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What is the overriding principle for determining a state's personal income tax system?
An internationally recognized rule of thumb is: "The more money you earn, the more taxes you pay." It makes sense but is not necessarily an easy plan to put in place.
There is a lot of work to do before taxation becomes fair worldwide, and China is no exception.
An increasing number of Chinese and overseas economists have pointed out the country's aging individual income tax law is too outmoded to reflect the current situation.
Although some revisions were made in 1993, the present individual income tax threshold is 800 yuan (US$99) a month as it has been since it was introduced in 1980, at a time when the living standards of ordinary citizens were very low. In those days, income was often less than 100 yuan (US$12) per month.
China's reform and opening up over the past two decades has rapidly increased average incomes. He Shaowei, an economist at the State Information Centre, said a monthly income of less than 600 yuan (US$74) is considered low, especially in big cities where at least 900 yuan (US$111) is needed to maintain a basic standard of living.
Personal income tax is not a major source of State revenue according to the principles of economics. It is a tool with which an administration can enforce macroeconomic control over social wealth distribution, using money taken from the rich to help the poor.
The international practice of trying to converge income across a society depends not only on income tax, but also a series of related taxes, such as property tax, gift tax and inheritance tax.
Individual income tax has become a major source of funding for the government. Revenue from the tax soared to more than 100 billion yuan (US$12.3 billion) last year from about 100,000 yuan (US$12,330) in 1980, according to www.taxchina.cn. Meanwhile, the gap between rich and poor continues to widen.
Wage earners and the self-employed account for 90 per cent of the income tax collected by the State, while some rich people who do not depend on a monthly wage can easily evade the tax by dividing their income into sections.
The heavy tax burden and low tax threshold is a major problem that badly needs to be solved by the government.
A worker who is the only wage earner in a family with a monthly income of 2,000 yuan (US$247) has to pay more income tax than a couple with a monthly income of 1,000 yuan (US$123) each, according to the personal income tax law.
Some people would say paying income tax is not only the obligation of the rich, but of every citizen. But, capacity to pay should be taken into account.
When rethinking the income tax system many factors should be considered. They include living expenses, inflation, reform of the housing system, medical care, unemployment, pensions and education; and finally, the income gaps between different regions.
The experiences of other countries should be learnt from. A low income tax rate helps to attract capital and talented people while high income tax rates may cause more people to try to avoid paying tax. Worse still, high rates may cool enthusiasm for work, thus reducing the accumulation of social wealth.
Several big cities have already raised the threshold at which income tax is paid in line with their practical situation.
The threshold for personal income tax is 1,200 yuan (US$140) in Beijing and Shanghai, which is unimaginable in other major economies. In addition, a large gap also exists between the tax thresholds that apply to Chinese and foreign expatriates working in China, which are 800 yuan on average nationwide and 4,000 yuan (US$493) respectively.
According to WTO requirements, the level should be the same for both groups, just as Chinese working abroad must pay income tax at the same rate as everyone else.
More than 60 per cent of the population are farmers, who do not need to pay individual income tax if they are engaged in agriculture, forestry, animal husbandry or fisheries.
The government has always attached great importance to rural economic development, calling for nationwide support to improve farmers' living standards. The rural economic structure has changed a great deal thanks to the government's preferential policies.
Some farmers now engaged in fishing and animal husbandry are very wealthy, and should therefore pay income tax.
Various experts have expressed different views about the goals and effectiveness of tax collection, with the matter of the payment threshold remaining at the core of their debates.
Last month, a revised draft of the personal income taxation law was approved by a State Council meeting, during which policy-makers decided to submit it to the Standing Committee of the National People's Congress, the country's top legislative body, for examination and approval after further revisions.
The revised draft suggests changing the current low tax threshold to a national average of 1,200 yuan. But simply raising the starting point for income tax payment is not enough to improve the taxation system in accordance with WTO guidelines.
(China Daily August 3, 2005)
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