Debate: Individual income

Li Daokui

Taxes should be used for social reform

The present individual income tax system is coarse and costly. Its social costs far outweigh its gains.

The entire welfare system of China's planned economy has gone. The country has not established a new welfare system to cover all its citizens. Although the Chinese government has made great efforts to improve people's livelihoods, many of the measures it has taken have been temporary. And taxpayers have not derived the benefits that they deserve from the tax they have been paying.

It is therefore natural for many people to be reluctant to pay taxes. Taxes, especially the individual income tax, should be imposed more carefully, because a heavy income tax burden on people could undermine social harmony.

Another big problem for the individual income tax is its design. In most other countries, individual income tax is levied on taxpayers' total income, including capital gains, not only people's salaries. To do that, the government has to carry out a thorough and systematic individual income tax reform and introduce brand-new ideas.

But it has been careful not to introduce a Western-style high progressive individual income tax system, for that is not suited to Chinese conditions given the comparatively low personal income of people in the country. Instead, the government should simplify the tax brackets and tax rates, and use a relatively flat, low rate for individuals - for example, it could charge a maximum of 20 percent tax.

It is important that the government promotes taxpaying culture as a way of social and economic reform, rather than collecting taxes just to increase its revenue. Actually, the total revenue from individual income tax, which was 483.7 billion yuan last year, accounts for only 6 percent of the government revenue. Thus the huge amount the government spends just to collect such a small percentage of its revenue is not worthwhile.

Besides, income from all sources should be subject to taxation, including salaries, capital dividends (rents, appreciations in assets), and other gains. But the government has to consider individual's family burdens when imposing personal income tax, so that people with greater liabilities and expenses pay less.

Also, tax rates should be made as simple as possible. One of the lessons China should learn from developed countries like the United States is not to revise individual income tax regulations frequently just to temporarily encourage or punish people for certain economic activities, because that can increase taxes for people.

China should learn from other countries' experiences, such as Russia and Singapore, too, and link tax revenue to social welfare and keep individual tax regulations simple and low to win public support, which will eventually lead to increase in revenue.

The current discussion on the issue in China has deviated from the right path. We have been paying too much attention to the individual income tax threshold when we should be thinking about how to use taxation to build a harmonious society.

The author is a professor of economics at Tsinghua University.

(China Daily 05/16/2011 page9)