China's tax reform to boost domestic consumption

By Kim Young-gyo
HONG KONG, July 11 (Yonhap) -- China's recent decision to reform its individual income tax system will likely boost domestic consumption as it is expected to help low and middle-income earners spend more, a report said Monday.
Starting from September, China will raise the minimum personal income required to pay taxes from 2,000 yuan (US$300) a month to 3,500 yuan. The number of people who have to pay personal income tax is expected to go down from 84 million to 24 million.
Dongbu Securities Co. of South Korea said in the report that the positive effect of increased consumption in the country will largely offset the negative impact on the government revenue.
"While the Chinese government's yearly revenue will likely be cut by 160 billion yuan, individual income taxes only contribute 5.8 percent to the total government tax earnings," said Gao Jing, a Chinese analyst at Dongbu Securities.
China's total tax revenue hit 7.74 trillion yuan in 2010, the country's State Administration of Taxation said earlier this year.
The tax reform announced at the end of last month is the fourth since 1980 that the country has adopted to slash tax burdens on individuals. The Chinese government carried out such tax reforms in September 1980, January 2006 and March 2008.
The brokerage firm estimated that 110 billion yuan, or 68 percent of the amount of exempted taxes in the first year, will flow into the consumer market, saying lower income families in China spend a larger proportion of their income.
The estimated figure was comparable to the government subsidy programs, which were introduced to spur consumption of automobiles and electronics products, it said.
From February 2009 to December 2010, the Chinese authorities spent 26.6 billion yuan on automobile subsidies. They also spent 37 billion yuan to encourage consumers to buy electronics products during the two-year period, which started in February 2009.
Dongbu Securities also said Chinese laborers who have monthly salaries between 5,000 yuan to 10,000 yuan will benefit the most from the new tax regime as they will have the largest absolute amount of tax exemptions.
Those who earn 5,000 yuan a month will gain an additional disposable income of 280 yuan, while those receiving 10,000 yuan will receive 480 yuan, it said.
While China has overtaken Japan as the world's second-largest economy, the country's consumption is seen as failing to match that level largely due to an urban-rural disparity and a widening income gap between the rich and poor.
Income redistribution is one of the priorities for China's economic plan for the 2011-15 period, which was announced earlier this year.
ygkim@yna.co.kr