People earning less than 2,000 yuan ($274) a month will not have to pay income tax in 2008. This is good news for Chinese breadwinners who have increasingly felt the pinch of rising prices in the past year.

On December, 23 2007, the draft amendment to the Law on Individual Income Tax was submitted to the Standing Committee of the National People's Congress (NPC), China's top legislature, for deliberation. Proposed in the draft amendment was a move to raise the monthly individual income tax levy threshold again from the current 1,600 yuan ($219) to 2,000 yuan. The amendment, formally approved on December 29, will come into effect as of March 1, 2008.

The increase in the threshold is aimed to relieve the economic burden of medium- and low-income earners amid the recent price hikes of essential goods, said Minister of Finance Xie Xuren at the legislative session.

The rise would free 70 percent of income earners from paying taxes, said Xie. The current threshold of 1,600 yuan only exempts 50 percent of taxpayers.

Despite the government's efforts to cut income taxes, the rich-poor gap keeps widening in China. Unsatisfied salary earners who have contributed to most of the tax collected, demand a complete overhaul of the country's individual income tax system.

Relieving the burden

The effort to ease the burden on taxpayers comes on the heels of China's consumer price index (CPI) hitting an 11-year high of 6.9 percent in November. The accelerated inflation is driving up living costs.

Basic monthly living costs, including food, clothing, accommodation and transport, for an average urban salary earner last year was 1,586 yuan ($217), up from 450 yuan ($61.6) in 2004, and will likely rise to 1,745 yuan ($239) per month in 2008, according to Ministry of Finance (MOF) data.

National Bureau of Statistics (NBS) data show that average monthly per-capita disposable income of urban residents was 1,150 yuan ($157.5) from January to September 2007.

"Over the past two years, basic living expenses have further increased," Xie said. "This requires us to readjust the individual income tax starting point again."

The present amendment echoes public demand, too. In a survey by China Youth Daily in October 2007, 97 percent of the 3,698 people surveyed agreed that the 1,600-yuan threshold was too low and should be raised.

The threshold increase will benefit those with a monthly salary of 2,500-4,000 yuan ($342.5-548) the most, meaning that they would keep 0.95-1.6 percent more of their salaries in their pockets as of March 1.

While increasing living costs make it necessary to cut income tax, it is the country's swelling coffers that make it possible for such a quick adjustment to occur.

"The move would mean a 30-billion-yuan ($4.1 billion) cut in state revenue," said Xie. "But the country has the financial capacity to withstand the reduction."

Xie predicted that revenue for 2007 would surge 31 percent, or by more than 1 trillion yuan ($137 billion) over the previous year, to hit 5.1 trillion yuan ($698.6 billion).

Individual income tax revenue in the first three quarters of 2007 surpassed 240 billion yuan ($33 billion), accounting for 6.5 percent of the overall national tax revenue.

Consumption to accelerate

It is expected that the new tax level will stimulate consumer spending.

While China's tax revenue and the profits of enterprises have swelled faster than GDP during the years of rapid economic growth, people's salaries have increased slower than GDP growth.

In the first three quarters of 2007, per-capita disposable income of urban residents increased by 13.2 percent and the per-capita expenditures increased by 9.8 percent over a year earlier, after adjusting price factors, according to NBS statistics.

After-tax net profits of state-owned enterprises (SOEs) in the first half of 2007 increased by 31.5 percent year on year, according to MOF statistics.

"Rapid increases in state revenue and in the net profits of SOEs have contributed to a persistently high national savings rate," said Ba Shusong, a researcher with the Development Research Center of the State Council. "Measures including income tax cuts and requiring SOEs to pay dividends to their major shareholder--the state--at differentiated rates, are conducive to reducing the high savings rate and implementing the smooth adoption of macroeconomic policies [in 2008]," said Ba.

It is safe to say that the rapid increases in profits of SOEs and tax revenue have been realized because of the low salaries of laborers.

For example, between 1995 and 2005, of the four components of GDP calculation in China, the share of employee compensation to GDP decreased by 12 percentage points, while that of the corporate profits to GDP increased from 21.9 percent to 29.6 percent, said the Report on China's Enterprises Competitiveness (2007) complied by the Chinese Academy of Social Sciences (CAAS).

"Insufficient consumer demand is caused by the persistent decrease in the ratio of household to national disposable income," said He Xinhua, a researcher with the Institute of World Economics and Politics of the CAAS, in an article entitled "Understanding High Saving Rate in China" published in China and World Economy.

He advised the government to play a more important role in income redistribution and to accelerate consumption, including raising the minimum wage, upgrading the deduction threshold of the payroll tax, and spending more on the social security system and compulsory education.

Further tax reform

China has left the personal income tax deduction threshold at 800 yuan ($110) unchanged for more than two decades until 2006 when it was doubled.

Reaction on Sina.com, one of China's largest portals, showed that many were not happy with just a 400-yuan raise. The consensus among netizens from Beijing, Guangdong and Hebei was that the threshold should be no less than 3,000 yuan ($411).

Growing income inequality has accompanied China's huge economic boom, which has failed to benefit its 800 million farmers as much as city dwellers.

Average salaries in China's developed coastal regions can exceed 6,000 yuan ($822) per month, compared with less than 1,000 yuan ($137) in the sprawling hinterland.

"It's more important to go deeper into individual income tax reform," said Miao Changwen, a NPC delegate, who advocated simplifying the current 5-45 percent nine-grade progressive tax rates to avoid further and frequent adjustments of the tax threshold.

China applies different fixed rates to varying items on a monthly, annual or specified time basis, without consideration of varying income sources of taxpayers. It's easy for many high-income earners, mostly private entrepreneurs and people who have income from sources besides their regular occupation, to evade tax payment.

China's low- and medium-income earners, the supposed beneficiaries of tax cuts, however, shoulder the majority of individual income tax as the tax authorities mainly depend on monitoring the payrolls of employers who deduct tax from the wages they pay to employees.

"The function of collecting income tax to redistribute income among the rich and the poor has been weakened due to the exodus of the rich," said An Tifu, Deputy Director of Chinese Taxation Institute. "The individual income taxation system should be further reformed to more effectively tax the rich while exempting the poor."

Many scholars suggested that China take all the necessary expenditures of a family, not merely the taxpayer, into consideration when determining the tax rate and deduction.

They agreed that it is far more important and urgent to restore the income redistribution function to the income tax collection, instead of only fine-tuning the threshold for individual income tax collection.