Tackling income tax evasion

Preferential policies do not stop the rich emigrating and they aggravate the unfairness in the distribution of wealth

At the just-concluded session of the Chinese People's Political Consultative Conference National Committee, Jia Kang, a member of the top advisory body, said the individual income tax is concentrated on people with low and middle incomes, as rich people are able to avoid paying it.

As a finance and tax expert with the Research Institute for Fiscal Science affiliated to the Ministry of Finance, some of Jia's comments on tax have sparked controversy in the past. However, his latest remarks are less controversial as it is indisputable that the middle- and lower-income groups have become the main source of individual income tax revenues. Such a tax structure has aggravated the unfairness in the country's income distribution and contributed to its failure to narrow the ever-widening gap between the rich and poor.

China's current tax threshold for individual incomes is 3,500 yuan ($562), an income level that is barely sufficient to afford basic foods and clothing in some big cities if prices for housing and other goods are taken into account. Households with incomes around this level sometimes cannot meet their needs if they have an elderly member of the family or a child to support. Wealthy people on the other hand usually employ a variety of channels to avoid paying income tax.

The key reason middle- and lower-income earners are the main source of income tax is the fact employers automatically deduct their employees' income tax. Such a practice has made it convenient for owners of private enterprises to give themselves a very low or even zero salary as a way of evading income tax.

The individual income tax is entrusted with regulating the country's income distribution among different groups, and aims to help narrow the rich-poor gap. Some of China's rich people fulfill their taxpaying obligation in the form of business tax or value-added tax. But these tax categories are different from the individual income tax and cannot work to regulate the country's income distribution. Taxing wealthy people with the business tax instead of the individual income tax weakens government efforts to close the wealth gap.