China’s reform plan of personal income tax – to levy taxation by family (rather than by individual) as unit – finally sees its promise to be put into practice. In past few years, the reform plan was always stuck in the phase of “to be negotiated” in pretexts that “the conditions are not ready”, or “the proper time is yet to come”. With the thirteenth “five-year plan” at the threshold, the reform plan is likely to be implemented with gradual paces – a crucial part of China’s reform policies to bring close the gap between the rich and the poor.
“Proposals from CPC Central Committee for the thirteenth ‘five-year plan’ of national economy and social development” (“Proposals” for short hereafter), which was passed in the fifth plenary session of CPC’s 18th national congress, put forward the notion of “shared development”. Among all policies concerning people’s livelihood, it is a key solution to bring close the income gap, so as to stick with shared development and boost the welfare of the general public. And the concrete measures include a new taxation system of personal income that takes into consideration different categories of income groups.
The thirteenth “five-year plan”, which is coming soon, is seen as the most important five-year span before a well-off society is fully realized in 2020, and the first five-year span after Chinese economy enters the stage of “New Normal”. Therefore, the central government sees it as a breakthrough point of reform to bring close the gap between the rich and the poor, and to improve the welfare of the general public. In light of that, many experts think that it’s the right time to push forward reform plans of personal income tax, including the plan to levy taxation by family (rather than by individual) as unit. The plan might be implemented step by step, and is expected to mature in the long run.
“According to the agenda of reform, the taxation system of personal income is sure to change in the thirteenth ‘five-year plan’.” Thus commented Jia Kang, member of the national committee of CCPPC, and former director of the research institute of financial science affiliated to the Ministry of Finance. In a recent interview with Phoenix Weekly, Jia Kang predicts that China’s taxation system is bound to achieve decisive progress before 2020, according to the overall development target of the country as a whole.
In spite of the prediction, Jia Kang confesses that legislative procedure is required before the reform plans can be realized. Only by doing that can they abide by the consensus of “levying taxation by law” and “paying taxation by law”.
改革方向已确立十九载 The direction of reform was fixed 19 years ago
Actually, “a new taxation system of personal income that takes into consideration different categories of income groups” as proposed in the thirteenth “five- year plan” is nothing new at all. The proposal was written in last four “five-year plans”, and will be written into the plan for fifth consecutive times.
“9th ‘five-year plan’ of national economy and social development, and an outline of the long-term development by 2010”, approved in the fourth session of the eighth National People’s Congress on March 17th, 1996, had already conceived a grand landscape for China’s future: to build “a new taxation system of personal income that takes into consideration different categories of income groups” that covers as many people as possible. In 2003, “The decision of several issues concerning the consummation of socialist market economy”, passed in the third session of CPC’s 16th National Congress, again notes the necessity of a new taxation system of personal income, and the wording is almost the same – “to optimize our current taxation system, and to take into consideration different categories of income groups”. In 2006, the reform plan was again written in the draft of 11th “five-year plan”. 12th “five-year plan”, which was initiated in 2011, drew an outline and details of reform in personal income tax – to build and finalize a new taxation system of personal income that takes into consideration different categories of income groups step by step, and to ameliorate the regulations of levying personal income tax.
Although the direction of reform in personal income tax was fixed 19 years ago, the situation remained virtually unchanged in the mainland of China. The above-mentioned new taxation system is constantly stuck in the phase of “to be studied”, and no concrete progress has been achieved up till now.
The new taxation system, which defines “personal income” as that of family (rather than an individual), seems to be a feasible plan. On the initial stage, the experts proposing the idea were seen as “armchair strategists”, and they failed to catch the eyes of the general public until 2011. In 2011, the threshold of personal income tax was elevated from 2000 Yuan to 3500 Yuan. Although the officials claimed that changes were made in accordance with the “popular will” they heard and accepted, many still regarded that as a measure of compromise.
Some experts and ordinary citizens didn’t think high of the changes, as they thought the unfairness of taxation could not be solved simply by elevating the threshold, nor could the gap between the rich and the poor be brought close. In a word, the rough-and-ready measure of “lump-sum tax” was not fitting well with the current economic development. More factors should be taken into consideration, like the family status and dependency burden of the taxpayers. In light of that, more discussions emerged to push forward a new taxation system of personal income with family, rather than individual as a unit. Representatives attending the plenary sessions of NPC and CPPCC would frequently raise proposals concerned with the issue, and the recently-released draft of thirteenth “five-year plan” has clear expressions of the possibilities of changes. The expectations of the general public are now raised again.
Observers hold the view that employment pressure might be huge in next few years, since Chinese economy has already entered the stage of “New Normal”. Social stability would be posed in serious threat if the government fails to bring close the ever-widening income gap between the rich and the poor. The new taxation system of personal income defines family as a unit, taking into consideration the practical situation of every single taxpayer. Thanks to the change, many ordinary citizens burdened by “Tax Misery Index” would feel relieved by paying less, and the gap between the rich and the poor is expected to become close. Therefore, the change is likely to arrive as a new policy of people’s livelihood.
政府保税或是受阻原因 Obstruction from governmental protection
As a matter of fact, the officials from national or provincial departments of taxation and finance also called for changes on different public occasions. In their opinions, it seems fair and proper to levy taxation by couple or by family, rather than by individual. However, their tones would become ambiguous if you continue to ask when the reform plans would land as fact.
The reasons for their reluctance might be multi-folded. The departments of taxation think that the conditions are premature, and list a bunch of reasons: the financial status of families in mainland of China lacks transparency, and comprehensive stats are not easy to made; the costs of levying income tax by family are overwhelmingly high, and the departments concerned would run short of labor and material sources; many ordinary citizens lack the legal awareness of pay tax spontaneously, etc.
For officials who work in the departments concerned, they might apprehend that the questions mentioned above would lead to serious flaws in tax regulations, if the government decides to levy income tax by family. The flaws would cause large-scale leaks of taxes, and even more unfairness is right in front of us.
On the other hand, many experts insist that these “pretexts” have been used for years, and nowadays, they should no longer hinder the reform plans from being implemented.
In any contractual society, taxpayers bear no responsibilities for the weakness of governmental departments in the abilities of levying taxes. As a matter of fact, these departments are obligated to improve the services they provide, and enhance their abilities to levy taxes. If the reform plan of levying income tax by family does come true, the work would be more demanding for the civil servants of the departments concerned, and the costs of collecting information at the initial stage would rise accordingly. But in the long run, the qualities of these civil servants would rise sharply, and it is conducive for the process of levying taxes in the future. Once the platform of taxpayers’ information is finalized, a series of policies and adaptions would emerge more conveniently.
The fact does exist that the financial status of families in mainland of China lacks transparency, but it should not pose as a major obstruction of the reform plan. They are actually two parallel issues – the problem of non-transparency exists now under the current taxation system of personal income. In China, it is a common knowledge that a large group of Chinese citizens (especially those with higher income) own large amount of so-called “grey income”, which is not regulated by current taxation system.
A source close to the central system of finance and taxation tells reporters of Phoenix Weekly: It is “not infeasible” to levy income tax by family, but the departments concerned usually lack motivation – it is governmental protection to blame.
The official stats reveal an awkward fact: after the threshold of personal income tax was elevated to 3500 Yuan, related governmental revenue dropped sharply (around 8.0% in 6 months, on a year-on-year basis). Officials from local departments of finance think that their sources of revenue might be cut severely, as families with heavier burden and lower income could pay less if the reform plan becomes a fact. That means huge pressure for local, provincial and central departments of taxation, considering the lowering speed of economic growth.
厘清“家庭”概念是前提 Key lies in a clear definition of “family”
Although the reform plan of levying income tax by family has won the heart of general public, most ordinary citizens are mentally prepared for the indecision and inaction of the government.
Mainland Chinese media conducted a public opinion poll in early 2015, and the result revealed that most people are pessimistic about the possibility of the reform plan of income tax in foreseeable future. Their apprehensions are multi-folded: the reform plan would harm the vested interests of the privileged, and the governments concerned become reluctant to push forward the process; the reform in a single category cannot change the unfairness embedded in China’s overall taxation system; some even feared that the changes might cause a series of social issues like pseudo-marriage, pseudo-adoption, pseudo-donation, etc.
In the eyes of some experts, most Chinese citizens are not worrying about the “technical problem” of the departments concerned. The task of ultimate importance before the government can levy income tax by family is – to give a clear definition of “family”.
Unlike the “nuclear family” (which usually covers one generation, or two at most) in most developed countries in the West, “family” in a traditional Chinese sense is huge with several generations under one roof. There are now hundreds of millions of peasants in China, and a large part of them (especially those senior citizens) are not covered by social insurance and welfare. Should we define a “family” by marriage status or the residence booklet? The opinions are diverged.
With the rapid progress of urbanization, the “mobile population” in the mainland of China exceeded 245 million by the end of 2014. The rigid regulations of China’s household registration system causes many unthinkable, and even deformed family structure like “left-behind children” (whose parents leave rural area to make livings in the city), “empty-nest elderly” (whose offspring is not with them for the similar reason) and “separation of young married couples”. Therefore, it becomes extremely difficult to build a nationwide information network that covers every member of every family.
In most countries and regions that levy income tax by family, the members of a “family” are counted by marriage lies.
In US, similar social problems also exist: married couples are separated, and senior citizens are not properly taken care of, etc. Therefore, the departments concerned allow citizens to choose their own methods of paying income tax – by individual or by family (which means a married couple). Talking about tax deductibility, tax abatement is applicable according to inflation rate of every year, and also taken into considerations are living expenses, personal payment of retirement pension and medical insurance, alimony after divorce or separation, tuition for higher education, personal payment of medical expenses, income tax of the state and city level, property tax and philanthropic donations, etc. Also applicable to tax deductibility are nursery fees for raising kids, accidental damages not covered by insurance, expenses for career development, and other necessary expenses of a family.
Liu Yuanju, research fellow from SIFL (Shanghai Institute of Finance and Law) has his explanation of the fact. He says that the size of a family is much larger in the East that in the West, and the situation is even more complicated in China, as you can never ignore the fairness and justice between different generations and groups. First of all, most senior citizens who need to be attended used to work in the “planned economy” mode of “low personal income and high national accumulation”, which means the pensions they receive now are inadequate.
Besides, with the rapid growths of urbanization, more peasants choose to make livings in the city, and their parents cannot imagine living an easy life in old age all by themselves. Therefore, many couples of peasants who work in the city are required by law to support their aged parents in the rural area. Many see it as a must, and a historical obligation to include the senior citizens in the definition of a “family”, if the government chooses to levy income tax by family.
“Only by clarifying the essential issues of tax deductibility and family definition can we become fully aware of the direction of the reform plan. Otherwise, we many fall into the vicious circle of ‘Huang Zongxi Theory’*, and revolve around the circle of ‘combing taxes, adding taxes, and combing taxes again’.”
(*Huang Zongxi was a renowned Chinese intellectual in Ming Dynasty, and “Huang Zongxi Theory” says that in the long history of China, government would combine taxes when the people complained about the tax burden, and would elevate tax rate when the people’s problems were resolved temporarily.)
In light of that, the feasible process of China’s taxation reform might be – to push forward the reform in income tax step by step, to complete and optimize the information platform gradually, and to put into practice a humane method of levying income tax by family. “I hope to see that departments concerned take the first step in no time.” Thus commented Jia Kang.