China Is About To Slash Income Taxes For 60 Million People

Some 60 million Chinese will wake up newly exempt from income tax tomorrow morning, as the government tries to boost poorer peoples’ spending power and fuel sustainable economic growth.

Though a few top earners will pay more, almost everyone else will get a break, according to Finance Ministry calculations.

“This is good news for most people, especially low- and middle-income employees,” says Yi Xianrong, a finance expert at the China Academy of Social Sciences think tank.

The tax break offers consumers some relief in the face of high inflation, which was running at an annual rate of 6.5 percent last month and eating into family budgets.

The biggest beneficiaries will be those at the bottom of the tax scale. The lowest rung of the income-tax ladder has been raised from 2,000 renminbi ($313) per month to 3,500 RMB ($547). The average Chinese wage is around 3,000 RMB a month.

The tax reform, made more generous after a wave of online protest against earlier government proposals for stingier changes, means that only about 8 percent of Chinese will pay any income tax at all, according to Wang Jianfan, deputy director of the Finance Ministry’s tax policy department.

Like many developing countries, China relies very little on hard-to-collect income tax for its revenue. Last year it raised only 6.6 percent of its taxes from personal income. Instead, the government goes after the business sector, which is easier to monitor.

Raising the income tax threshold will cost the government 160 billion RMB ($25 billion) in lost revenue, according to the Finance Ministry, but this is “no big deal” for Chinese public finances, according to Arthur Kroeber, head of the Beijing-based Dragonomics economic consultancy.

“Fundamentally, China’s fiscal conditions are very strong”, Mr. Kroeber says, pointing to government estimates of a budget deficit below 2 percent this year.

What the government gets for its $25 billion, says Dr. Yi, is goodwill at a time when ordinary people are grumbling increasingly loudly about rocketing food prices. “If people’s purchasing power goes up, that is good for social stability,” Yi says.

Household income has been falling as a share of GDP, relative to corporate and government revenues, for several years, but the new tax breaks are unlikely to reverse that trend because income tax plays such a minor role in China’s economy.

“If the government wants to redistribute income from the corporate to the household sector, tax policy is not going to do the trick,” warns Kroeber.

This post originally appeared at The Christian Science Monitor.

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UBS's George Magnus: Here Are 5 Ways To Fix Near Record High Income Inequality

George Magnus, a senior economic adviser at UBS Investment Bank, says we're facing a crisis in capitalism and policymakers should read up on Karl Marx for dealing with it, he wrote in an Op-Ed for Bloomberg.

Magnus writes that as companies pursue greater profits and productivity, they are trimming their workforces. (Notice how his own firm, UBS, announced last week it was cutting 3,500 jobs as part of cost-cutting efforts.)

This has created a crisis -- U.S. income inequality is now close to its highest level since the 1920s.

To address the crisis, "policy makers have to place jobs at the top of the economic agenda, and consider other unorthodox measures." 

Here's five things he says policymakers should do:

1. Cut employer payroll taxes and create fiscal incentives to encourage companies to hire people.

2.  Allow for eligible households to restructure mortgage debt, or swap some debt forgiveness with future payments to lenders.

3. Well-capitalized and well-structured banks should be allowed some temporary capital adequacy relief to try to get new credit flowing, especially to smaller companies.

4. In dealing with the euro zone debt crisis, European creditors should extend the lower interest rates and longer payment terms recently proposed for Greece.

5.  Instead of using just bond-buying programs to defend against deflation and stagnation, central banks should target a growth rate of nominal economic output.

Read the full Op-Ed here >>

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Yes, It's Absurd That 46% Of Americans Don't Pay Income Tax—But Not For The Reasons You Think

Amid the yelling back and forth about how America should deal with its debt and deficit problem, two major debates have emerged.

The first is whether the problem should be addressed via spending cuts or tax increases.

The sane answer is both.

Federal government spending recently surged over 20% of GDP, higher than it has been for most of the past century (see Chart 1). Barring a massive surge in GDP growth, or huge reductions in social-program spending (Medicare, etc.), federal spending will remain too high to offset merely with tax increases. So spending has to be cut.

Tax revenue, meanwhile, is running below the bottom of its long-term range of 15%-20% of GDP (Chart 2). So, barring truly massive spending cuts, which seem politically unfeasible, tax revenue needs to increase.

So, among those who acknowledge that the solution isn't black and white—that spending will have to be cut and taxes will have to increase—the fight narrows down to what should be cut and who should pay more.

And the specific argument above who should pay more income taxes, as it has since time immemorial, boils down to: Rich people (pick your definition), versusEveryone else

In the past month, several billionaires have weighed in on the "rich people should pay more" argument. Warren Buffett, one of the richest men in the world, argued that it's outrageous that he pays a lower tax rate than his secretary and said Congress should make him pay more. Charles Koch, meanwhile, argued that he pays a huge amount of taxes and that he thinks he can spend his money more efficiently than the government can.

I personally think billionaires can and should pay more. But that's not the point of this article. While the billionaire argument continues to rage, there's also the fight over the other side of the scale: "Everyone else."

And one of the points made in this fight is the well-publicized fact that 46% of Americans don't pay federal income tax.

That's ridiculous, howl rich people and their defenders. Everyone should pay tax. Why should half of the country get some of their government services for free?

And you know what?

They're right.

It is ridiculous.

What's more, it's hurting the country.

But not for the reasons you think.

Conservatives frequently throw the "46%" statistic around and suggest that half the country pays NO taxes. This isn't true. The 46% pay payroll taxes, sales taxes, state taxes, and other taxes. But they don't pay federal income taxes. And they should.

Why?

Not because this will suddenly balance the budget. It won't.

Everyone should pay income taxes because we're all in this together. And no one in this country should get something for nothing.

People pay a lot more attention to the decisions they and their representatives make when they have some skin in the game. They care about what their money is spent on. They understand, in a way that folks who pay nothing don't, that you can't just have everything they want (unless they're willing to pay for it). They feel personally insulted and injured when the government squanders their money, the way it has squandered so much money over the past decade (bank bailouts anyone?).

Just as important, they become active members of—and contributors to—the system, not members of a class of people who benefit from services paid for by others.

The current system, in which only half of the country pays the federal bills for everyone else, has contributed to the "us vs. them" environment in which class warfare is increasingly taking hold. This runs counter to the iconic promise of America, which used to be based on the success and breadth of the middle class.  Although there will always be arguments about who should pay more, the fact that almost half the country pays no income tax isn't helping.

But no, no, no, say the folks who defend the fact that 46% of Americans don't pay federal income tax.

Of those 46%, half are "elderly." And a third of the non-elderly make less than $20,000 a year.

That's true.

But they still should pay something.  Not a huge amount.  But something.

For the poorest Americans, even a few hundred dollars a year would go a long way toward changing the debate from "us vs. them" to just "us."

And it might—might—make rich people a bit more willing to pay a bit more.

Americans are at their best when they are working together to solve a common problem. Our current debt-and-deficit problem is a common problem, as is the debate over how much spending should be cut (and what) and how much taxes should be increased (and how).

We need the whole country to pitch in and solve that problem. And one good step in the right direction would be to broaden the tax base so that everyone is paying something.

UPDATE: I've gotten lots of smart feedback already on this argument. The most persuasive case against it is the argument that, when one looks at TOTAL taxes paid, it's clear that everyone is already paying something. I still think that it's the federal income tax that most people focus on when they think about paying their tax bill and that everyone should pay something.  But here's a chart from Paul Krugman showing the breakdown of total taxes by income bracket:

SEE ALSO: THE TRUTH ABOUT TAXES: Here's How Low Today's Really Are

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