Re­form must usher in best in­come tax sys­tem

China Daily (Hong Kong) - - VIEWS -

One of the sig­nif­i­cant goals of the tax sys­tem re­form is to es­tab­lish an in­di­vid­ual in­come tax mech­a­nism that com­bines the clas­si­fied and com­pre­hen­sive tax­a­tion sys­tems. At present, the clas­si­fied in­di­vid­ual in­come tax sys­tem levies 11 kinds of taxes based on dif­fer­ent cal­cu­la­tion meth­ods.

Clas­si­fied in­di­vid­ual in­come tax is easy to man­age but has many dis­ad­van­tages. For ex­am­ple, peo­ple earn­ing the same amount of money may pay dif­fer­ent amounts in taxes. But un­der the com­pre­hen­sive tax­a­tion sys­tem, tax can be col­lected ac­cord­ing to a uni­fied plan, which to a large ex­tent can solve the prob­lem of un­fair tax­a­tion.

The cur­rent in­di­vid­ual in­come tax thresh­old is 3,500 yuan ($509) per month, which can­not be ad­justed for stan­dard de­duc­tion. And com­pre­hen­sive tax­a­tion sys­tem should have an in­her­ent dy­namic ad­just­ment mech­a­nism for stan­dard de­duc- tion, which al­lows stan­dard de­duc­tion to be ad­justed ac­cord­ing to the chang­ing na­tional ba­sic liv­ing ex­pen­di­ture.

How­ever, China is not yet ready for com­pre­hen­sive in­di­vid­ual in­come tax sys­tem, so the au­thor­i­ties have de­cided to com­bine the clas­si­fied and com­pre­hen­sive tax sys­tems to meet the needs.

This brings us to spe­cial de­duc­tion, a new con­cept for China’s in­di­vid­ual in­come tax­a­tion sys­tem, which is not sim­ply de­cided by ad­min­is­tra­tive au­thor­i­ties, but also re­lates to the re­vi­sion of the in­di­vid­ual in­come tax law. Spe­cial de­duc­tion should be based on the ac­tual sit­u­a­tions in dif­fer­ent re­gions, con­sid­er­ing the dif­fer­ence in liv­ing ex­pen­di­tures in dif­fer­ent re­gions.

Spe­cial de­duc­tion is im­por­tant be­cause in­di­vid­ual in­come tax should be levied on in­di­vid­u­als’ in­comes af­ter de­duct­ing the amount of money they spend on ne­ces­si­ties. If such ex­penses are not de­ducted from in­di­vid­u­als’ in­comes, in­come tax can greatly af­fect peo­ple’s liveli­hoods.

Food, cloth­ing, hous­ing and trans­porta­tion are ba­sic hu­man ne­ces­si­ties, so the money in­di­vid­u­als spend on them should be de­ducted from their in­comes be­fore be­ing taxed. As hous­ing prices are ex­ces­sively high in many cities, it is im­por­tant to deduct the in­ter­est paid on hous­ing loan, too, from in­di­vid­u­als’ in­comes. But the ac­tual amount of hous­ing loan in­ter­est to be de­ducted should be de­cided ac­cord­ing to the ac­tual sit­u­a­tions.

In­di­vid­ual in­come tax col­lec­tion can drop con­sid­er­ably if the to­tal in­ter­est on hous­ing loan is fully de­ducted from in­di­vid­u­als’ in­comes, be­cause in many cases peo­ple won’t need to pay any in­di­vid­ual in­come tax at all. So spe­cial de­duc­tion for hous­ing loan in­ter­est should be fixed af­ter tak­ing into con­sid­er­a­tion dif­fer­ent fac­tors, in or­der to pre­vent the new tax­a­tion sys­tem from cre­at­ing un­fair­ness again.

The money used to sup­port se­nior cit­i­zens and/or raise chil­dren is a drain on the eco­nomic re­sources of in­di­vid­u­als and house­holds, so it should be part of spe­cial de­duc­tion too. This in turn will in­crease the pres­sure on tax col­lec­tors and man­age­ment au­thor­i­ties, be­cause it in­volves a se­ries of com­pli­cated fac­tors: dif­fer­ent in­come lev­els of se­nior cit­i­zens — some lead com­fort­able lives on their earn­ings while oth­ers de­pend on their chil­dren — the in­come lev­els of house­holds and in­di­vid­u­als that pay for el­der­care, the per­cent­age of house­hold in­come that in­di­vid­u­als pay to sup­port their par­ents, and so on.

Spe­cial de­duc­tion should also in­clude the ex­pen­di­ture on chil­dren. Ac­cord­ing to sta­tis­tics, the over­all fer­til­ity rate in China is only 1.047, which is about half of the world’s av­er­age. Of course, the govern­ment can re­duce the ex­pen­di­ture of in­di­vid­u­als and fam­i­lies rais­ing chil­dren by in­vest­ing more in ed­u­ca­tion and health­care, but it should also deduct that ex­pen­di­ture from their tax­able in­comes be­cause rais­ing the birth rate of the coun­try is part of the na­tional pop­u­la­tion de­vel­op­ment strat­egy.

A fair in­di­vid­ual in­come tax sys­tem re­form should take into ac­count all the above fac­tors and in­tro­duce the best pos­si­ble tax­a­tion sys­tem.

The au­thor is a re­search fel­low at the Na­tional Academy of Eco­nomic Strat­egy, Chi­nese Academy of So­cial Sci­ences.

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