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New tax law needed to narrow income gap
(China Daily)
Updated: 2005-08-01 05:30

The draft amendment to the personal income tax law the State Council has in principle approved is a belated but important step towards updating one of the country's obsolete laws.

The decision made by the State Council, China's cabinet, on July 26 has essentially cleared the way for the draft to be given to the Standing Committee of the National People's Congress, the top legislative body.

Before its submission, further revisions may still be made such as to the threshold for personal income tax, which may be raised, while a decision to do away with the present one-size-fits-all basis of 800 yuan (US$99) has clearly been endorsed by the government.

That old tax threshold, determined according to the average income level, has not been raised since the personal income law was adopted in 1980. At that time, a monthly salary of 800 yuan was beyond the imagination of most Chinese people who lived on a monthly income of merely tens of yuan.

But China had quadrupled gross domestic product (GDP) within two decades by 2000. Last year the country's per capita GDP exceeded 10,000 yuan (US$1,230).

In the first half of this year, the per capita disposable income of urban residents reached 5,374 yuan (US$663) while their rural cousins on average netted 1,586 yuan (US$196) in cash, up 9.5 per cent and 12.5 per cent respectively over the same period last year.

Meanwhile, robust growth of the national economy has stoked an even more rapid upward spiral in tax revenues. Between 1994 and 2004, the country's total tax revenues soared five fold to 2.57 trillion yuan (US$317 billion).

On the one hand, current income levels across the country have made the existing 800-yuan threshold, originally designed to tax the rich, a heavy burden for too many people.

With such a threshold income level, it is very difficult just to make ends meet in major cities like Beijing and Shanghai.

On the other hand, swollen government coffers enable policy-makers to raise the threshold for personal income tax.

Personal income tax accounted for 6.7 per cent of the country's total revenue last year. A rise in the threshold will make a dent in this growing source of tax revenue for the moment.

But in the long run, such a tax cut will boost the public's consumption power, a key growth engine that the country has yet to make full use of.

Besides, the government's account has been expanding for so long that policy-makers have been left with the financial strength to deal with potential resulting budget deficits in poor areas.

It is not clear whether the new threshold will finally be fixed at 1,200 yuan (US$148) or perhaps 1,500 yuan (US$185). This will depend on related departments' judgments on the impact of the revision on all budget executives.

The resolution of the government to largely get rid of the unnecessary burden on taxpayers, especially the poor, is obvious. It is simply wrong to inflict a decades-old tax for the rich on today's vast low-income group.

During the course of this reform process, some rich regions called for a higher threshold for certain areas, citing higher living costs. The alleged 20-per-cent margin left to the discretion of local authorities might be an expedient response.

But in the absence of sufficient and swift transfer payments across regions, such a practice risks taxing more of the poor in less-developed areas and less of the rich in developed regions.

After all, the ultimate goal of tax reform should be narrowing the income gap via funds redistribution.

Hence, as it is to be fine-tuned and approved, both policy-makers and legislators should carefully weigh up the draft's clauses to ensure its fairness.

(China Daily 08/01/2005 page4)

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