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The income gaps among urban residents are now more significant than the disparities between urban and rural residents. This has become the main source of polarization in China. An efficient taxation system could help reduce the gaps between the rich and the poor, according to experts at the International Symposium on Public Finance Reforms and China's Economic Development that concluded Sunday.

 

It was commonly believed in the past that the income gaps in China were mainly between city and countryside residents, said Zhang Xin, dean of the Public Management School at Shanghai University of Finance and Economics. Since 2002, however, with the growing proportion of urban population, plus the migration of people, both rich and poor, from rural areas into cities, the income gaps among urban residents have become bigger than those between city and countryside residents.

 

"The present taxation system in China only uses its function to increase national finance revenue. Its other functions, like the adjustment of income distribution, have been neglected to some extent," said Gao Peiyong, deputy director of the Institute of Finance and Trade Economics with the Chinese Academy of Social Sciences (CASS). "So reforms to the current taxation system have to be carried out to exert its role in this field."

 

It is the individual income tax system that now takes the role of adjusting income distribution, but it is not powerful enough. Wang Zhenzhong, deputy director of CASS' Institute of Economy Research, pointed out that the present Individual Income Tax Law is not yet perfect for closing the gap between the rich and the poor.

 

The amendments to the law, which were made at the beginning of this year, have only raised the basic line of taxation. Wang suggested that China should learn from the British practice, for instance, to increase deductions for dependants, disabled and the like.

 

A recent survey by the State Administration of Taxation showed that the increasing speed of the taxation gaps between different areas was faster than that of GDP disparities between them, said Xu Shanda, the administration's deputy director.

 

One of the reasons is that the payer and receiver of the tax are not the same local governments, according to Xu. "Some local taxation doesn't become the financial revenue of that local government; instead, it's part of the revenue of another local government. That is to say some local governments benefit from the taxation of others. It's not reasonable."

 

Xu said that a typical case is the construction of a railway between Datong and Qinhuangdao. The railway does not pass through Beijing. However, since the construction company was registered in the city business tax had to go there. This was unfair to the two local governments because they had to relocate the residents along the line and take care of security after completion. They spent money and time but didn't get what they deserved.

 

The imperfection of the finance and taxation systems caused the difference in tax source and revenue. Moreover, the commonly-shared tax income takes too large a portion of the whole tax income. In China, the commonly-shared tax income includes VAT, income, business and consumer taxes. As an example business tax goes to the local government where a business is actually registered. If the work place is different from the registration location the government of the work place cannot collect any business tax.

 

One of the functions of the financial department was to narrow the above gaps. Xu pointed out that the way forward was to reconsider the method of the second distribution of taxes between the central and local governments adopted in 1994. He suggested the local tax source be first turned into tax revenue before being the second-time distribution between the central and local governments.

 

The symposium was held by the School of Economics at Peking University on June 23-25, 2006.

 

(China.org.cn by Xu Lin, June 27, 2006)