Thu, June 30, 2011
Business > Economy > China revises individual income tax law

Cut tax to balance growth

2011-06-28 09:27:42 GMT2011-06-28 17:27:42(Beijing Time)  China Daily

A higher minimum threshold for personal income tax is only a matter of time, as China's living standards improve along with its robust economic growth.

But Chinese legislators should keep in mind that a sense of urgency in this regard could make a big difference to the pace at which China embraces balanced and consumption-led growth.

Policymakers have tried to rein in the steady decline in people's incomes as a share of the country's ever-bulging gross domestic product (GDP), which is badly needed for the country to boost domestic consumption into a key growth engine as soon as possible.

Should household incomes keep shrinking in proportion to GDP, compared with government coffers and corporate profits, there will be no chance of China significantly reducing its dependency on exports and investment for growth.

The praise that the public lavished on the upward adjustment of the minimum threshold for personal income tax is fully understandable. Though not a sufficient policy response to their needs, consumers were reassured that the government understood their difficulties in covering their rising living expenses.

Meanwhile, however, there is public concern about the adequacy of such tax cuts. The Ministry of Finance has come up with a estimated price tag of about 120 billion yuan ($18.5 billion) for this round of tax cuts if the minimum threshold for personal income tax was increased from 2,000 yuan a month to 3,000 yuan a month.

After receiving a record number of public comments on the draft, more than 230,000, with merely 15 percent in favor of the proposed 1,000-yuan-increase in the minimum threshold, China's top legislators revealed a slightly revised draft amendment on Monday, instead of crossing the 3,000-yuan exemption threshold as expected by most online respondents.

Given their long-term anxiety about future fiscal growth, policymakers from the financial department might have good reasons to justify their entrenched preference for small and gradual steps rather than bold ones. Nevertheless, they also need to update their calculations in line with the economic reality.

If the 1,000-yuan rise in tax exemption threshold is reasonably based on the government prediction of an annual 8-percent increase in fiscal revenues, financial policymakers should be aware that China's fiscal revenue for the first five months of this year have already surged to 4.68 trillion yuan, up 32 percent from a year earlier.

Besides, the country's mounting inflationary pressure has also chopped domestic consumers' purchasing power more severely than expected so far this year.

A substantial tax cut has already come too late for many Chinese households. What a pity if it remains too little when it finally does arrive.

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