Merriden Varrall explores the geopolitical considerations arising from China's recent tax reforms.
At the end of August this year, the government in the People’s Republic of China (PRC, or China) passed a number of major reforms to individual income tax (IIT) laws. In summary, the major changes were around what can now be counted as tax deductible (for example, care for supporting the elderly); raising the tax free threshold; moving responsibility for income tax from business to the individual; and changing tax residency rules.
Tax in China is a highly sensitive issue, so why these changes, why now, and what might happen next?
As Lu Zhizhen from the Beijing-based policy research firm China Policy explains, these recent changes to personal income taxes have several complementary purposes. At the highest level, lacking a broad and efficient tax system denies Beijing some of the primary levers of a modern economy. IIT makes up less than seven percent of total tax revenue which is very low compared to the average for developed countries. As countries around the world focus on taxing their nationals' global income, these reforms are part of Beijing’s broader ongoing efforts to institutionalise and reform the tax system in a step towards making it better fit global norms.
Domestically, the government (or more accurately, Party-state, the unique governance combination of administrative government and Chinese Communist Party) upholds that the reforms will also stimulate the economy at a time of slowdown.
The third and perhaps most critical driver is to meet the Chinese people’s expectations that the government will improve their material wellbeing.
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