Time to go deeper into tax reform

Opinion / Liu Shinan

 Time to go deeper into tax reform
By Liu Shinan (China Daily)
Updated: 2005-11-02 05:58

The day before yesterday, the China Social Investigation Institute
published the result of a survey it conducted following the recent
amendment to the Personal Income Tax Law.

While the absolute majority of respondents expressed satisfaction with
the raising of the threshold for monthly personal income tax from 800
yuan (US$99) to 1,600 yuan (US$198), 46 per cent thought the adjustment
alone was not enough to narrow the gap between the rich and the poor,
though 42 per cent said it did play such a role.

Certainly it is an improvement of the situation, for a large number of
low-income earners are again exempt from that tax, as they were 21 years
ago, when the personal income tax was initiated. The tax threshold set in
1994 left 99 per cent of people out of the duty. But 800 yuan is no
longer a mark of being rich as 60 per cent of people earn more than that
now, while living costs rise.

In recent years, low- and middle-income earners have complained about
becoming the bulk contributors to personal income tax, which they alleged
"had become a means to rob the poor to aid the rich." While the old
criterion involved more and more low- and middle-income earners in the
army of taxpayers, many high-income citizens tried every means to evade
the tax.

According to statistics from the State Administration of Taxation, 65 per
cent of personal income tax was paid by wage earners last year.

According to statistics in 1999, in the United States, people with an
annual income of more than US$120,000, which accounted for 5 per cent of
the population, contributed 55 per cent of the country's total personal
income tax, while 55 per cent of the population, which earned less than
US$26,500 a year, accounted for only 4 per cent of the country's total
personal income tax.

It is easy to see why China's low and middle-income earners shoulder the
majority of personal income tax. The tax authorities mainly depend on
monitoring the payrolls of employers who deduct tax from the wages they
pay to employees. High-income earners, mostly private entrepreneurs and
people who have income from sources beside their regular occupations, can
easily dodge the eyes of tax collectors.

When questioned about the loopholes, tax officials all say it is "very
difficult" to find out how much rich people earn. It is almost impossible
to trace where the rich people hide their money, they say. To do so, they
say, complicated, advanced technologies and equipment as are used in the
United States have to be adopted, which will "dramatically increase the
management cost."

In the past, all enterprises were owned by the State. But the planned
economy is low in production efficiency, we later realized.

We reformed our economic system and adopted the mechanism of market
economy. Since that is the way we manage our economy, we should be ready
to pay the cost of management.

In the era of planned economy, the State did not levy personal income
tax. The tax was actually charged in the form of low pay to wage earners.
Now that we have changed our way of managing the economy, but the cost of
installing advanced equipment for monitoring business activities should
not be viewed as an extra burden.

Some people have argued that the tax recovered by the new equipment may
not offset the cost of the new complicated method. At the beginning, it
may be so. But once the new system is established and taxation is
conducted in a normal way, revenue from all personal income tax,
especially plus that previously dodged by rich people, will far exceed
the cost.

In a Western country, the personal income tax accounts for about an
average 51 per cent of the total state revenue, according to data
provided by the Organization for Economic Co-operation and Development in
2000. In China, it was about 7 per cent last year.

The cost of a system for income monitoring and management is not an
excuse for weak taxation. In fact, there are many things tax officials
have failed to do well which are not related to advanced technologies.

The income of restaurants, for instance, is not difficult to monitor.
Everybody can see that the income generated by the eating industry is
mammoth. The authorities depend on receipts to monitor the business of
restaurants. But few customers, except those who eat on public money, ask
for receipts after their meal. The authorities try to encourage customers
to request a receipt by attaching a bonus to it using a secret code.
Ninety per cent of the time, however, one reads "Thank you" instead of a
bonus after scratching off the cover of the code.

If half, or even a quarter, of the receipts bore a small-sum bonus, the
rate of requesting receipts would soar dramatically. It should not be
difficult to calculate which is larger, the cost of the increased bonus
or the revenue from retrieving the dodged tax.

Email: liushinan@chinadaily.com.cn

(China Daily 11/02/2005 page4)

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