Personal Income Tax Adjustment Need Not at the Cost of Reducing Fiscal Revenue

The 31st Session of the Tenth National People's Congress Conference was held on 23rd December, 2007. Rising up the threshold of Personal Income Tax has become a hot issue and more and more clear. Finance Minister Yuren Xie stated, the threshold is likely to rise from RMB 1600 to RMB 2000, and the percentage of wage-earner taxpayers will reduce from 50% to 30%.
24th Dec. Beijing Business Today

Finance Minister delivered us of all our fears of the threshold of personal income tax. Now, it’s not a good time to talk much about whether the threshold is too low, but, there would not be notable floating though the possibility of further increasing still exists. After this topic, following words from Minister Xie made me feel a bit upset – once the threshold is raised to 2000RMB per month, there will be a 30 billion loss in fiscal revenue.

Similar opinion also emerged last year –at 17th January. 2006, Jiping Wang, head of Beijing Local Tax Authority asserted that, as soon as the threshold being adjust to 1600 RMB, there will be a deduction of total 1.6 billion to local tax income; considering this, a series of tax-free income categories, such as communication subsidy, housing accumulation fund, medical insurance etc, will be taxed. A great debate was caused by this speech – One of the most significant principles of lawmaking is no tax should be collected from citizen’s basic living fee, however, which of former tax-free category is not populace’s “basic living fee”?

Certainly, there’s no doubt that Minister Xie will take measurements to remedy the reduction of fiscal revenue; whereas these financial efforts might make people benefited from the threshold adjustment felt uneasiness, the sacrifice of fiscal revenue is not necessary neither.

Before the tax threshold adjustment, there are 50% wage-earners pay taxes, the question is: how much contribution have they made to the individual income tax? Minister Xie’s answer was: about 65% individual income tax was draw from these 50% wage-earners, at the same time, 20% rich population only offered 10% of national individual income tax. The well known 20% - 80% law indicates that, normally approximately 80% social wealth is owned by 20% high-income people. But it seems the rich people always have more ways to avoid the levy of tax than pay actively, though at the same time the low-income tax payers have no options to avoid. Based on this, simply raising the threshold without corresponding measures will not only reduce the tax burden of wage-earners but also certainly decrease the fiscal revenue.

The equitableness of tax drawing is based on two aspects: reasonable threshold and various responsibility sharing. If the threshold adjustment is dissatisfying common people while continuously decreasing fiscal revenue, then apparently the methodology of tuning needs more deliberating. Basically, personal income tax plays as an adjusting lever, the high-income class should pay more.

In America, the threshold will increase along with the personal income increasing, which means to an individual tax payer, the higher income, the lower threshold, until every penny of income is taxable. Accordingly, in China only the affluent class yet wage-earners could be able to profit from the non-flexible tax threshold.

Actually, there is also differed participating in personal tax in China. For instance, people with more than 120 thousands per year, should pay the tax compulsorily, but in fact the major tax income is come from wage-earners. Obviously, the absence of high-income people has delayed the process of increasing the threshold of income tax; what is more, the bound of acceptance to the reduction of national financial revenue will become a realistic problem.

In conclusion, an ideal threshold adjustment to personal tax lawmaking should enhance the surveillance to high-income class and clarify their responsibilities while raising the threshold. Only by this mean, there will be no more heavy complaint about the reduction of financial revenue, which could only make people misunderstand that relevant departments would fill the reduction with using unnecessary fund.