Tax reform a welcome effort to address wealth gap

PUBLISHED : Friday, 02 September, 2005, 12:00am
UPDATED : Friday, 02 September, 2005, 12:00am

It is 25 years since the mainland set the wage level at which workers must begin paying income tax at 800 yuan a month. In that time almost everything else has changed, especially the cost of living. The result has been to highlight the plight of a vast underclass of urban and rural poor struggling to make ends meet on the wrong side of a growing wealth gap.

This is a recipe for social unrest that could blight China's rise as a great economic and trading power. Growing public anger at the inequality created amid the new prosperity and the clamour for tax reform cannot be ignored much longer. The mainland's leaders have rightly shown a sense of urgency and some openness in trying to come to grips with the issue.

One measure that would help narrow the wealth gap would be to change the tax regime so that more after-tax income is left in the hands of lower-wage earners. And a simple way to do that is to raise the income tax threshold, or the earnings level at which a worker begins paying tax.

This is part of a two-pronged approach adopted by the State Council. It has proposed nearly doubling the threshold to 1,500 yuan a month, at an estimated cost to the state's revenue of 20 billion yuan. It expects to recoup this amount and more by tightening up comparatively lax and haphazard collection of tax from high-income earners. These people would be required to prepare their own tax returns and would face stiff fines and jail terms for trying to evade tax by not disclosing their full earnings.

The priority is not to raise more tax revenue. First and foremost is the pressing social need to restore the value of low incomes. The existing tax threshold was part of a social contract that has been breached. The government once provided free education and medical care. People could see where their tax was going - but not any longer. Now they pay for these services. This has bred resentment about paying tax. The rising income gap between the rich and poor has been identified as a primary cause of the growing number of mass protests recently.

In discussions in the National People's Congress Standing Committee it has been argued that 1,500 yuan is far from enough to cover the basic needs of urban residents and low-income families.

Many also question an across-the-board threshold for the entire country, as incomes and living standards vary significantly. Living costs in Beijing, Shanghai and coastal cities are considerably higher than in remote western areas.

The unprecedented - and welcome - step announced this week of holding open hearings on the legislation and inviting taxpayers to take part reflects the public interest in the issue. It is also a landmark recognition that social equity can easily become a casualty of the mainland's rapid development and market reforms.