Editorial: Government, Public Must Grasp Essence of Personal Income Tax Reform
China’s reform of personal income taxes is on the fast track.
In his government work report on March 5, Premier Li Keqiang said the government will raise the income tax threshold while allowing people to enjoy tax breaks in areas such as medical expenses and child education. Shortly thereafter, Finance Ministry officials told the media that the government will improve the taxation system by incorporating various means of income as the basis for taxes, a system known as “comprehensive taxation.” This tax system will co-exist with the existing system, which imposes different tax rates for different incomes.
A number of delegates attending the ongoing annual legislative sessions in Beijing have proposed changing the law concerning personal income tax, and that stirred up a new round of public discussion. However, most discussions are centered on raising the upper limit of tax-free income, but fewer people paid enough attention to the introduction of comprehensive taxation. It may have something to do with people’s lack of understanding of taxation and the purpose of an income tax.
The personal income tax has been becoming an important source of government fiscal revenue. But its most important function is redistribution of social wealth. The yardstick to measure the effect of personal income tax reform is whether it can really ensure that low-income people don’t pay tax; that middle-income people pay an appropriate amount of taxes; and that high-income people pay more taxes. Both the government and the public should grasp the essence of tax reform.
It is natural to have intense public attention on the discussion of personal income tax reform each year, as a change of the income tax exemption threshold is closely related to people’s own interests. It is also reasonable that as the cost of living and prices of consumer products have kept growing, the tax-free income level should also be raised. However, the income tax threshold was originally designed to ensure that the basic cost of living is tax-free. The public should not expect a huge rise of this bar. The reform will be multipronged in order to achieve reasonable redistribution among various income groups.
According to government plans, income from labor, such as salaries, wages, payments for writing, or royalties, can be combined as the base for a comprehensive income tax. Other nonlabor incomes will still be taxed with different rates for different categories. Although such a practice appears to make things more complicated and increase the cost of levying a tax, it is a relatively fairer way and has been adopted by many developed countries.
In fact, the direction of reform has been established for many years. In 1996, the National People’s Congress passed the country’s Ninth Five-Year Plan (1996-2000), which made clear its call to establish a tax system that combines the comprehensive model and category-based models. Since then, this goal has been reaffirmed on several occasions. However, years later, the reform has not seen a breakthrough.
For personal tax reform to be successful, it is necessary to widen the tax base. The key lies in strengthening the management of capital and property incomes for the higher-income population. At present, the wage- and salary-earners have become the major sources of the personal income tax, as employers are supposed to deduct the taxes from the employees’ pay. However, higher-income people’s sources of income are diversified. They often have a big proportion of income from capital operations, which often evades taxation. It is not only unfair, but also widens the income gap. Only by including the property and capital income outside the government’s tax control can the tax rate be determined reasonably. And only by daring to tax high-income people in both political and business circles can the government demonstrate its determination to maintain social equality.
Personal income tax reform has been making little progress for years. The common official explanation is the difficulty in capturing all the necessary personal data.
In fact, there should no longer be major technological difficulties to resolve, as information technology has made huge progress in recent years, and governments at all levels possess ample resources for the job. As long as authorities are determined to push forward the reform, the taxation department will be able to share information with banks, police, business administrations and customs in the near future. The tax department should also speed up its building of a nationwide tax information sharing system.
The reform of the personal income tax needs a road map and to be carried out gradually. The government can start with the easy part, such as raising the starting point of the income tax to a reasonable level, making special deductions, and establishing a regular automatic adjustment mechanism. In designing the comprehensive taxation plan, the government should raise taxes on capital gains and create conditions for reducing the rate of labor income tax. The existing tax system based on individuals can be changed to a tax reporting system based on couples and families. Reform can be done step by step, year by year.
Most people hope the personal tax reform can reduce their tax burdens. However, the share of individuals paying personal income tax is still lower in China than in many developed countries. It is unrealistic to expect big tax cuts under the policy of raising the share of direct taxes. Reforming individual taxation is in essence the adjustment of the benefit of various interest groups. It is completely normal for the tax burden to rise and fall for a specific stratum or individual. At present, both European countries and the U.S. have a tendency to lower marginal tax rates of personal income taxes. China will face increasing pressure from international tax competition. There is a strong need for China to lower the highest marginal tax rate for labor income and adjust its tax structure for various income ranges. To raise the tax burden of high-income earners, more should be done with their property income.
Citizens can easily notice changes in the personal income tax. That increases the challenge of reform, but also helps improve a country’s ability to govern. After a successful reform, the tax system will help redistribute wealth and promote fairness and harmony in Chinese society.
The third plenary session of the 18th National Congress of the Communist Party promised to increase the income of lower-income earners, enlarge the share of middle-income people, and narrow the income gaps between different regions and industries. With this goal in mind, personal income tax reform will play an important role in realizing this ideal blueprint.
Translated by reporter Wu Gang (email@example.com)
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