Liu Shinan

Time to go deeper into tax reform

By Liu Shinan (China Daily)
Updated: 2005-11-02 05:58

The day before yesterday, the China Social Investigation Institute published the result of a survey it conducted following the recent amendment to the Personal Income Tax Law.

While the absolute majority of respondents expressed satisfaction with the raising of the threshold for monthly personal income tax from 800 yuan (US$99) to 1,600 yuan (US$198), 46 per cent thought the adjustment alone was not enough to narrow the gap between the rich and the poor, though 42 per cent said it did play such a role.

Certainly it is an improvement of the situation, for a large number of low-income earners are again exempt from that tax, as they were 21 years ago, when the personal income tax was initiated. The tax threshold set in 1994 left 99 per cent of people out of the duty. But 800 yuan is no longer a mark of being rich as 60 per cent of people earn more than that now, while living costs rise.

In recent years, low- and middle-income earners have complained about becoming the bulk contributors to personal income tax, which they alleged "had become a means to rob the poor to aid the rich." While the old criterion involved more and more low- and middle-income earners in the army of taxpayers, many high-income citizens tried every means to evade the tax.

According to statistics from the State Administration of Taxation, 65 per cent of personal income tax was paid by wage earners last year.

According to statistics in 1999, in the United States, people with an annual income of more than US$120,000, which accounted for 5 per cent of the population, contributed 55 per cent of the country's total personal income tax, while 55 per cent of the population, which earned less than US$26,500 a year, accounted for only 4 per cent of the country's total personal income tax.

It is easy to see why China's low and middle-income earners shoulder the majority of personal income tax. The tax authorities mainly depend on monitoring the payrolls of employers who deduct tax from the wages they pay to employees. High-income earners, mostly private entrepreneurs and people who have income from sources beside their regular occupations, can easily dodge the eyes of tax collectors.

When questioned about the loopholes, tax officials all say it is "very difficult" to find out how much rich people earn. It is almost impossible to trace where the rich people hide their money, they say. To do so, they say, complicated, advanced technologies and equipment as are used in the United States have to be adopted, which will "dramatically increase the management cost."

In the past, all enterprises were owned by the State. But the planned economy is low in production efficiency, we later realized.

We reformed our economic system and adopted the mechanism of market economy. Since that is the way we manage our economy, we should be ready to pay the cost of management.

In the era of planned economy, the State did not levy personal income tax. The tax was actually charged in the form of low pay to wage earners. Now that we have changed our way of managing the economy, but the cost of installing advanced equipment for monitoring business activities should not be viewed as an extra burden.

Some people have argued that the tax recovered by the new equipment may not offset the cost of the new complicated method. At the beginning, it may be so. But once the new system is established and taxation is conducted in a normal way, revenue from all personal income tax, especially plus that previously dodged by rich people, will far exceed the cost.

In a Western country, the personal income tax accounts for about an average 51 per cent of the total state revenue, according to data provided by the Organization for Economic Co-operation and Development in 2000. In China, it was about 7 per cent last year.

The cost of a system for income monitoring and management is not an excuse for weak taxation. In fact, there are many things tax officials have failed to do well which are not related to advanced technologies.

The income of restaurants, for instance, is not difficult to monitor. Everybody can see that the income generated by the eating industry is mammoth. The authorities depend on receipts to monitor the business of restaurants. But few customers, except those who eat on public money, ask for receipts after their meal. The authorities try to encourage customers to request a receipt by attaching a bonus to it using a secret code. Ninety per cent of the time, however, one reads "Thank you" instead of a bonus after scratching off the cover of the code.

If half, or even a quarter, of the receipts bore a small-sum bonus, the rate of requesting receipts would soar dramatically. It should not be difficult to calculate which is larger, the cost of the increased bonus or the revenue from retrieving the dodged tax.

Email: liushinan@chinadaily.com.cn

(China Daily 11/02/2005 page4)