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China Must Make Its Tax System More Progressive: IMF

by Mary Swire, Tax-News.com, Hong Kong

21 August 2017


China should make its tax system more progressive and fairer for lower earners, the International Monetary Fund (IMF) said.

The IMF said that China has "the highest levels of income inequality in the world, which, while easing slightly recently, is projected to increase without policy action."

It added that China's tax revenue is relatively low at 20 percent of GDP compared with the OECD average of 34 percent "due primarily to low income and property tax receipts."

In a report, it said that one way of addressing this imbalance would be to introduce a recurrent property tax with rates set by local governments within a centrally approved band.

The IMF said that the country should also reduce exemptions that result in about 80 percent of urban workers not having to pay income tax. Meanwhile, China should remove a minimum earnings measure for social contributions which leads to "prohibitively high effective tax rates for the working poor."

It said direct taxes on income and property should be increased but added that "the process should be gradual and consistent with the broader tax reform strategy."

Elsewhere the IMF suggested that China could increase its revenues by "substantially raising taxes on fossil fuel and pollution."

China's authorities argued that adopting a carbon tax would negate the need for further increasing pollution tax rates or expanding the base.

The authorities also favored tax sharing as a means of financing spending of local governments, as opposed to giving them more revenue autonomy through a property tax and personal income tax surcharge, the IMF said.

TAGS: tax | property tax | pollution tax | International Monetary Fund (IMF) | China | tax rates | carbon tax | tax reform

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