China unveils major tax reforms to make rich pay more

Sweeping tax changes will also cut power of state-owned firms and narrow gap between urban elite and rural poor

guardian.co.uk, Reuters, Wednesday 6 February 2013

Shoppers in Beijing: China has signalled its intention to build 'a long-term

mechanism' to boost rural incomes. Photograph: Peter Parks/AFP/Getty

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China has unveiled sweeping tax reforms to make wealthy state-owned firms, property speculators and the rich pay more to narrow the gap between the urban elite and hundreds of millions of rural poor.

The plans approved by the state council – China's cabinet – also included commitments to push forward market-oriented interest rate reforms to give savers a better return and more security.

Chief among the reforms is a requirement to raise the percentage of profits contributed by state-owned firms to the government by about five percentage points by 2015.

Together with measures to raise wages and improve households' return on assets, the reforms signal an attempt to shift economic growth towards increased consumption and away from reliance on investment spending.

One key change will make interest rates more flexible. Interest rates on savings deposits have lagged inflation for many years, depressing returns for households and pushing those who can afford it to more speculative investments.

"Push forward market-oriented interest rate reform, appropriately expand the floating range for interest rates on deposits and loans and protect depositors' interests," the announcement said.

It called for "building a long-term mechanism" to boost rural incomes, and reiterated previous pledges to raise incomes, particularly for the poor.

Citizens would see more opportunities to earn money from assets, including increasing fund products, and expanding income from rents, dividends and bonuses.

Rural migrants would get more opportunity to transfer their official residency to cities, where wages and social services are better.

Trimming the power enjoyed by state-owned firms was top of the list of structural reforms submitted by thinktanks before the November change of leadership in the ruling Communist party.

State-owned firms generally transfer only a small portion of their profits to the state but have come under increasing pressure from reformists who believe they benefit from too much support that the private sector does not share.

These profits are seen as a potential source of funding as China builds pension, health insurance and other systems to create a social safety net for its citizens.

Raising the dividend payout from state-owned enterprises will go some way to curbing criticism from China's trading partners that Beijing unfairly supports its state-backed firms by giving them numerous tax breaks and access to cheap capital.

"For state-owned companies in some industries with overly high income, we will strictly implement the two-tier controls on firms' total salary and wage level to gradually reduce the salary gap between different industries," said the circular.

The announcement also took on powerful state-backed monopolies, calling for "enhanced supervision" to avoid improper access to public resources at low or no cost. Oil companies and others have long resisted attempts to increase the amount they pay the state for natural resources.

Decades of economic reform have made some very rich and brought prosperity to an urban middle class. But many, particularly in the countryside, have been left behind.

Efforts to build a progressive individual income tax system have been stymied by undeclared sources of wealth, while pilot plans to introduce a property tax have been wildly unpopular.

The National Bureau of Statistics this month released an updated estimate that the country's Gini co-efficient, a measure of income disparity, had reached 0.474 – well above the 0.40 level considered a trigger for social discontent.