New tax-free threshold too low, say critics

PUBLISHED : Saturday, 29 December, 2007, 12:00am
UPDATED : Saturday, 29 December, 2007, 12:00am

When the Standing Committee of the National People's Congress meets today to endorse changes to the country's income tax regime, it is unlikely to end the debate.

The central government hopes to offset rising living costs by lifting the monthly income tax threshold from 1,600 yuan to 2,000 yuan, but critics say the new limit is too low.

In a survey last month by China Youth Daily and, 97 per cent of some 3,700 respondents said the 2,000 yuan threshold was still too low, and 70 per cent said it should be at least 3,500 yuan.

The Standing Committee has been discussing the draft amendment since Sunday, with some deputies reportedly in favour of a threshold of 2,800 yuan, 3,000 yuan, or even 5,000 yuan.

The discussion follows a report to the Standing Committee session last week by Finance Minister Xie Xuren , who said the proposed change was designed to relieve the burden on medium- and low- income earners and was within the country's financial capacity.

Mr Xie said the increase would free 70 per cent of income earners from paying income tax - a 20 percentage point increase - and would also mean an increase in disposable household income, which in turn would help people cope with decade-high inflation.

But the 400-yuan increase is not enough to please many residents.

If the law is passed, 35-year-old Beijing shop assistant Liu Hui , who earns 3,000 yuan a month, will have her tax bill reduced by 40 yuan a month. She currently pays 115 yuan.

'I can use the 40 yuan to buy two kilograms of pork for my daughter, which has been a rare food on our table this year. But I don't think it is enough. The government should exempt the poor like me from tax,' she said.

Driven by rapidly rising food prices, the Consumer Price Index rose by an 11-year high of 6.9 per cent year on year last month, arousing widespread discontent.

The Finance Ministry says it took price rises into account when suggesting the 2,000 yuan threshold. It expects urban employees to spend an average of 1,586 yuan a month on daily needs this year.

He Zhenyi , a tax researcher with the Chinese Academy of Social Sciences, said he believed the law should be used as a tool to reduce the wealth gap and boost domestic consumption, which contributes little to economic growth compared with fixed-asset investment and exports.

'The threshold will be further raised in coming years to encourage people to spend more. The tendency is very clear. And adjustments might be frequent,' Mr He said.

The existing law has been in effect since January last year and raised the threshold from the 800 yuan cut-off in place since 1980. Some legal experts are worried the quick change this time and possible regular revisions in the near future will make people doubt the validity of previous decisions.

'The previous revision did not anticipate that the economic situation would change so fast. There were calls to raise the threshold higher last time, but the decision-makers did not do so. Our legislature should be more forward-looking,' said Shanghai University of Finance and Economics professor Zeng Junping .

But according to Mr He, the central government is equally worried about the possibility of a big drop in tax revenue, and it was only increases in treasury revenue over the past two years that persuaded officials to increase the tax exemption.

Although the bigger exemption is aimed at alleviating the tax burden on low-income earners, high- income earners will benefit more. People earning 3,000 yuan a month will pay 40 yuan less in tax, but those earning 5,000 yuan will pay 60 yuan less. Anybody bringing in 10,000 yuan a month will benefit by 80 yuan if the tax scales are not changed. And high income earners, particularly business owners, have many ways to evade at least part of their tax responsibilities.

'Thus, the wealth gap will be widened, instead of reduced,' China Youth Daily contributor Sheng Xiang wrote in a commentary.

The present law has also been under attack because of the high tax rate and lack of differentiation between prosperous and poverty-stricken areas. However, the revision is not expected to change either of those.

According to the Forbes Tax Misery Index released in May, the mainland ranked third in the world in tax burdens, after France and Belgium. The index measures corporate tax rates, individual income tax rates, value-added tax rates, and others. Personal income taxes of up to 45 per cent are levied on mainland wages.

The levying of tax on an individual basis, rather than looking at household situations, would also continue. Taxes are based on wages, regardless of whether the taxpayer has a child or jobless partner.

Earnings gap

Urban residents last year had average disposable incomes of 11,759 yuan

Rural dwellers' average incomes (in yuan) rose 7.4 per cent last year to 3,587


Send to a friend

To forward this article using your default email client (e.g. Outlook), click here.

Enter multiple addresses separated by commas(,)

This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
Enter the characters shown in the image.