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UPDATED: August 29, 2011 NO. 35 SEPTEMBER 1, 2011
Down With Income Taxes
China increases its income tax exemption threshold to reduce tax burdens on low-wage earners

LOWER TAXES: People go through individual income tax declaration procedures at the Local Taxation Bureau of Meishan, Sichuan Province (YAO YONGLIANG)

As a company clerk, 32-year-old Ren Jun doesn't make a lot of money. Of his meager paycheck, he needs to pay about 250 yuan ($39) in taxes each month. From September, Ren will catch a break—his taxes will be significantly reduced to about 30 yuan ($4.69). As of September 1, amendments to China's individual income tax law, highlighted by an increased monthly tax exemption threshold, will be implemented.

The amended law raises the monthly tax exemption threshold from 2,000 yuan ($313) to 3,500 yuan ($547). It also lowers the minimum tax rate from 5 percent to 3 percent for people whose monthly taxable incomes are between 3,500 yuan and 4,500 yuan ($703).

Before amendment, the individual income tax law stated that people who earn less than 2,000 yuan per month were exempt from income taxes. The draft amendment, submitted on April 20 for the first reading to the National People's Congress (NPC), the country's top legislature, proposed the threshold be raised to 3,000 yuan ($469).

In April, the State Council proposed raising the income tax exemption threshold from 2,000 yuan to 3,000 yuan with the aim of boosting domestic demand and reducing tax burdens on low-wage earners.

The proposal was published online to solicit opinions from the public. According to the NPC's website, as of May 31, 82,707 people had commented on the draft amendment, and about 83 percent were dissatisfied with the threshold of 3,000 yuan.

During the second reading of the draft by the NPC on June 28, the exemption threshold was still 3,000 yuan, but the minimum tax rate was lowered from 5 percent to 3 percent.

On June 30, the final amendment was approved by the NPC, raising the threshold to 3,500 yuan.

Adequate raise

"The adjustment of the tax exemption threshold echoes the voice of society," said Gao Peiyong, Director of the Institute of Finance and Trade Economics of the Chinese Academy of Social Sciences (CASS). "Since this year, inflation pressure has increased and the income gap has expanded. These two problems need to be solved. Raising the tax exemption threshold is a tax adjustment measure to alleviate the problem of the income distribution system."

China promulgated the individual income tax law in 1980, which fixed the tax exemption threshold at 800 yuan ($125). The average monthly salary of working staff at that time was just 63.5 yuan ($9.9). In 1994 the individual income tax law was amended, but the exemption threshold was still 800 yuan. In 2006 and 2008, China raised the threshold to 1,600 yuan ($250) and 2,000 yuan, respectively.

But the threshold increase still lags behind rising consumer prices. According to figures from the National Bureau of Statistics (NBS), in 2010 the consumer price index rose by 3.3 percent and in the first half of 2011, the index rose by 5.4 percent year on year. Food prices increased 7.2 percent last year and surged 11.8 percent in the first half of this year.

In contrast, government revenue from income tax has increased rapidly. According to figures from the NBS and the Ministry of Finance (MOF), since 1994 individual income tax revenue has increased at an annual average rate of 34 percent, the fastest among all taxes. In 2009 China collected individual income taxes of 394.94 billion yuan ($61.71 billion), accounting for 6.64 percent of the total tax revenue of the country.

The Beijing-based Central University of Finance and Economics (CUFE) published a report in May, saying that China's current tax burden is heavier than many middle- and upper-income countries. The research suggests that the government reduce tax rates while increasing spending in crucial areas such as healthcare and education.

"When the costs for residents to maintain basic lives have changed significantly, it is natural for the tax exemption threshold to be adjusted and the threshold is likely to further increase in the future in accordance with price changes," said Bai Jingming, Deputy Director of the Research Institute for Fiscal Science affiliated to the MOF.

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