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Income Tax

Paying What They Owe

NewsChina secured an exclusive interview with Liu Jianwen, director of China Association for Fiscal and Tax Law, to discuss China’s income tax reform amid heated online debates and speculations

By NewsChina Updated Feb.1

Every time there’s a rumor about a change to China’s income taxes, it prompts heated online discussion, followed by official rebuttals. One example of this recently was a hot debate over whether somebody earning 120,000 yuan (US$17,700) a year was in the “high-income” group, which abated after the tax authorities said there was no official definition for such a group. 

But the tax reforms have generated public concerns because China’s income tax has effectively become a payroll tax, deducted from people’s wage packets instead of being assessed as a whole every year as is in most developed countries. That lets a lot of income among the rich go untaxed, while taking money from working people – and has intensified public criticism of the unfairness of the system as a result.  

Liu Jianwen, director of the China Association for Fiscal and Tax Law, and a law professor at Peking University, told NewsChina that there have been numerous public appeals over the current tax reforms and strict legislative procedures should be followed during the process of reform in order to avoid mistaken decisions, reduce the risk of bad enforcement, and ease public anxieties.  
NewsChina: The references to 120,000 yuan (US$17,700) as a threshold come from 2005 taxation regulations. How was that amount picked?  

Liu Jianwen: The revision to the income tax in 2005 is worth remembering because it’s the first time public hearings were introduced in the Chinese legislative process. A total of 20 representatives were selected from 5,000 to 6,000 candidates and I was lucky to be one of them, and the only law professor. 

In the revision, taxation authorities announced that individuals who earn more than 120,000 yuan (US$17,700) a year should declare their incomes to be taxed appropriately – because at that time it really was a high amount. In 2010, the State Administration of Taxation released a guideline to reform the income tax system by adding people who are involved in equity deals and real estate property transactions, film stars and some financial workers to the high income group in a bid to tighten supervision. Back then, however, neither the legal circles nor academia defined people with an annual income of 120,000 yuan (US$17,700) as the high income group, but among the public the amount was deemed the yardstick of a high income. 

Since 2005, China’s GDP and fiscal revenues have increased by several times and living standards have improved substantially. To many people, 120,000 yuan (US$17,700) is a standard only slightly higher than the average, particularly in major cities. If this amount becomes the benchmark to define high income groups, the public will strongly resist the move. 
NC: Many people think that the income tax has become a payroll tax. Do you agree? 
Liu: There’s definitely an academic consensus that income tax has become a payroll tax, even though that wasn’t the intention. There is still a long way to go to establish a tax collection and management system targeting real high earners. There are many reasons to blame for this, including ignorance about property transaction prices and the actual income of film stars, as well as the lack of a registration system for equity trading. Taxation authorities have failed to master the detailed information of tax payers. In addition, unlike overseas countries, there is a disconnect between tax payments and the personal credit system in China. 
NC: China currently breaks income tax into different categories. What are the problems with this?  

Liu: The advantage is that it’s simple, clean, and easy to calculate, but it’s not always fair. Some people have multiple sources of income and some have a single source of income, but people with multiple sources can benefit from a whole set of possible deductions. For example, a professor might have personal service payments and royalty payments in addition to their monthly salary, and be able to claim deductions on all of them.  

Treating income as a single figure, just like China’s corporate income tax, plays a key role in fair income redistribution but it hardly reflects the differences of individual earnings. 
NC: Why has income tax reform made such slow progress?  

Liu: Income tax reform is not isolated – it is closely connected to the entire financial and taxation system, as well as social and economic development. China remains a developing country and compared with developed countries, incomes are not very high and it is difficult for income tax to play a major role in the entire tax collection system.   
NC: It is a common belief that the public will pay less if the benchmark of income tax is raised. The Ministry of Finance, however, announced that increasing the minimum threshold of income tax is not the right direction for reform because it is likely to lead to further social inequality. What is behind the differences in understanding between the public and the authorities?  

Liu: The issue is very sensitive and the public needs to be rational. Nevertheless, it is very hard to be rational because it is closely related to their own interests. Previous tax reforms could be implemented on their own, but today everything needs to be pushed forward together. This needs coordination between budgets and income tax, as well as with the whole tax collection system. The deduction thresholds of the new round of reform are dependent on the overall direction of change, but the possibility of a shift is low.  
NC: Tax deductions on mortgage interest have generated heated discussion. Will there be a goal for this round of tax reform? 

Liu: China has almost no specific deductions and it is a common practice overseas to combine basic deductions and specific deductions. Specific deductions take into consideration the needs of special communities, industries and regions. If China combines basic deductions and specific deductions, there will be less enthusiasm to increase the basic deductions or the exemption line. This is a likely direction for reform to take. 

There are many expectations from the public including specific deductions on education expenditure, mortgages and medical care but in my opinion it is impossible for it to encompass so many aspects. There will be a step-by-step approach and priority will be given to those less controversial factors, like impoverished families or those families that have to raise children or support the elderly. 

Many people are actually expecting the implementation of tax deductions on mortgage payments but some are also worrying that it would be unfair to those without an apartment. The way I see it, it is less likely for tax deductions on mortgage payments to be added to the specific deductions and it is hard to predict whether policy makers will add them or not. Generally speaking, there will be no fundamental changes in this round of reform even though the public is anticipating them. 
NC: What are the main income tax reform breakthroughs this time compared to previous reforms? 

Liu: There are many differences. To begin with, the focal point of reform is different because previous reforms emphasized adjustments of the exemption threshold and the reform this time focuses on models of tax collection. The biggest difference is that this is the first time revising the income tax after statutory taxation was proposed in 2013 and revised in 2015. Statutory taxation was introduced to reduce policy intervention in a bid to give the public a sense of safety because strict legislative procedures will be followed. 

Chinese are anxious about taxes, especially as people’s incomes have grown. But tax anxieties will increase the public’s democratic awareness and push the country to develop on the track of political democracy and rule of law. The government should learn to avoid policy-making mistakes and risks through laws to reduce social instability and ease public concerns.  
NC: How can we make sure high earners pay appropriately? 
Liu: We need to improve the collection system, strengthen enforcement, and make sure the data is there and is shared. In China, the platforms for sharing information haven’t been established yet and it’s hard to collect from high earners as a result.  
In the Internet era, great importance should be given to the establishment of a large data platform to collect, manage and use personal information to lay a foundation for the modern tax collection system. The establishment of a large data platform is also closely linked with transparent government budgets and the declarations of assets by government officials.