ccording to official data, China’s growth rate in the first three quarters of 2016 was 6.7 percent. This looks like a robust figure that accords with the government’s target. But the fact that two-thirds of all financial loans during the period have gone to the real estate industry indicates that China’s efforts to restructure its economy are far from successful.
In recent months, China’s leadership has launched “supply-side” reforms to inject vitality into the manufacturing and service industries, especially in the private sector. A major aspect of the reform is lowering the tax burden for businesses. It is estimated that the tax burden, referring to the percentage of gross earnings paid in tax, is 40 percent, including corporate tax and other expenses such as social security contributions for employees. According to data released by the World Bank, China’s commercial tax rate, calculated by looking at tax as a percentage of commercial profits was 67.8 percent in 2015, which was the 13th highest tax rate among the 183 economies studied.
Last year, the government launched an initiative to replace business taxes with value-added tax and some cities have lowered mandatory social security contributions by businesses by 1 to 2 percentage points. But the impact of the reform appears to be very limited, with reports that the tax rates in some localities and some industries have further increased.
According to a survey of private entrepreneurs by Li Weiguang, a professor at Tianjin University of Finance and Economics in November, 87 percent of those surveyed said the existing corporate tax rate is too high, and only 8 percent said it is acceptable. Li said that currently the profit margin of most privately-owned Chinese companies is less than 10 percent, making them vulnerable to many macro-economic changes. To boost China’s private sector, the government needs to make more drastic reforms to the commercial tax rate.
Besides commercial taxation, there have also been persistent calls to reform China’s personal tax code. Unlike many other countries where personal incomes are categorized based on different sources and are subject to different tax rates, China’s personal income tax regime hits wage-earners hardest. For example, under the current tax code, the tax rate for an individual with a monthly salary of 80,000 yuan (US$11,600) is over 45 percent, regardless of the size of the person’s family and with almost no applicable deductions. By contrast, capital gains from stock trading, regardless of how great they are, are tax free.
The result is that the middle class has become the primary contributors to the revenue earned from personal income, not the rich. The unfair tax burden on the middle class is not only a major obstacle to the government’s efforts to boost domestic consumption, but has also limited the expansion of the middle class, which is considered the backbone of the country’s social stability and prosperity.
As China has recently relaxed its family planning policy to allow people to have two children, and as its population is increasingly aging, Chinese families will see their financial liabilities increase in future years. Couples may need to take care of four parents and two children. The country’s tax code needs to cope with these demographic changes.
Lou Jiwei, the former finance minister, said in March that the Finance Ministry has submitted a reform plan for personal income tax to the State Council, which will then be submitted to the National People’s Congress for approval. According to Lou, the reform plan aims to lower the tax rate for “middle and low income earners,” although the specifics of the plan remain unknown.
As the economic slowdown remains a major challenge, the government needs to launch more serious tax reductions to both revitalize the economy and increase the fairness of China’s tax system.