How Will a Tax Overhaul Affect People’s Lives

China’s personal income tax threshold is expected to rise to 5,000 yuan ($776) per month from the current 3,500 yuan ($544), according to a draft amendment on the Individual Income Tax Law recently submitted to the country’s top legislature, the Standing Committee of the National People’s Congress. The amendment is the seventh tax overhaul since the personal income tax code was issued in 1980.

For the first time, taxation is expected to cover all personal income, including income from personal services, rewards, as well as writ- ers’ royalties. Certain items will also be included as personal tax deductibles, including the cost of children’s education and continuing education, medical fees for major diseases, and interest on housing loans as well as housing rent.

This tax code revision has stirred up wide discussion across society. Currently, personal income tax is the third largest tax item following value-added tax and corporate tax. It serves as an important tool to balance social wealth, as well as stabilize and promote economic growth. The role of taxation in improving people’s livelihood and ensuring social equality can’t be undervalued. China’s current personal income tax system, in effect since January 1, 1994, seem increasing out of pace with the country’s economic and social progress, despite continu- ous adjustments and reforms. People have been calling for a new personal income tax cut- off point and a new set of deduction items for many years now.

Since its announcement, the draft amend- ment has been widely applauded as an effective way to reduce wealth distribution inequality in the current Chinese economy. In particular, anti-avoidance clauses and supplemental deduction items are being highlighted by the media. Moreover, the way the reform should be effectively carried out to make taxation better and more effi cient is also a big topic of discus- sion among the public.

A move to benefit more

Fan Dayu (China Youth Daily) Individual income tax is closely related to everyone’s immediate interests, and thus the draft amend- ment has received wide attention. The public is most concerned about the income tax thresh- old. The cutoff point is a fi xed fi gure for a period of time, and is thus easily detached from ever- changing commodity prices and the public’s income levels. The 3,500-yuan threshold is obviously lagging behind the surging economic growth that China has seen in the past decade. To raise the cutoff point to 5,000 yuan, as the draft amendment proposes, will greatly relieve the middle- and low-income classes’ taxation burden and help to increase their income and boost society’s consumption capacity.

Individual income tax helps to adjust wealth distribution and balance social wealth. High- income earners have the obligation to pay more taxes. However, in China, high-income earners’ tax payments are disproportionately low, while middle- and low-income earners are burdened with relatively high taxes. The reason for this inequality lays in taxation classification practices. According to the current individual in- come tax code, taxes fall into 11 categories, with different deduction standards, tax rates and tax computation methods. Ordinary people tend to have one single income source, namely, salaries or wages, making it easier to cover them with taxation rules. High-income earners, however, usually have more than one income source, making the current taxation classifi cation ineffi - cient for collecting their taxes and leading to taxevasion and fraud.

This upcoming tax reform will create space for tax reduction for ordinary people while also establishing a general framework for an indi- vidual tax system suited for the future. With the deepening of the individual income tax reform and the improvement of the credit system, the reform will help to promote social equality while encouraging more people to increase their in- comes through hard work in a more egalitarian society.

Zeng Jinhua (Economic Daily) Currently, individual income tax is China’s third largest tax only after value-added tax and corporate tax. As we enter a new era and encounter new situa- tions, to push forward the reform on individual income tax is becoming urgent. This amend- ment draft has taken into account successful personal income tax practices and experiences in other countries. It has also taken into full con- sideration China’s reality, focusing on people’s welfare.

The reform aims to transform the taxation classifi cation into one composed of a synthesis tax system and a classifi cation system, which is a common practice in the world. In addition, tax deductions will be applied to many items, such as the cost of children’s education and continu- ing education, medical fees for major diseases, interest on housing loans and other loans. Moreover, the anti-avoidance clause in the draft will prevent individuals from dodging taxes and fi ll other loopholes.

The reform will raise the requirement for taxation authorities’ capabilities and techniques for managing the new situation. Law enforce- ment should also be stepped up to punish tax evasion and fraud. At the same time, the pub- lic’s awareness of the taxation law should also e enhanced. They must strictly follow the law to pay taxes accordingly. A good taxation sys- tem will only bring benefi ts if efforts are made on all fronts.

Balance of social wealth

Shi Langdu (People’s Daily) Every time the cutoff point of personal income tax is raised, a new host of people stand to benefi t. However, the ever-rising overall income level will gradually decrease the number of people benefi ting from previous tax threshold increases. According to statistics from the Ministry of Finance, the government’s personal income tax revenues jumped by 18.6 percent year on year in 2017. The fact that the personal income tax increase overtook personal incomes reveals that Chinese people are becoming richer. But at the same time, it also implies that to make taxation a tool for balancing social wealth, the system of personal income tax must keep up with the times.

Seven years have passed since China raised the threshold for personal income tax. Every time, the cutoff point has been fi xed based on full consideration of people’s expenditures on housing, education and medical care, so that their lives could be improved. This time, the newly-added deductible items such as educa- tion costs and medical fees for major diseases, are a big step forward and will surely cover larger groups of people, exempting more people from having to pay personal income tax.

One thing is certain, with fewer taxes to pay, people will have more money to spend. In this sense, a higher threshold for personal income tax will directly spur domestic consumption, indirectly boost the country’s employment and strengthen the mid-income class.

However, a higher cutoff point in personal income tax is not necessarily a good thing; there must be a balance between equality and efficiency. On the one hand, there should be equilibrium between the state treasury and individual wealth. The former backs a country’s overall development. To a certain extent, how to best spend tax revenues so that they can best benefi t the whole population is even more im- portant than taxation itself. On the other hand, in order for personal income tax to really help to adjust income distribution and narrow the gap between rich and poor and bolster social fair- ness, the cutoff point should be fi xed in a way that will make middle- and low-income earn- ers’ lives easier. Therefore, apart from a raised threshold for personal income tax, tax deduc- tions and even a cut to the rate of indirect taxes are also very important.

Gao Lu (Qianjiang Evening News) Families in different economic situations react differently to a similar amount of debt. The same is true for individual income tax. Compared with the past one-size-fits-all taxation method, the revised taxation scheme will undoubtedly be more flexible and cater to individuals’ personal conditions. A scientific and objective calculation of a person’s actual income should be based on both income and spending. Thus, if individual income tax is set on this basis, it will be more apt to be able to bal- ance social wealth distribution.

Meanwhile, this taxation overhaul will also transform the way of collecting personal in- come tax, which requires adaptation from both individuals and taxation authorities. As a result of the inclusion of deduction items, individuals will need to prepare various materials to submit to taxation authorities. These new materials and subsequent procedures will inevitably in- crease the burden on taxation authorities. Thus, relevant authorities should begin to work out the schemes to cope with this rising workload ahead of time.