China Proposes New Personal Tax Cuts in Wake of Slowing Economic Growth
China’s State Administration of Taxation released new proposals of personal tax cuts in housing, education, and health on October 20. Behind these proposals, Beijing seeks to boost consumer spending as China enters a period of slowing economic growth in the middle of a trade war with the United States.
The proposals followed the Ministry of Finance’s statement two days earlier, which outlined the goal to reduce taxes for both corporates and households by more than 1.29 trillion yuan ($187 billion). Deputy head of the ministry’s Department of Tax and Policy, Yuan Haiyao, said that the reductions are part of a greater effort to “stimulate market vitality.”
Many of the proposed personal tax cuts are meant to target members of the middle class. As a result of the economic boom that occurred in the last 40 years, China has the world’s largest middle class, even though it is still relatively small when compared to China’s total population of 1.4 billion. Not only does the sizable middle class attract foreign traders and investors to China, the Chinese Communist Party also hopes that increased middle-class spending will stimulate economic growth and prevent China from falling into the middle income trap, a term that describes developing countries that get stuck at a middle level of economic development.
In recent years however, the Chinese middle class has been spending less and less. The price of housing keeps increasing faster than income levels, which leads to more middle-class families incurring household debt. China’s underdeveloped social welfare system also forces people to save for medical and old age expenses. The proposed tax cuts are meant to address these issues, as well as the broader trend of tax burdens rising at a faster than household income in the past few years.
The move to increase consumer spending became increasingly important since the trade war with the United States escalated in August, when the United States imposed 25 percent tariffs on over $200 billion worth of Chinese exports. The effects of the tariffs on the Chinese economy became apparent last week when the National Bureau of Statistics released its growth figures for the July-September quarter. The figures reported that annual growth slowed down from 6.7 percent in the previous quarter to the current 6.5 percent, the lowest growth pace since the global financial crisis in 2008.
Still, the Chinese government believes that it has a wide range of available economic measures to maintain economic growth, including the newly proposed personal tax cuts. Just last August, the government increased the monthly personal tax allowance from 3,500 yuan to 5,000 yuan.
On its own however, much remains to be seen about the effectiveness of the newly proposed tax cuts. As Tang Beibei, a legal consultant at an American firm in Beijing says, “The measures on education, health care and elderly care are all relevant to people’s lives, but I don’t think they go far enough, with rents rising sharply in Beijing and mortgage rates also going up…. And given all the usual red tape, it might not be so easy for people to the allowances they are entitled to.”