Time ripe to levy inheritance tax
Ling HuChina Daily  Updated: 2004-11-03 08:47

Chinese citizens' income has increased dramatically over the past 20-odd years, coupled with the country's extraordinary economic progress. Some experts are therefore contemplating a new question regarding private property: should an inheritance tax be levied?

Inheritance tax, also known as "death duty," is a common form of taxation in many countries. But whether and when it should be introduced in China seems to be an issue that needs careful consideration.

Wang Minggao, head researcher of a national social science project on the property system and anti-corruption, said China has the right conditions for starting an inheritance tax.

"Whether a country should establish inheritance taxation should be decided by main economic indices including per capita gross domestic product (GDP), private deposits, the size of the high-income population, and also some structural indications like the Gini Coefficient that reflects the wealth gap," said Wang, who has studied inheritance tax for several years.

China's per capita GDP surpassed US$1,000 in 2003. And the balance of private deposits amounted to 12.1 trillion yuan (US$1.5 trillion) at the end of August, according to the central bank.

"Economists have found that more than 60 per cent of deposits are in the hands of about 20 per cent of citizens. It is roughly estimated that about 10 million families have assets worth over 1 million yuan (US$120,900)," Wang said.

"The economic climate is such that it favours introducing inheritance taxation," he added.

It is also believed that an inheritance tax may help narrow the widening wealth gap.

China's Gini Coefficient, an international measure of income equality has, in recent years, averaged around 0.4, which is the alert level for income inequality.

"The government now mainly relies on an income tax to adjust private income, but many rich people have found ways to evade taxes due to loopholes in the legal system," said Huang Xun, a law professor at Xiamen University.

He said an inheritance tax will only stop tax evasion to an extent as in some cases funds will be brought out after their owners death.

"China's taxation on property covers land, real estate, transportation vehicles and contracts, but it overlooks a common theme of daily life - inheritance," he said. "This is a flaw in the current taxation system."

Huang also agreed that the current economic situation makes inheritance taxation a possible option.

"When China was founded half a century ago, the government did not establish such a tax because people were very poor," he said, "but now things are different."

In 1950, the central government made inheritance a target item in its tax policy schedule but gave up on the idea due to the poor economic situation. In 1994, the central tax authorities named inheritance tax and gift tax as "new tax items the State will possibly establish."

In 1996, the National People's Congress approved a long-range economic plan in which the government proposed to "introduce inheritance tax and gift tax gradually."

A gift tax is usually established concurrently with the inheritance tax to prevent people evading the inheritance tax by presenting their property to others as "gifts" during their lifetime.

Apart from abundant sources of tax revenue, Huang noted that China's market-oriented reform provides some guarantee that an inheritance tax can be collected effectively.

China has established a real estate market, stock and futures exchanges, and asset assessment institutions, which help tax authorities keep abreast of the properties of taxpayers.

A real-name deposit system implemented in recent years will also prevent illegal transfers or the concealment of property via bank accounts.

Nevertheless, experts believe the implementation of an inheritance tax would be far more complicated than perceived.

"The core issue of inheritance taxation is to define the minimum taxable value and design reasonable tax rates," said Wang Minggao.

An inheritance taxation study group led by Wang recently proposed to set the minimum taxable property at 800,000 yuan (US$96,600), a number many researchers see as acceptable.

"We found that most Chinese families' assets are below this number so that the taxation is not likely to have repercussions on the livelihoods of the majority," said Wang.

He added that the proposed number is a general reckoning rather than a one-size-fits-all criterion should the inheritance tax be levied. In high-income areas like Beijing, the minimum taxable value can be raised to some extent.

Huang Xun said the tax authorities should also be very cautious when working out the tax rates.

Inheritance tax is usually levied in two ways: A one-time charge before the inheritance is divided and the separate taxation of each heir, according to Huang.

The first method is convenient but usually results in high taxes under a progressive taxation system because the amount of taxable property is large.

With the second method, inheritors pay lower taxes because the taxable property is calculated respectively. But the actual collection of taxes could be troublesome in this case.

In China, the distribution of an inheritance is not subject to the supervision of a court unless disputes arise. Most families divide inheritance through closed-door meetings between each others.

"It is almost impossible to know just how much each inheritor receives," Huang said. "Therefore, a realistic option for China's tax authorities is to levy a tax before the inheritance is divided."

As this form of inheritance taxation may lead to economic difficulties for some heirs, it is necessary to have some flexible policies built-in such as reductions or waivers, he added.

China's current inheritance law says that when dividing inheritance, special care should be given to heirs who have no sources of income or have other difficulties.

Still, some remain cautious about starting inheritance taxation in the near future.

Dai Peng, an economist at the Institute of Finance and Taxation of Renmin University of China, said the tax item might not be cost-effective considering the high costs needed to collect it.

"Rich people often have various forms of assets including cash, deposits, real property, securities, etc. It would be costly to uncover all these assets and estimate their value accurately," he said, adding that it would be better to impose the tax when the country is more prosperous, say, with a per capita GDP of US$3,000.

Yet Huang Jun presented a different view. "The difficulty in tax collection is one thing but whether or not to do it is another. It's like saying you should give up eating for fear of being choked."

"The purpose of the inheritance tax levy is more about bridging the income gap than increasing government revenue," Huang stressed.

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