Tax increase rumors spark concerns from middle class

Huge income gap among regions makes it hard to set threshold

Chinese authorities on Monday denied that the country may raise personal income taxes on those earning more than 120,000 yuan ($18,460) a year, as netizens responded furiously to a possible tax increase on the country's emerging middle class.

Citing unnamed experts affiliated with the State Administration of Taxation (SAT) and the Ministry of Finance, the Xinhua News Agency on Monday reported that suggestions of higher tax rates for those residents with earning above 120,000 yuan per year misread the document and were mere rumors.

Despite the clarification, a document from the State Council, China's cabinet, that indicated a possible increase in income taxes had already resonated over the past few days.

The State Council document, released on Friday, was aimed at addressing issues such as "the lack of human capital accumulation," "difficulties in raising income" and creating a fair environment. But one paragraph that suggests adopting higher rates for high income earners drew attention.

The government should gradually establish a personal income tax system that combines both comprehensive and classified tax systems, further reduce the tax burden on middle and lower income earners, adjust incomes, and appropriately regulate the taxes of high income earners, the document said.

Many residents, particularly those in first-tier cities like Beijing and Shanghai, have raised concerns about any tax hikes and stressed high cost of living in these big cities.

Following the document's release, articles that suggested a raise in taxes for high income earners, who earn above 120,000 yuan a year have been widely shared on Chinese social media sites, and received comments expressing shock and disbelief over such a low threshold for higher incomes.

"Earning 120,000 a year is high? After all our daily expenses, with that income, we can't even afford a one-square meter home, and you are telling me that's high income," one netizen said on Weibo, a popular social media platform in China, on Monday.

Tax monitoring purposes

The 120,000 yuan per year level was pegged during reforms implemented in 2006, which required those falling under that category to file a report with taxation authorities, according to Li Wanfu, director of the Institute of Tax Science, a research arm of the SAT.

"People are putting two separate things together and spreading rumors," Li told the Global Times on Monday. "It was not set as a high income threshold in 2006, and certainly not now after 10 years."

And the threshold was merely established for tax monitoring proposes, not for determining tax rates for different income groups, according to Ma Caichen, a professor at the School of Economics at Nankai University.

Ma said the threshold set 10 years ago might be too low in first-tier cities, considering the rise in housing prices and other living standards, but "it is still a reasonable threshold compared to the national average."

"The working class is very concerned about any changes to their tax rates because it's their hard-earned money and they face very high stress living in the cities, and they should not pay higher rates," Ma said.

Ma said that given the huge income gap among different Chinese cities, it is impossible for the country to set a specific threshold for high income earners that fits the whole country. "For example, 120,000 yuan per year in Beijing might be quite low, considering rising housing prices and other living standards, but in Qinghai Province, that's a lot," he said.

But this is just a threshold tax authorities want to monitor, not for implementing higher tax rates, so "it is still a reasonable threshold on the national level," he said.

But this is part of the tax reform, and the overall trend is to ease the burden on middle income earners, according to Ma. He further suggested that the income tax threshold be adjusted based on changes in prices.