Editor's Pick:

Debate: Individual income

(China Daily) Updated: 2011-05-16 08:03

Hua Sheng

Higher threshold won't help the needy

The National People's Congress has been reviewing the draft amendment of the Individual Income Tax Law and planning to raise the individual income tax threshold from 2,000 yuan ($307.8) a month to 3,000 yuan ($461.7). The public and the media say the threshold should be raised to 5,000 yuan or 8,000 yuan, or even 10,000 yuan. And some scholars suggest that it be tied to the consumer price index.

People say the higher the personal income tax threshold the better it would be, and cite many reasons for that.

First, almost everyone wants to save tax, especially because the government's fiscal revenue has been growing rapidly over the past few years.

Second, many people simply want to pay as little tax as possible.

So what is the ultimate purpose of tax cuts and how can we achieve the goals?

Some people believe that raising the individual income tax threshold can better help distribute national income and lessen the burden of low-income taxpayers. But facts point to a totally opposite direction.

Statistics from the Ministry of Finance show that at present only 28 percent of wage earners pay individual income tax, and farmers do not have to pay any at all. That means 72 percent of wage earners will gain no benefit even if the income tax threshold is raised.

Under such circumstances, how can we say that a higher threshold will ease the burden of low-income groups? Such suggestions, in fact, are aimed at reducing the tax burden of the middle-income group rather than the low-income group. As a result, reducing the threshold will help little in narrowing the income gap in society.

About 480 million people work in the country's secondary and tertiary industries, and about 200 million of them are migrant workers. About 72 percent of the wage earners earn less than 3,000 yuan a month. This means that raising the threshold of the individual income tax to above 3,000 yuan would not benefit them much. Hence, we should not exaggerate that a higher income tax threshold will facilitate more equitable income distribution.

If the government raised the personal income tax threshold to 3,000 yuan, people earning 3,000 yuan, 5,000 yuan and 20,000 yuan a month would save 75 yuan, 150 yuan and 200 yuan. And if the government raised the threshold to 5,000 yuan, the money the three categories of wage earners would save would be 75 yuan, 325 yuan and 1,625 yuan.

This clearly shows that raising the threshold higher than 3,000 yuan will be meaningless for the low-income people - instead, it will benefit the high-income group. Such a change would be totally against the direction of income distribution reform. So when it comes to increasing the personal income tax threshold, higher does not necessarily mean better for the majority.

Besides, raising the threshold to 5,000 yuan is not advisable for the government, either. If the threshold is raised to 3,000 yuan, the number of people paying individual income tax will drop by about 48 million, which may be acceptable. But if the threshold were to be raised to 5,000 yuan, only 3 percent of the overall population would be paying personal income tax, which is as good as abolishing the tax altogether.

Hence, raising the threshold above 3,000 yuan will affect the income redistribution reform, but also reduce the government's total revenue which it will not agree to.

The author is president of Beijing Yanjing Overseas Chinese University.