Fri, March 12, 2010
Business > Economy

Raising tax threshold not enough: E&Y

2010-03-12 01:19:21 GMT2010-03-12 09:19:21 (Beijing Time)  Global Times

By Wang Xinyuan

Simply raising the threshold for the payment of the individual income tax (IIT) won't do much to spur domestic consumption, and comprehensive changes such as subsidies to the poor and tax exemptions for medical care, housing and education are needed to lessen the tax burden on the middle class, according to global accounting firm Ernst & Young.

Raising the income tax threshold has been on the agenda at the ongoing sessions of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC).

Many NPC deputies and CPPCC members have proposed raising the IIT exemption to 3,000 yuan ($439.24) or even 5,000 yuan ($732.06). Currently, a worker with a month-ly income above 2,000 yuan ($292.83) falls into one of nine progressive brackets with tax rates ranging from 5-45 percent.

"Comprehensive considerations should be taken to ensure fair wealth redistribution," said Mi Yiquan, a partner in the human capital division of the Ernst & Young (China) Advisory Beijing Branch.

Raising the tax threshold won't do anything for the poor who fall below the existing threshold, and it won't impact the rich either, Mi said.

The number of people with a monthly income below 2,000 yuan accounts for roughly half the population subject to personal income tax, the National Business Daily reported Wednesday, citing an unidentified source.

To get the rich to pay more, attention should be given to the large gap between the corporate tax rate and the highest IIT rate, currently 20 percent, which is much higher than most other countries and leads the rich to transfer their personal wealth to corporate income for tax evasion purposes, Mi said.

The heaviest burdens on the middle class include monthly mortgage payments, medical bills of elderly family members and children's educational expenditures, Mi said. If those expenditures were tax exempt, the middle class would see its purchasing power grow, he noted.

The government could also encourage the rich to share some of their wealth by making donations to the poor, or it could simply redistribute taxes levied on the wealthy to the poor, Mi said.

Mi suggested that an annual personal tax declaration system be set up, but said the most difficult part would be information sharing among agencies such as banks and tax bureaus. Modifications in the law are necessary to include banks in the process and differentiate between IIT levied by the central government and local government tax bureaus, he said.

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