Taxation in the People's Republic of China

By Jinyan Li | Go to book overview

3
Income Taxes on Individuals

A general personal income tax was not introduced in the People's Republic until 1980, 1 although a tax on wages and salaries had been proposed in 1950 and a personal income tax was discussed in 1955 at the Fifth National Tax Conference. An Interest Income Tax was charged from 1950 to 1959 on former capitalists, whose assets or businesses were taken over by the state in return for bonds. 2

The main reason for not introducing an individual income tax was that it was unnecessary because the state controlled the majority of the means of production and conducted economic activities through strict central planning. Under that system, the prices of all inputs and outputs of an enterprise were set by the government. There existed no market for capital, goods, or labor. All employment and wage levels were planned by the state under an extreme low-wage policy to keep down the cost of industrialization. The income allocated to individuals was merely sufficient to satisfy the basic needs of everyday life. In 1981, for instance, the average annual income of an urban resident was 500.40 yuan and the average living expense for the year was 456.84 yuan. 3 Owing to various policy restrictions on the private economy, the prohibition of private ownership of property, and the restriction on employment opportunities except those assigned by state agencies, an urban resident could not earn any income other than salaries or wages from his or her working unit, and a rural resident could only work in a people's commune, earning income mainly in kind. 4 The egalitarian nature of the distribution system did not allow any large differences in personal income. Therefore, there had been no need to use tax to redistribute social income and the low wage level allowed no margin for the state to levy a tax to raise revenue, which had been collected by other means.

A personal income tax became necessary when the economic reforms were introduced in the late 1970s. The "open to the world" policy resulted in many foreigners working or doing business in China. These foreigners had incomes much higher than average Chinese citizens. The domestic economic reforms also created opportunities for citizens to display more initiative in work and business, and thus earn income other than ordinary wages. As a result, certain individuals became rich. Differences in individual incomes started to appear, and led to the

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Taxation in the People's Republic of China
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface ix
  • 1 - Evolution of China's Tax System 1
  • Notes 26
  • 2 - Taxation of Goods and Services 31
  • Notes 45
  • 3 - Income Taxes on Individuals 51
  • Notes 63
  • 4 - Income Taxes on Domestic Enterprises 69
  • Notes 87
  • 5 - Income Taxes on Foreign Investment 99
  • Notes 116
  • 6 - Agriculture Tax 125
  • Notes 133
  • 7 - Local Taxes 137
  • Notes 146
  • 8 - Evaluation of the Current Tax System and Prospects for Future Reform 151
  • Notes 173
  • Selected Bibliography 177
  • Index 191
  • About the Author 195
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