currently uses a nine-bracket progressive rating system, and the draft will eliminate the 15 and 40 percent tax rates.

According to the draft, the minimum tax rate of 5 percent will be applied to those whose monthly salaries range from 3,000 to 4,500 yuan, compared to the current 2,000 to 2,500 yuan. Also, the peak rate of 45 percent will apply to those who make more than 80,000 yuan per month, instead of the current 102,000 yuan.

The new tax rate system means lower taxes for those who earn less than roughly 20,000 yuan a month and higher taxes for those who make more than the figure, experts said.

This was criticized by white collar workers as a monthly salary of 20,000 yuan is no longer considered a high income in big cities like Beijing, Shanghai and Shenzhen, particularly on the backdrop of high housing prices. Prices of newly-built apartments within Beijing's fourth-ring road, the urban center, are at about 35,000 yuan per square meter.

For white collar workers, the government should further reduce taxes in a bid to expand the middle class group, said Guo Shiping, a researcher at the School of Economics at Shenzhen University.

The call came as China's total tax revenue surged 22.6 percent in 2010 and soared 32.4 percent in the first quarter of 2011, two or three times the gross domestic product growth.

The amendment is estimated to cut the country's personal income tax revenue by about 120 billion yuan in comparison to last year's figure, according to Finance Minister Xie Xuren.

The reduction will have very limited impact on China's fiscal revenue, UBS Securities economists said in a note. Personal income taxes totaled 483.7 billion yuan in 2010, accounting for only 6.6 percent of the country's tax revenues, data showed.

Many experts suggested the income tax be based on family incomes, rather than personal incomes, to better reflect family burdens and also urged stricter supervision over high-income earners and those with multiple income channels.

However, Li Tiegang, deputy dean of the School of Economics at Shandong University, said the tax regime based upon family incomes would be costly and hard to carry out, as China now has no platform to collect family income data.

"The draft amendment is a first step in the right direction," Li said. "It, however, should be adjusted and improved after being implemented."