Tax to Narrow Income Gap in China
Haiying Lin, Hainan Tax Bureau, China

Recent statistics show that income gap in China is widening at an alarming rate. China's Gini coefficient now stands at 0.458 in China; is above the international warning line of 0.4, and indicates that Chinese society suffers from income distribution inequity.

In this sense, there is a strong urge for Chinese government to employ macroeconomic measures, especially tax policy, to brake the widening income disparity. The following tax polices can be adjusted to bridge income gap:


Firstly, China will have to improve its personal income tax system to maintain a fair distribution of wealth. China's rich people, which accounts for less than 20 per cent of the country's total population, owned more than 80 per cent of the country's bank deposits last year. But their personal income taxes were less than 10 per cent of the total. In cities, people who earn lower incomes have a heavier tax burden than those who make more money. The progressive individual income-tax system has become a "regressive" system which indicates an urgent need for reform of the personal income tax system: For instance, the income tax base should be further raised and increase tax-free section for low-income group, taking into account a taxpayer's family burden, so that there will be less tax for low-income groups, allaying the burden on them.


Meanwhile, measures should be undertaken to strengthen the collection of individual income taxes to prevent tax evasions of high-income group. i.e. set up special files for high-income people and increase the inspection of their income tax; enhance co-operation and information exchange among tax authorities and other institutions, especially banks to efficiently control personal income tax.


Secondly, the time is ripe for China to implement an inheritance tax to bridge the widening gap between rich and poor. This scheme will help make up for deficiencies in the personal income tax system, and strive for further narrowing the income gap. It can partly stop tax evasions and the money collected can go to settle civil servants' pay and pension arrears. In such case, levying inheritance taxes not only is conducive to diminishing unequal social wealth distribution between the upper and lower income groups, but also is of significance to maintaining social stability.


Thirdly, China's current consumption tax system, introduced in 1994, increasingly becomes incompatible with today's situation and need to be adjusted to help narrow the income gap. i.e. new tax categories should be initiated such as a luxury goods tax, while other original taxable items should be exempt from taxation or taxed at a lower rate, like gold ornaments.


Besides the adjustment of the above tax regimes, differential tax rate policy can also be adopted to go hand in hand with national industrial and employment policies to minimize income disparity. For instance, favorable tax policies can be granted to labour-intensive industries, township business as well as service sectors that absorb laid-off state-own workers and jobless. Additional tax cut should be adopted in agricultural sector and the inland regions to reduce the widening urban-rural and regional income gap.


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