Geographies in Depth

80 million Chinese people no longer pay income tax

A vendor holds Chinese Yuan notes at a market in Beijing, August 12, 2015. China shocked global markets on Tuesday by devaluing its currency after a run of poor economic data, a move it billed as a free-market reform but which some experts suspect could be the beginning of a longer-term slide in the exchange rate. REUTERS/Jason Lee  - GF20000020395

Chinese government increased the tax-free threshold for monthly personal income from $520 to $745. Image: REUTERS/Jason Lee - GF20000020395

Sean Fleming
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Taxes. They’re the bedrock on which vital public services and infrastructure stand. From roads to hospitals, schools to national defence, taxation provides all the components of a well-ordered, properly functioning society.

They are also one of the headline personal finance statistics individual citizens tend to pay most attention to; a small change to the government's approach here or there has a direct impact on people’s disposable income. And in China, millions of people have become especially aware of that connection.

Image: Bloomberg/OECD

That’s because in October last year, the Chinese government increased the tax-free threshold for monthly personal income from $520 to $745 (3,500 to 5,000 yuan). A second reform of the tax law came in January, which allowed further tax deductions for a range of household expenses such as school fees, healthcare and care for the elderly. It also included an element of mortgage interest relief.

The net effect of these changes has been that a staggering 80 million people no longer have to pay personal income tax at all – that's more than the entire population of the UK. An additional 65 million people – roughly equivalent to the population of France – now pay 70% less in personal income tax.

On the global taxation stage, the Nordic region is famed for levying high rates of tax to pay for public services. In Denmark, taxes on personal income are equivalent to 24.56% of GDP – that’s the highest tax-to-GDP ratio among the OECD countries. It’s way ahead of second-placed Sweden (13.14%), third-placed Finland (12.63%) and the OECD average (8.24%).

China, which isn’t in the OECD, has seen its ratio of tax revenue to GDP grow from 10.5% in 1994 to 20.1% in 2015.

Determining which countries levy the highest rates of personal tax requires a detailed understanding of the nuances of each government’s approach to a series of variable factors. In some cases, the rate paid by a single individual will differ from that paid by a married one. There will be different rates of tax-free income allowance and different additional tax benefits, such as mortgage interest tax relief, which will only apply to homeowners. But, according to Investopedia, Belgium has the highest average personal income tax rate, at 42%, although that rises to 50% for those on the highest incomes.

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There’s a progressive taxation model in China, too. Those who pay tax on their income are taxed at a rate of 3%, rising to 45% for the highest earners.

China is also reducing VAT rates in April. This, combined with the reduction in personal taxes, is intended to spark increased domestic economic activity – particularly important at a time when the international economic scene, complete with the China-US trade war, has become so volatile.

  • The 16% rate (applies to the manufacturing sector) falls to 13%
  • The 10% rate (construction and transport) falls to 9%
  • The 6% rate (services) is unchanged

Although taxes raise around 84% of China’s general government budget revenue, it’s the business sector that shoulder the most. Corporate income tax contributes 19% of the budget amount, VAT collection makes up one-third. By comparison, individuals’ income tax payments account for just 7% of China’s total general fiscal revenue.

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Geographies in DepthEconomic Growth
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