Not that taxing

Fewer Chinese to pay income tax – will it boost sentiment?

Not that taxing

For most birthday celebrations, it is the birthday boy that gets the presents. But with the Chinese Communist Party marking its 90th anniversary last week, roles were reversed. Some of the country’s lowest earners ended up taking home the birthday gifts.

Why? Policymakers announced that the tax code was being revised to raise the minimum threshold for income tax from Rmb2,000 to Rmb3,500 a month ($540).

That means 60 million people – newly exempted from income tax – will find it a little easier to cope with rising prices. Presumably, the move will also make it a little easier for Party officials to champion their ‘unbreakable bond’ with the masses.

“Under the new amendment, about 7.7% of wage earners will have to pay income tax, down from the current 28%,” tax official Wang Jianfan told reporters last week.

How real is the benefit? “Food prices surged 7.2% last year,” warns the China Daily, “and income earners’ share of national income has reduced in recent years from 67.2% in 1995 to 57.1% in 2008.”

Certainly, a common criticism of China’s economic model is that households have not seen enough of the benefits of development, and will need to get a greater share if domestic consumption is to take over from government investment and exports as the core growth driver.

Nonetheless, the political elite will hope the latest move shows their responsiveness to public concerns.

The claim is clearly that they have been listening: initially the threshold for exemption was going to rise to just $460 (per month) but 240,000 respondents to an online poll persuaded policymakers that was still too low (The average urban wage is Rmb2,687).

The most recent change is expected to cost the public purse $25 billion in lost income, according to taxman Wang.

Income tax constituted about 6% of government revenues last year.

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