BOFIT Viikkokatsaus / BOFIT Weekly 2018/36

The Standing Committee of the National People's Congress last week announced an income tax reduction, with the largest cuts going to low- and middle-income individuals. Under the income tax tables coming in October, individuals earning less than 5,000 yuan (EUR 630) a month pay no income tax (earlier 3,500 yuan). The three lowest income tax brackets for individuals (3 %, 10 %, 20 %) were adjusted so that e.g. the income ceiling in the third-lowest (20 %) rises from 9,000 yuan a month to 25,000 yuan. Other tax bracket definitions remain unchanged. China's highest income tax rate (45 %) applies to individuals with monthly earnings exceeding 80,000 yuan (EUR 10,000).

The reform also provides more opportunities for income tax deductions. For example, larger shares of the costs of education, care for serious illness or injury, housing and elder care can now be deducted. The government plans to give more detailed deduction rules during the autumn. Those rules come into force at the start of 2019. The comment period on proposed tax changes ran through July. Media reports note that hardly any of the over 100,000 comments resulted in changes to the government's original proposal.

The government hopes the tax cuts will boost consumption to support economic growth. China's finance ministry estimates that the cuts will increase the average urban-dweller's consumption by about 300 yuan (EUR 40) a month. The impact of the tax change on public sector revenues is expected to be small, however. Unlike the US, where income taxes account for half of the tax take or Finland with over 60 %, they only accounted for about 8 % of total government revenues in China last year. Value-added tax is China's largest tax revenue stream, accounting for 39 % of last year's tax take. Corporate taxation generated 22 % of the tax take.