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Raising tax threshold a progressive step

(China Daily)

13:50, September 01, 2011

Sept 1 sees the first rise in the individual income tax threshold since March 1 2008. The previous increase of tax-free earnings from 1,600 yuan ($251) to 2,000 yuan a month lifted the percentage of population not required to pay income tax from 50 percent to 70 percent. The new threshold at 3,500 yuan a month will take 80 percent of citizens out of the income tax net. This is an important simplification in the costs of collecting tax as well as a reflection of the pressures on the standard of living among the lower-income earners.

If an absolute tax threshold is not adjusted to reflected price and wage inflation, it effectively results in increasing the tax burden, and in the three and half years that have passed, inflation has raised average living costs by more than 20 percent - but surely by much more for the low-income groups for whom food prices are a significant part of household expenditure. The current adjustment is more than that needed to compensate for consumer price inflation but it is appropriate as a matter of fairness.

By far the largest sources of tax revenue in China are taxes on spending rather than earning, through valued added tax and consumption tax on price inelastic items such as tobacco and alcohol. It matters not that these taxes are collected from producers because the incidence of the tax will still fall on consumers. It is widely recognized that such taxes are "regressive" because they account for a larger proportion of a poorer person's income than a rich person's income, based on the reality that people in the low-income group need to spend most of it and the rich can save. This impact can be moderated somewhat by luxury goods taxes.

Hence for equity, China needs a solid system of "progressive" income tax achieved by a good slice of income being exempt and higher marginal rates on above average income levels, so that those with the greatest ability to pay contribute a higher proportion of their income in tax. The threshold increase combined with a lowering of the taxable income level at which the highest 45 percent rate applies by 20 percent from 100,000 yuan to 80,000 yuan a month now is a well-intentioned step in that direction.

By Colin Speakman, China Daily

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