Income tax proposals risk widening wealth gap, critics say

PUBLISHED : Sunday, 24 April, 2011, 12:00am
UPDATED : Sunday, 24 April, 2011, 12:00am


The government's draft amendment regarding personal income tax, put on hold by the National People's Congress Standing Committee, has prompted discussion in the press and internet, and revealed how people feel about the gap between rich and poor.

On the Shanghai-based, a commentary said consideration should be given to the difference in the cost of living in various regions when working out how the new income tax law would implement the principle of equality.

For instance, it said, a monthly salary of 3,000 yuan (HK$3,600) could go a long way in some interior regions, while one person could barely survive on that amount in the large coastal cities.

The commentary disagreed with officials' claims that the tax law amendment had considered average household conditions, insisting this was not true.

In the case of a married couple when one partner works and earns 10,000 yuan a month while the other was unemployed, it would be 'entirely unnecessary' to tax them at the 20 per cent rate. They should be taxed as a family of two.

If the couple had to take care of elderly people, this would make a difference to their living expenses.

So any changes to the tax law should take account of China's rapidly ageing society, the commentary said.

In a typical one-child family, a working-age couple would have four elderly people to take care of. Of major cities, Shanghai had the highest percentage of people aged 60 and over among its permanent resident population.

Other critics said some of the tax brackets in the draft amendment appeared to be poorly thought out.

In a blog by 'Wigsel' in the business news portal, the commentator said that according to his calculation, the tax amendment, if approved, would raise the tax rate of those who earn 9,000 to 20,000 yuan per month from 20 per cent now to 25 per cent.

'What is the logic, if any at all, behind such an increase in tax burden on the office workers?' it was asked.

Qin Huaichuan, a commentator on the Guangzhou-based Yangcheng Evening News, said the key to the reform of personal income tax was not how high or low the threshold for taxable income should be.

Tax incentives were often given in form of direct taxes, such as personal income tax and property tax, than in the form of indirect taxes, such as sales tax, business tax and value-added tax, he said.

Beijing, however, depended on indirect taxes for 70 per cent of its government revenue.

Without a cut in indirect taxation, the nation's tax burden would remain heavy.

Zhang Monan, a researcher with the State Information Centre, said from the perspective of the nation's overall distribution in wealth, the main problem was perhaps not income being distributed, but how wealth was accumulated.

Writing in the Securities Times, she cited data from National Bureau of Statistics showing that in 2007, the number of individuals with assets of US$1 million and more accounted for just 0.03 per cent of the population, while their assets made up 60 per cent of the national gross domestic product.

The percentage of these people in the population was lower than in many other market economies, from the United States, Switzerland, to Hong Kong, which showed a greater concentration of wealth.

The gap in wealth would have a domino effect and lead to even greater imbalances, further weakening domestic consumption because the poor would have little to spend in the marketplace, while the rich would also spend less and rather use their money for investments.

Assets-based tax was minimal on the mainland, while in the US it was said to contribute 70 per cent of the country's educational budget.

China should make a greater effort concerning its assets-based tax legislation, she said.