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Only 48%? It is too low!”“48%” refers to the proportion of Chinese residents’wage income in China’s GDP in 2008. It is Han Weisen, chief economist of World Bank’s representative office in China, thinking it is too low. He got the figure from World Bank’s report of the first quarter of 2012, which was issued on April 12.
Previously, the report from the People’s University of China said that the proportion of Chinese residents’ income in GDP decreased from 59% to 47% between 1995 and 2006. In comparison, in most countries of the Organization of Economic Cooperation and Development (OECD), such proportion remained above 60% and sometimes hit 90% from 1978 to 2008.
The World Bank thought that the Chinese residents had to endure both low income and the heavy burden in taxation and paying for social security.
The same report revealed that the average tax rate for Chinese laborers was 45% in 2008, much higher than the average level of OECD and even higher than the 15 developed countries of European Union. Thus the World Bank suggested that China should drastically decrease the tax rate for laborers by greatly cutting the rate of personal income and lowering the proportion of social security charges in the wages.
“Actually, the lower tax rate for personal income will make more people have higher salaries so that they can buy more to boost the economy further, which will improve the tax income of the government as well,” Han Weisen said.
Supreme Average Tax Rate for Laborers
The said average tax rate for laborers refers to the gap between the actual labor cost the employers afford and the income that is given to employees. It is a method that the governments of all countries used to take the income of laborers. It equals total labor cost minus net income which is divided by the total labor cost.
This standard was initially used by the European Union, which took measures to lower its own tax rate for laborers in recent years.
In contrast, the average tax rate for laborers in China had a drastic increase from 2000. Prof. Zhao Liping from Guangdong Academy of Business said that the average tax rate for laborers increased from 26.9% in 2000 to 45.4% in 2008, almost doubling in nine years.
Compared with the other index in other OECD members, the personal income tax and the charges for social security take a small portion of the GDP in China but the average rate for Chinese laborers is high. This might be because that the recompense for labor elements in China takes a small proportion in the national income distribution and the government takes a big bite of the labor compensation via funds (tax).
In Prof. Zhao Liping’s opinion, the drastic increase of the tax rate for Chinese laborers might be attributed to the fact that the income of social security funds and tax is growing at a much faster than the labor compensation. “In addition, the social security fund income has a crazy development pace, which is another important reason for the high tax rate.”
According to the data, the income from the social security funds’ proportion in the GDP of China increased from 1.92% in 1998 to 4.36% in 2008. Meanwhile, the tax income increased as well. The growth pace of these two elements was faster than the tax income, which only grew from 10.77% to 18.5 within the same ten years.
In addition, the personal income tax uses progressive tax rate, which means that the increase of minimum income level for personal income tax pushes the tax rate for highincome earners. For example, the residents whose monthly salary is 19 thousand yuan previously needed to pay 20% of their income for the tax but now they have to pay 25%.
In Han Weisen’s opinion, the high accumulative tax rate of personal income tax and the high threshold of social insurance charges lead to the high average tax rate for Chinese laborers. “For example, people with the highest level of income in China have to afford a 45% rate of personal income. In addition to other charges, like pension, healthcare insurance, unemployment insurance and so on, the actual amount of money given to these people is far away from their salaries.”
World Bank Advises Unburdening
In this light, the World Bank advised the Chinese government to reduce the tax rate for laborers by cutting the personal income tax rate and introducing the tax of real estate.
“Actually, the personal income tax only accounts for a tiny portion (around 5%) of the total tax income in China. It does not pose great significance for increasing the minimal income level for the personal tax because only 20% of the Chinese citizens need to pay the personal income tax,” Han Weisen said.
In its report the World Bank suggests lowering the fees deduced from the residents’income for the social security, including the housing accumulative funds, unemployment insurance and pension funds. Presently, an ordinary citizen needs to contribute 40% of his/ her income to the social security funds.
Prof. Liu Yuanchun, vice dean of the School of Economy at the People’s University of China, thought that the low proportion of salary in GDP was not a secret. In recent years the Chinese wage increased by 11%-12%, far behind the normal GDP growth which is between 15% and 17%.
“In order to increase the actual level of residents, it is necessary to consummate the salary system and build a stable, standard and supporting system,” Prof. Liu Yuanchun said.“It is good for keeping the economy growing at a fast and stable pace.”
Previously, the report from the People’s University of China said that the proportion of Chinese residents’ income in GDP decreased from 59% to 47% between 1995 and 2006. In comparison, in most countries of the Organization of Economic Cooperation and Development (OECD), such proportion remained above 60% and sometimes hit 90% from 1978 to 2008.
The World Bank thought that the Chinese residents had to endure both low income and the heavy burden in taxation and paying for social security.
The same report revealed that the average tax rate for Chinese laborers was 45% in 2008, much higher than the average level of OECD and even higher than the 15 developed countries of European Union. Thus the World Bank suggested that China should drastically decrease the tax rate for laborers by greatly cutting the rate of personal income and lowering the proportion of social security charges in the wages.
“Actually, the lower tax rate for personal income will make more people have higher salaries so that they can buy more to boost the economy further, which will improve the tax income of the government as well,” Han Weisen said.
Supreme Average Tax Rate for Laborers
The said average tax rate for laborers refers to the gap between the actual labor cost the employers afford and the income that is given to employees. It is a method that the governments of all countries used to take the income of laborers. It equals total labor cost minus net income which is divided by the total labor cost.
This standard was initially used by the European Union, which took measures to lower its own tax rate for laborers in recent years.
In contrast, the average tax rate for laborers in China had a drastic increase from 2000. Prof. Zhao Liping from Guangdong Academy of Business said that the average tax rate for laborers increased from 26.9% in 2000 to 45.4% in 2008, almost doubling in nine years.
Compared with the other index in other OECD members, the personal income tax and the charges for social security take a small portion of the GDP in China but the average rate for Chinese laborers is high. This might be because that the recompense for labor elements in China takes a small proportion in the national income distribution and the government takes a big bite of the labor compensation via funds (tax).
In Prof. Zhao Liping’s opinion, the drastic increase of the tax rate for Chinese laborers might be attributed to the fact that the income of social security funds and tax is growing at a much faster than the labor compensation. “In addition, the social security fund income has a crazy development pace, which is another important reason for the high tax rate.”
According to the data, the income from the social security funds’ proportion in the GDP of China increased from 1.92% in 1998 to 4.36% in 2008. Meanwhile, the tax income increased as well. The growth pace of these two elements was faster than the tax income, which only grew from 10.77% to 18.5 within the same ten years.
In addition, the personal income tax uses progressive tax rate, which means that the increase of minimum income level for personal income tax pushes the tax rate for highincome earners. For example, the residents whose monthly salary is 19 thousand yuan previously needed to pay 20% of their income for the tax but now they have to pay 25%.
In Han Weisen’s opinion, the high accumulative tax rate of personal income tax and the high threshold of social insurance charges lead to the high average tax rate for Chinese laborers. “For example, people with the highest level of income in China have to afford a 45% rate of personal income. In addition to other charges, like pension, healthcare insurance, unemployment insurance and so on, the actual amount of money given to these people is far away from their salaries.”
World Bank Advises Unburdening
In this light, the World Bank advised the Chinese government to reduce the tax rate for laborers by cutting the personal income tax rate and introducing the tax of real estate.
“Actually, the personal income tax only accounts for a tiny portion (around 5%) of the total tax income in China. It does not pose great significance for increasing the minimal income level for the personal tax because only 20% of the Chinese citizens need to pay the personal income tax,” Han Weisen said.
In its report the World Bank suggests lowering the fees deduced from the residents’income for the social security, including the housing accumulative funds, unemployment insurance and pension funds. Presently, an ordinary citizen needs to contribute 40% of his/ her income to the social security funds.
Prof. Liu Yuanchun, vice dean of the School of Economy at the People’s University of China, thought that the low proportion of salary in GDP was not a secret. In recent years the Chinese wage increased by 11%-12%, far behind the normal GDP growth which is between 15% and 17%.
“In order to increase the actual level of residents, it is necessary to consummate the salary system and build a stable, standard and supporting system,” Prof. Liu Yuanchun said.“It is good for keeping the economy growing at a fast and stable pace.”