Details about Tax System in China
China’s tax system is too regressive. Its social security system is not yet perfect. As a result, China needs to collect more taxes (from high-income groups) and devote more resources to social spending. This includes more spending on public health.
This is not the norm for the Chinese economy (before the coronavirus). The goal of the rule is to reduce the significant role of the Chinese government and give the market more room to operate and take control on Tax system In China. But the agenda is not complete. It must be combined with the creation of a new tax system and the provision of broader social insurance.
China is very good at state capitalism: many of China’s big companies are state-owned or effectively controlled by the party. Large private companies generally remain successful only to the benefit of the party-state and thus face pressure to meet state goals. China is awash with state-backed investment funds to support strategic industries, while the state still directs bulk purchases, making it beneficial for domestic companies and domestic production.
But unlike European countries that use heavy taxes to balance market outcomes, China actually taxes the bottom half more than the top half. Income tax starts only at the top of the income distribution and generates very little revenue. So VAT and highly regressive social contributions generate most of China’s tax revenue. The limited taxes, in turn, limit the amount China is willing to spend on social security.
China Security System:
As a result, China’s tax and spending system does little to change what Dexter Roberts calls China’s “profoundly unequal and unbalanced society.” I also have a new article on this subject in the online edition of Foreign Affairs. But that’s not just my opinion. The IMF has come to the same conclusion: see the 2018 paper on China’s high savings rate, the 2018 paper on income inequality, the 2018 paper on taxes, and the 2018 paper on China’s fiscal federalism. They are, of course, the work of individual authors, but together they paint a picture of the shortcomings of China’s current tax and social security system.
China applies a personal income tax equivalent to 1.3% of GDP (see this IMF document). *The system is decentralized (different tax rates for different types of income) and really only works at the top of the income distribution. The income tax collected in the United States (including the states) is approximately 10% of GDP.
China’s existing social security system is funded by social contributions, a high minimum contribution rate (the exact amount varies by province). As a result, the tax burden tends to fall more heavily on low-wage workers.
“The current tax structure is regressive, especially for the poorest. Although there is a high threshold for exemption from personal income tax, the nominal amount of the social contribution is at the bottom, which is a heavy burden on poor households, and the effective tax rate of more than 40 percent”.
According to the International Monetary Fund, the bottom 50% pay higher taxes than all but the top 5% (who pay the most in income taxes). The best way to survive in china economy is to hire Moore MS Advisory for you.