Personal Income Tax System in China Need to Be Changed

Personal income tax is expected to undergo a reform very soon in China. The State Council today has hold a meeting focusing on the reform. The government will likely raise the personal income tax threshold and adjust related tax brackets to try to create a fairer income distribution system. In the meantime, debate has surfaced over whether China's taxation system should take family burdens into consideration.

Let's take a closer look with reporter Liu Min.

Personal income tax accounts for 6.6 percent of China's overall tax revenue. More than 65 percent of personal income tax is paid by those with medium and low incomes. The goal of the tax, to reduce the wealth gap, has lost its original function. The new expected personal income tax threshold of 3,000 yuan income a month rather than the current one of 2,000 yuan a month is based on the country's average basic cost-of-living expenses.

Economist Ma Guangyuan says raising the income tax threshold is the quickest and simplest way to reduce China's wealth gap.

"The main purpose of it is so that poor people don't have to pay income tax. But there are different opinions on how to set the threshold. Academics say the universal standard should be twice the per capita GDP, which should be more than six-thousand yuan per month. Another standard is 1.5 times the average blue-collar salary which is 4,000 to 5,000 yuan a month in China at the moment. So it would be more rational to set the threshold between five to six-thousand yuan per month based on global standards."

Whether family burdens should also be taken into consideration in income tax calculations has also long been discussed, but up to now the government has said they would not work efficiently.

Li Keguang, a political consultant from Guangzhou, gives an example to urge the government to change its mind.

"The husband earns 4,000 yuan per month, but his wife doesn't have a job. The husband has to pay tax after he reaches the current threshold of 2,000 yuan. In another family, each of the couple earns 2,000 yuan per month each, but they don't need to pay personal income tax. That's why the current taxation system in China is still quite unfair."

Most developed countries have more complex taxation systems that take family burdens into consideration. In the United States, one can either report taxes on behalf of oneself alone or claim deductions for family dependents that he supports.
Ma Guangyuan says China needs to shift its focus from simply raising the income tax threshold to building a more consistent tax system that's fair for all.

"Now there are only 50-million taxpayers in China, accounting for 3.8 percent of the total population. However, there are only 2.4 million high-income people who have reported making more than 120-thousand yuan per year. They make up less than five percent of the total personal income taxpayers. China should think more about how to encourage rich people to pay more."

Tax rate adjustments are now considered the best way to get more wealthy citizens to pay personal income tax. For them, the highest tax rate is 45 percent. But the highest rate for companies and businesses is 25 percent. Thus, high income people would find ways to dodge high taxes through multiple ways. Some suggest, the highest personal income rate should be reduced to 30 percent, while the corporate tax rate should be close to 30 percent.

For CRI, I'm Liu Min.