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UPDATED: April 24, 2010 NO. 17 APRIL 29, 2010
Is Social Security Tax Feasible?



China's Finance Minister Xie Xuren recently wrote an article for an official publication of the Central Committee of the Communist Party of China on deepening taxation reform. He said that China was considering phasing in a social security tax to improve the fund-raising system for social security programs.

This is the first time a social security tax had been officially proposed. The article triggered a strong response from the public. In an online survey, almost 70 percent of the respondents disapproved of the proposal, saying they believe such a tax would increase the burden on average people.

The proposed social security tax is also termed "social insurance tax" in some cases, which will be levied on the payroll. Employees and their employers will have to pay the tax, and will contribute 50 percent each. In some countries, the two groups are required to pay differing proportions of the tax.

Although the term is new, taxation professionals say that the social security tax is not totally fresh. It's said current insurance premiums for social security and health insurance will be merged and transferred into the tax, which will be collected by the state, instead of by local governments. Professor Yang Weihua at Guangzhou-based Sun Yat-sen University said the introduction of the tax was the final step in social security charges—that is, the two would not coexist and so would not add to the economic burden on the public.

Opponents argue, given China's present economic development, improving the social security system is already a pressing issue affecting sustainable economic growth and social fairness, but the government should not always target the public's savings when it comes to social security fund raising. Making good use of all kinds of funds that have already been collected will also achieve the same objective.

Tending toward tax

Feng Xing (www.ce.cn): Its success in Western countries shows that the social security tax is an important social stabilizer and balancer. After World War II, market economies in the West were able to maintain lasting development and social stability, and to a large extent, this was attributable to the social security tax.

In China, premiums for pensions and medical and unemployment insurances all go into social security funds in the form of social security charges, which are managed by provincial governments. The standards and rules for collection vary in different regions, which blocks the smooth flow of labor forces.

If the "premiums" are transferred into a "tax," social security charges will become legally compulsory and ensure collection. Meanwhile, allocation of any insurance fund will be covered by state budget and local governments will not be able to spend the funds as they please. Unified management of social security funds will boost smooth labor force flow, because taxes will be paid to the national treasury and workers will be able to enjoy social security benefits anywhere.

Imposing the tax conforms to China's economic and social development trends. The Ninth Five-Year Plan for National Economic and Social Development and Targets for 2010, which was devised in 1996, said the social security tax would be phased in. Now 14 years have passed, so it's time to put it into practice.

Wang Hongling (www.chinavalue.net): It's unrealistic for today's China to offer high-level social welfare services as some Western welfare states are doing, but providing its citizens with basic social security is the government's obligation, especially in a market economy environment.

The social security tax is a major fund-raising channel to support a welfare system in many countries. China has always taken gradual and studied steps of reform, so it's impossible for the country to offer citizens free and full coverage overnight. But the current system, under which individuals have to pay their own premiums, has to be continued for a while. The problem is, under this system, the fairness the system should have is not there. The reform of the system is certain, but the question is "how to reform?"

The proposal of the collection of a social security tax points out the reform's direction, but the detailed procedure is complicated. However, we still have to try it.

Liao Jiaqin (Nanfang Daily): Whether a social security system is effective depends on whether it is able to offer a strong "safety net" for all citizens, so the work force can always enjoy benefits wherever they work. As a result, the labor force will be able to flow freely to different companies and workplaces across the country.

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