Reducing individual taxes

(China Daily)
Updated: 2011-03-16 15:37
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The rapid surge of China's fiscal revenue so far this year makes a compelling case for prompt and sweeping tax reduction for as many as possible Chinese households.

Raising the personal income tax-free threshold to accommodate the rise in living expenses amid soaring inflation is the least that Chinese policymakers can do right now.

But a thorough overhaul of the current taxation system, which has ostensibly failed to tilt the distribution of wealth in favor of ordinary consumers, should also be put on the government's agenda at the earliest possible opportunity.

With the newly approved 12th Five-Year Plan (2011-2015) giving more weight to improving people's living standards than the pace of economic growth, the government can no longer afford to ignore the fact that aggressive taxation eats away at consumers' spending potential.

Latest statistics show that China's fiscal revenue increased by more than a third year-on-year in the first two months of this year to 1.85 trillion yuan ($281.6 billion).

At a time of great uncertainties about global growth, which have forced some countries into a tight corner over their ballooning public debts, China's strong revenue growth should be regarded as a boon. It was the wherewithal that the Chinese had to quickly activate massive infrastructure investment that enabled the country to take the lead in emerging from the 2008 global financial and economic crisis.

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But while China's growing coffers continue to shore up confidence in the new phase of social and economic development, the virtues of its sound fiscal condition should not be overplayed to the extent that it is achieved at the cost of Chinese consumers' purchasing power.

It is particularly noteworthy that the country's personal income taxes increased by 54.6 percent during the first two months to 146.6 billion yuan.

In addition to rapid economic growth and price hikes, the Ministry of Finance attributed such a strong revenue growth to payment of annual bonus during the Spring Festival holidays, which fell in February this year.

That looks like a matter-of-fact analysis. China's real income growth and climbing consumer prices will indeed raise the amount of personal income tax that individuals have to pay.

Nevertheless, this explanation neither justified the rise in personal income taxes by such a wide margin nor touched on the real problems within the existing taxation system.

With the nominal income levels for rural and urban residents going up 14.9 percent and 11.3 percent respectively last year, it is hard to justify the 54.6-percent increase in personal income taxes. More importantly, the huge rise of both personal income taxes and overall fiscal revenues will likely point to a further decline of people's income as a share of gross domestic product.

If the country is to transform its growth model to rely more on domestic consumption for balanced and sustainable growth, policymakers have to come up with a new and consumer-friendly taxation system.