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Why only 2% of Chinese pay any income tax

“Of course not, I’m not an idiot,” says Liu Yongli, a chauffeur in Beijing, when asked whether he has ever paid personal income tax. That may explain why personal income tax accounted for only 8% of total tax revenue in China last year, compared with an average of 24% in the OECD, a group of rich countries.

The finance ministry estimates that 187m people ought to be paying income tax. Yet a former finance official reckons that in 2015 only 28m people—just 2% of the population—did so.

A revamp of the income-tax system has been in the works for several years. A tax-evasion scandal this summer involving Fan Bingbing, China’s most famous actress, who ducked nearly 300m yuan in taxes, may have added urgency to the task. (Ms Fan was eventually fined 884m yuan.)

Fanning the flames

The public interest is enormous. A state-sponsored “consultation exercise” on the reform in July attracted over 130,000 comments which is around 100 times the average for such exercises, which the national parliament is legally required to conduct before approving new laws.

Salaried professionals in big cities have long complained that they bear an unreasonable share of the tax burden. That is because firms are legally required to withhold a portion of salaries in taxes. Employers agree to scam allowing them to shirk on social insurance contributions, which can be as high as 40% of a worker’s salary.

The finance ministry reckons that a worker on a monthly salary of 15,000 yuan is enjoying savings of around 1,000 yuan a month as a result of raising the tax-free threshold.

But the reforms also include rules that aim to make it harder for companies to avoid social-insurance contributions by paying workers under the table. Those who make more than 60,000 yuan a year will be required to file annual tax returns, starting next year.

But China has run a budget deficit in 21 of the past 22 years. Last year the deficit breached the government’s self-imposed cap of 3% of GDP. Public debt stands at around 50% of GDP. Although none of these figures is alarming, especially by the standards of the rich world, the economy’s slowing growth will eventually make the government’s debts harder to control.

Original Story at the Economist.

From → tax evasion