China plans to slash income taxes to get people to stop saving and start spending their money

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China’s parliament has drafted a tax cut that will slash tax for most individuals, as part of the government’s efforts to boost consumption and reduce inequality.

China is seeking to reduce excessive rates of savings and investment and generate a higher share of growth from household consumption. Economists say that raising post-tax household income is crucial to encouraging consumers to open their wallets.

China is also one of the most unequal in the world, with a Gini coefficient for income of about 0.40, according to official data — a level defined by the World Bank as the threshold for “severe inequality”. An authoritative non-government survey in 2016 estimated that the true figure was even higher.

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The new tax plan raises the threshold above which an individual is subject to income tax from $6,300 to $9,000 per year and expands the three lowest tax brackets — 3 per cent, 10 per cent and 20 per cent — to cover millions of taxpayers who previously paid higher rates. The maximum threshold for the 20 per cent bracket was nearly tripled from $16,000 to $45,000 per year.

Almost all individual taxpayers will receive a tax cut, with those earning between $27,000 and $45,000 receiving the largest cut in percentage terms, according to an analysis by China International Capital Corp, an investment bank.

A taxpayer earning $31,000 a year would see their effective tax rate fall 8.1 percentage points, while a person earning more than $90,000 would see a decline of 4.2 percentage points.

The standing committee of National People’s Congress, China’s legislature, released a draft version of the tax changes for public comment until July 28. The final version is expected to take effect in October.

The latest plan also includes new measures to combat tax avoidance, which is rampant in China for individuals. These include measures to strengthen real estate tax collection, prevent use of offshore tax havens, and crack down on “unreasonable commercial arrangements” designed to avoid taxes.

The tax cut will not have a significant impact on China’s fiscal budget because the country relies less on individual income taxes for fiscal revenue than other large economies. Individual income tax raised $180bn in China last year at the current exchange rate, equal to 8 per cent of total tax collections. In the US, the share is about half.

The reduced rates are not expected to create a significant revenue hole. Total Chinese tax revenue rose 11 per cent last year, including a 19 per cent rise in income tax revenue. Value-added taxes are the largest component of Chinese tax revenue, comprising 39 per cent of tax collections last year. Corporate income taxes contributed 22 per cent.

China is also moving forward with plans to impose a property holding tax, but that process, which is more controversial, is expected to take several more years.

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