Some 60 million Chinese will wake up newly exempt from income tax tomorrow morning, as the government tries to boost poorer peoples’ spending power and fuel sustainable economic growth.
Though a few top earners will pay more, almost everyone else will get a break, according to Finance Ministry calculations.
The tax break offers consumers some relief in the face of high inflation, which was running at an annual rate of 6.5 percent last month and eating into family budgets.
The biggest beneficiaries will be those at the bottom of the tax scale. The lowest rung of the income-tax ladder has been raised from 2,000 renminbi ($313) per month to 3,500 RMB ($547). The average Chinese wage is around 3,000 RMB a month.
The tax reform, made more generous after a wave of online protest against earlier government proposals for stingier changes, means that only about 8 percent of Chinese will pay any income tax at all, according to Wang Jianfan, deputy director of the Finance Ministry’s tax policy department.
Like many developing countries, China relies very little on hard-to-collect income tax for its revenue. Last year it raised only 6.6 percent of its taxes from personal income. Instead, the government goes after the business sector, which is easier to monitor.
Raising the income tax threshold will cost the government 160 billion RMB ($25 billion) in lost revenue, according to the Finance Ministry, but this is “no big deal” for Chinese public finances, according to Arthur Kroeber, head of the Beijing-based Dragonomics economic consultancy.
“Fundamentally, China’s fiscal conditions are very strong”, Mr. Kroeber says, pointing to government estimates of a budget deficit below 2 percent this year.
What the government gets for its $25 billion, says Dr. Yi, is goodwill at a time when ordinary people are grumbling increasingly loudly about rocketing food prices. “If people’s purchasing power goes up, that is good for social stability,” Yi says.
Household income has been falling as a share of GDP, relative to corporate and government revenues, for several years, but the new tax breaks are unlikely to reverse that trend because income tax plays such a minor role in China’s economy.
“If the government wants to redistribute income from the corporate to the household sector, tax policy is not going to do the trick,” warns Kroeber.