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UPDATED: June 18, 2010 NO. 25 JUNE 24, 2010
Is a Luxury Goods Consumption Tax Useful?

U.S. management consultancy firm Bain & Company has released a report showing in 2009 China's luxury goods market swelled by nearly 12 percent, reaching $9.6 billion and accounting for 27.5 percent of global sales. These statistics put China in the place of the world's second-largest luxuries consumer, after Japan.

Bain & Company predicts in the next five years China's consumption of luxury goods will be valued at $14.6 billion, the world's greatest. The Boston Consulting Group Inc. in the United States holds a more optimistic view. It believes by 2015 China's consumption will top $36 billion.

In the face of the rapidly swelling market, experts say taxation polices can serve as a way of guiding people's consumption behavior. For example, a luxury goods consumption tax is a good choice.

Microsoft Corp.'s online portal in China conducted a survey on levying such a tax. The result shows 78.57 percent of respondents supported the idea, while 20.15 percent were against and 1.29 percent were undecided.

Supporters argue China's per-capita income is not a quarter that of the United States, but China consumes a quarter of the world' s luxury products. Misleading aspects of the West's luxurious lifestyle must be corrected through various practices and a consumption tax would be a practical way of achieving this. This practice would also effectively curb excessive consumption and help to adjust social distribution. The internal driving force of a country's fast development is first, growing productivity, an important source of national wealth; and second, a nation's frugal life style. So levying a tax on luxury consumption would encourage reasonable consumption and indirectly adjust income distribution.

Opponents say, because of high tariffs on imported luxury products and special consumption tax on some commodities, imported luxury products always sell at a much higher price in China than in other countries. As a result, many Chinese choose to buy these products from overseas markets. Imposing a tax would further curb consumption and cause greater numbers of the rich to travel and shop abroad, contributing to other countries' economic growth.

Promoting fairness

Xi Xuchu (www.xhby.net): Today, China's consumption of luxury goods accounts for more than a quarter of the global market, the world's second largest share. The consumption is attributed to the rapidly-growing number of rich people in China. Statistics from the Ministry of Finance show 10 percent of China's urban population possesses 45 percent of the country's urban wealth. What's more, China's rich people treat consumption of luxuries as they do consumption of daily necessities such as food and vegetables, but they only pay very low taxes on their purchases.

International practice has it the rich should pay more in taxes than the poor. In the United States, those who earn more than $100,000 a year pay 60 percent of the country's annual personal income tax. Taxes on luxuries as a major and important way for governments to redistribute social wealth are widely adopted around the world. In some countries, where there is no encouragement for their consumption, specific luxury goods may sell at several times their original price after being taxed. Taxation is not only a source of public financial revenue but also provides leverage to adjust the rich-poor gap.

To collect taxes according to different consumption models is rational. The luxury goods consumption tax targets only consumption at a higher level than usual and does not affect people's consumption of everyday products. It also does not apply to the average person. This not only helps to realize better wealth redistribution in society but also provides a positive guide for reasonable consumption.

Pointless interference

Tao Duanfang (The Beijing News): The rich-poor gap in China is so large it impairs social harmony and development. Is taxing luxury goods consumption really so effective? Is it able to solve the fundamental problem?

The key factors leading to unfair wealth distribution are: First, interest groups in certain areas and departments make huge profits due to monopolies over certain resources; second, low personal income tax cut-off points and excessively favorable taxation policies for high-income groups, as well as underdeveloped auditing and personal credit systems, ultimately make this type of tax leverage ineffective and unable to fulfill the role of helping the poor by collecting from the rich.

To avoid these hard questions and turn to taxes does not help greatly.

Luxury products are high value-added commodities. They are not only means of showing off wealth and possessions but also provide many job opportunities for the working class. If taxing luxury goods consumption is used as a way to adjust the rich-poor gap, the rich need only turn to overseas markets and luxury products' manufacturing and marketing in China will wither. Many workers will lose jobs, which will further widen the rich-poor gap.

Suppose the rich really gave up luxury consumption because of a tax, would low-income earners thereby benefit?

At present, there is no clear definition of luxury products. Scholars have provided lists of houses, cars, furniture, brand name watches, cosmetics, and so on. Then, what is top-grade furniture and what is a brand-name watch? More importantly, in China, high income is often connected to power and privilege. The people who should be taxed enjoy more ways of avoiding them. They may put their luxury entertainment down as business expenses.

It's quite possible ordinary people who occasionally buy luxury products will be caught by such a tax. As a result, a luxury goods consumption tax may affect the relatively poor.

The gap between the rich and the poor must be narrowed, but a tax on luxury goods consumption is an ineffective solution, either in the short or long term. To make wealth distribution more equal, it's necessary to break monopolies on resources in certain industries and strengthen the leverage effect of personal income tax. If these problems are not dealt with properly, other remedies for narrowing the rich-poor gap will be very ineffective.

Liang Fafu (China Youth Daily): China's current consumption tax already covers luxury products and the more valuable jewelry and cosmetics. If a special tax on luxury goods consumption is imposed, it will lead to double taxation.

The public does not need to be so sensitive and indignant about an individual's consumption of luxuries. Although seeing the rich show off their wealth, possessions and high social status by conspicuous consumption is unseemly, their behavior is at the same time providing jobs, contributing taxes, stimulating competition and promoting technical upgrades.

In luxury goods consumption, the rich are able to satisfy their vanity while the poor are able to make money by offering services. The government also gets tax revenues. So, as long as the money spent by the rich is legitimate, their consumption brings about generally beneficial results.

The strange thing is, throughout Chinese history, this sort of consumption of luxuries has always been roundly condemned but the consumption of officials was seldom criticized. It was even thought the behavior of officials in relation to consumption should match their status, so they could safeguard their solemnity and dignity.

China has now entered an era of the consumption of luxuries and the public should be tolerant of citizens' personal consumption and promote stricter supervision of officials' consumption.

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