Editorial: Changes to Personal Income Tax System Must Serve Reform
The recently proposed amendments to China’s personal income tax law have triggered heated public debate.
The draft amendments, which include raising the income tax threshold to 5,000 yuan ($768.60) per month from 3,500 yuan, were recently submitted to the Standing Committee of the National People’s Congress for consideration.
Finance Minister Liu Kun, when introducing the amendments, explained that the aim was to fix the parts of the existing personal income tax system that do not meet “the needs of reform,” and to supplement and improve the necessary conditions for reform. “The needs of reform” can be considered the central idea of these amendments.
Liu did not elaborate on what “the needs of reform” are, but we believe that they can be thought of on two levels. One level is the needs of the individual income tax system itself, and the second is the need for China to comprehensively deepen reform and opening up. The two levels are closely related. The former should be subordinate to and embody the latter.
In short, the proposed amendments are an important step in deepening the reform of China’s personal income tax system, and in the gradual construction of a system that is both comprehensive and able to accommodate diversity. And, to take a broader view, these amendments should reflect the needs of China’s high-quality development, its push to be an innovative country, and its aim of improving its global competitiveness. At the same time, they must meet society’s demands for fairness and justice.
The litmus test for the success of the tax reforms will be whether they can change the current situation in which low-income citizens must pay taxes, middle-income citizens must pay more, but higher-income citizens are able to evade taxes.
The unveiling of the draft amendments triggered heated public debate. Despite differences in opinion, most people who weighed in agreed that there was a need for reform. The draft amendments will be open to public consultation in accordance with China’s legislative process. We hope the version that is finally passed will take into full account the public’s reasonable opinions, respond to their concerns, and set an example of legislative transparency and accountability to the people.
In addition to the raised income tax threshold, which has attracted the greatest public attention, another highlight of the proposed amendments is a new integrated tax on four types of work income — wages and salaries, labor service payments, author remuneration, and royalties. This is a step in the right direction. It must also be acknowledged that this is a difficult step to take.
However, this integrated tax increases the burden on workers with a higher proportion of their income in the latter three types. This is not in line with policymakers’ aim of “encouraging the people to increase their income through labor, and moving toward prosperity.” For those whose income is actually not that high, this will be akin to trying to “carve meat off a heron’s legs” — taking away from something that is already meager.
Even worse, the new integrated tax could cancel out some of the tax benefits extended to scientific researchers in recent years, which are aimed at increasing innovation. This would hinder China’s desire to transform into an innovative country. The Chinese economy is currently switching from old to new drivers, and the world’s “Fourth Industrial Revolution” is in full swing. The state urgently needs to use the tax system to encourage citizens to create and innovate. It should make the appropriate arrangements through tax exemptions or changes in the taxation rate.
The public has long called for strengthened supervision and taxation of groups with high, hidden, and capital income, in order to fully realize the principle that each worker’s tax burden should be proportionate to their income, rather than allowing the highest earners to evade taxation. “Taking from the poor to give to the rich” is a terrible strategy. The experience of many countries shows that inequality is the best incubator of populism.
At China’s current level of social and economic development, public calls for fairness and justice are reaching an unprecedented intensity. Rumors of “yin and yang” contracts, which give one record of income to tax officials and keep another for companies’ internal use, have spread, alongside reports of tax evasion by movie stars. This has both material and psychological social effects. The newly proposed tax law amendments should stop focusing only on wages when eliminating inequality, and instead focus on a wider range of income sources.
Another highlight of the new amendments is the introduction of tax deductions for children’s education, continuing education, medical expenses for major illnesses, interest payments on mortgages, and housing rent. This is in line with China’s goal of sustainable development. However, this also marks a major shift in China’s tax collection and management system, and taxpayers and authorities will face new challenges.
Tax authorities should make it as convenient as possible for taxpayers to declare their incomes in order to prevent bureaucracy from getting in the way of efficiency. The draft amendments do not specify standards for the new special deductions. But, in any case, the authorities must avoid setting standards that are too low and declaration procedures that are too cumbersome, causing taxpayers to give up on claiming deductions. Additionally, the law still sees the individual as the basic unit of taxation. China needs to start considering households as tax units as soon as possible because deductions for education and housing need to be determined based on the household as a unit, which is the usual practice in developed countries.
Convenience is one of the main reasons personal income tax is currently applied overwhelmingly to salaries. It is easy for companies to directly deduct taxes from employees’ paychecks, and it is convenient for the authorities to collect taxes directly from employers. Conversely, it is difficult to tax high-income individuals, whose income generally comes from dispersed sources. But considering current advancements in science and technology, how difficult can it really be to collect and manage taxes, as long as the government is determined to do so?
Policymakers should urge tax, banking, public security, commerce, and customs authorities to form an information network and share resources in order to fully execute the new tax law.
Countries around the world are competing to cut taxes, regardless of whether these moves are welcomed or rejected. This is bound to affect China’s competitiveness, and the country should take precautions to protect it. The proposed amendments have not changed China’s high tax rates of 30%, 35% and 45%.The relevant departments should confront the gap between the statutory tax rate and the actual tax rate. It is better to fully levy a lower tax than to impose a high tax rate that cannot be fully applied. The authorities should put their energy into the strict collection and management of income tax, and actively engage in international cooperation to combat tax evasion.
The latest amendments will mark the seventh time China’s tax law has been changed since it was introduced in 1980. At a time of social transformation, it may be reasonable to introduce change in small increments. However, each increment should still be as large as possible, mostly to remove obstacles for future legislators. Fulfilling “the needs of reform” will by no means be a convenient task for finance and tax authorities. The progress of tax reform should be measured based on the social benefit achieved, and on the expectations of citizens.
Translated by Teng Jing Xuan (firstname.lastname@example.org)
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