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.