Cover Editorial, issue no.347, December 24, 2007
Original article: [Chinese]

The personal income tax law will be reviewed by the Chinese National People's Congress this week. Details of the amendment remain scant, but there has been public outcry to raise the taxable threshold.

We believe the wishes of the people should be considered, and the lawmakers should adopt a holistic approach in revising the law, which contains problems beyond having a low threshold.

In 2005, the taxable threshold was raised to 1600 yuan from 800 yuan. The move did help to ease the burden on low wage earners, but the bar was still set far lower than the people's expectations. The calls for raising the threshold further have persisted since. Perhaps this is an indication that there exists a huge gap between the government's calculation yardstick and the reality of costs of living.

But the tax threshold is not the only issue-- the taxation framework also lacks reasonable pre-tax deductible items. It fails to take into consideration the cost of living shouldered by tax payers, such as personal expenses and family spending. This has led to a gap between the taxpayers' expectations and taxation structure laid down by the lawmakers.

A taxpayer has to spend on personal and family basic needs, including education, healthcare, insurance, child and care for the elderly. In all fairness, these expenses should be excluded from a taxpayer's income, as these are the costs necessary for making a living. Similarly, the interest rate paid for acquiring housing loan has also been unreasonably included into taxable income.

In today's Chinese society, a family unit is made up of a married couple taking care of parents from both sides. Even if the elders have pensions at their disposal, an underdeveloped insurance coverage system and increasingly costly healthcare exert overwhelming pressure on a family when any one member falls sick. On top of that, when a child is born, the bills add up. How much of a taxpayer's income is left after footing all these bills? At present, these costs are not considered for pre-tax deductions.

Therefore, if the government failed to formulate a reasonable pre-tax exemptions framework by taking into consideration of all the above, raising the taxable threshold – be it to 2000 or higher - would not change the public sentiment.

Since the country embarked on market-oriented reforms, taxpayers have been inundated with more burdens such as supporting the aged, paying for healthcare and education. If that's the case, correspondingly, more wealth should be kept in the taxpayers' pockets. The most unreasonable taxation policy would be one that requires taxpayers to assume more social burdens while also paying for rising taxes.

When faced with unreasonable taxation, taxpayers would resort to tax evasion by all means. This is partly true with the recent lukewarm response from taxpayers in the over 120,000 yuan yearly income bracket asked to file their income tax returns. In reality, how many of them still have more than 120,000 yuan at hand after relative expenditures are taken into consideration? Undoubtedly, intentional avoidance in paying taxes will greatly increase operational costs for the State Tax Bureau.

This is not a complicated mathematical equation to work out, and the policy makers should have the capacity to comprehend that. But why do problems remain ten years after the tax law was first promulgated?

Apparently, tax revenues for year 2007 is expected to hit over 5.1 trillion yuan, approximately 1 trillion yuan more than projected. Diligent tax officers have certainly contributed to the growing revenues. If the objective of the policy makers were to keep accelerating tax revenues, then the likelihood of any tax reduction measure to be introduced in tax reforms is slim, the same could be said about personal income tax.

The progress in personal income tax law reform is dependent on the mentality of policy makers. If policy makers wish to act as a patriarch of a family and assume most social responsibilities, then more wealth will be placed in the state treasury. It is certainly a rational choice, and also has been proved right in many countries, for the government to serve public interests with wealth from the public.

But if policy makers prefer to see its citizens living their own lives and counting on themselves, then most of the wealth should unquestionably be left to them. Both approaches can lead to satisfactory governance, but policy makers have to choose one out of the two.