News, page 3, issue no. 406, February 16, 2009
Translated by Liu Peng 
Original article: [Chinese]

China's Ministry of Finance is mulling over a revamp of the personal income tax system to narrow the wealth gap among Chinese, the Economic Observer has learned.

A proposal under study suggested that a person's taxable income should take into consideration the number of dependents he or she had, and that the high income groups should be taxed more.

A treasury officer told the EO that the revamped formula would not be implemented before July 2010.

The Formula
The proposal would have pleased those in the working class like Wang Li (pseudoname), who is the sole breadwinner in a family of three.

Wang's monthly wage totaled 5,000 yuan, but after paying 325 yuan of individual income taxes each month, his family's monthly per capita income was down to 1,667 yuan, an amount lower than China's personal income taxable threshold of 2,000 yuan.

But under the proposed revamp, Wang would likely be exempt from paying personal income taxes, as his earnings failed to meet the threshold after taking into account the number of dependents he had.     

At present, China adopts a classified individual income tax system, which charges different rates on different kinds of earnings under 11 categories, including salaries, bonuses, interest from deposit and shares, rent income, prizes, sales of personal assets, and inheritances.

In order to quell increasing public outcry over heavy tax burdens, China has in recent years raised the individual income taxable threshold several times, from 800 yuan in 2006 to the current 2,000 yuan.

Though the latest proposal did not include further raising this threshold, as was widely expected, intended to reduce the tax burdens from a more human angle, such as recognizing that an individual with more family responsibility would need more pre-tax deductibles or exemptions. 

The Challenges
According to treasury statistics, nearly 65% of the individual income tax revenues in China in recent years came from wage-earners.

In comparison, though only about 20% of Singapore's population was classified as high income earners, this group of individuals contributed some 93% to the country's personal income tax revenues.

The EO learned that the latest proposed tax formula hoped to gain more revenues from the rich while easing the burden on lower income wage-earners. However, some tax officers were critical of its feasibility.

A treasury official told the EO that the biggest implementation challenge was to build an integrated information sharing platform between governmental agencies and the banking sector, as only with this could tax payer's financial status and commitment could be ascertained.

In other words, a fully electronic taxation network must first be developed so that officials could access a tax payer's income, deposits, and expenditure transaction information by keying in his or her identity card number. This would require support from public security agencies and banks, said the above source.

The EO learned that the Ministry of Finance had intended to appropriate funds to build such a system, and would consult the central bank of China and banking regulatory commission.