China Tries a Consumer Focused Tax Cut

Reuters: China plans income tax breaks to boost consumption

The threshold for collecting income taxes will rise to 5,000 yuan ($732.21) per month from 3,500 yuan, according to the amendment passed in parliament on Friday.

Taxpayers also will be allowed to deduct expenses related to children’s education, interest on home mortgages, housing rent and treatment for serious diseases.

The income tax amendment will significantly boost consumption and cut tax revenue by about 320 billion yuan per year, vice finance minister Cheng Lihua told a news conference.

Wang Jianfan, a finance ministry official, said the number of taxpayers would decline after the tax law changes. The proportion of taxpayers in the urban workforce was expected to fall to about 15 percent from the current 44 percent, he said.

That sounds awesome if you don't think about what that sentence says about wages. Round it to 30 percent of taxpayers, nearly one-third, will fall off the tax rolls if the threshold is 5,000 yuan in income, plus deductions for education, mortgage interest and rent. This table was posted in a recent Chinese article about high rents in first-tier cities. (See: Central Planning 101: Blood-Sucking Realtors! The Rent Is Too Damn High!) The first column is the name of top-tier Chinese universities, followed by their location. The next two columns are 985 school and 211 school. Read about Project 985 and Project 211. Basically it is a Chinese effort, begun in the 1990s, to boost the quality of their universities. The final three columns show the average salary of the 2017, 2015 and 2013 graduating classes.

The average rent in Beijing is approaching 5,000 yuan.

The consider this:

The key issue to note here is that only 15% of the URBAN work force earns as much as ¥5,000/mo. $BABA says the average consumer spends ¥9,000 on its platforms per year. Since by definition, $BABA consumers are average, they must be spending ~30% of gross annual income. https://t.co/gHz1n7mEVQ

— ASY (@doumenzi) September 2, 2018

Hence this from SCMP: China tax cut finalised but leaves many unimpressed

The final bill approved by the Standing Committee of the National People’s Congress increases individual taxpayers’ annual tax-free threshold to 60,000 yuan (5,000 yuan per month) from the previous 3,500 yuan per month, expands the income range for the lower tax brackets, and adds new tax deductions, including one for parental elderly care, on top of the existing deduction for social insurance payments.

The final bill is little changed from the first draft unveiled in June, with seven tax brackets and a top income tax rate of 45 per cent. The 5,000 yuan per month tax-free threshold was left in place from the first draft despite many demands for it to be raised further.

The "standard deduction" and rent in a first-tier cities combines for ~10,000 yuan (1万). Elite college graduates from 2013 are making about 14,000 yuan per month.

China was supposed to transition from an export powerhouse to a domestic consumer economy, but it ran into the same problem seen across much of the world: wages growing slower than inflation. The latest tax cut won't address the fundamental struggle between labor and capital. There's no fault in the policy, it's just that much stronger medicine is needed.