Income Distribution Reform on the Way

Government's Resolution on Reform

In October 2010, the fifth plenary session of the 17th Central Committee of the Communist Party of China (CPC) passed a proposal for the Twelfth Five-Year Plan, China's economic blueprint for the next five years. The proposal said efforts should be made to rationalize income distribution system, cement the role of tax policies in income distribution adjustment in which excessively high incomes would be adjusted, and reduce the widening gaps between urban and rural areas and among different industries.

In the meantime, 30 provinces in China have raised local minimum wage standards since 2010, most of which increased by 10 percent.

A report in "The Legal Evening News" said that among the 31 provincial governments' 12th five-year plans this year, 23 provincial governments promised to ensure that residential income keep pace with economic development. Six provincial governments, including those in Shandong, Zhejiang and Chongqing, pledged that the growth rate of residents' annual income should be greater than that of GDP.

Moreover, the State Council on Tuesday passed a proposal to raise the personal income tax threshold and planned to present it to the NPC.

Most experts see the move as the beginning of income distribution reform, although the country's cabinet did not disclose details about the reforms or cite a timeframe for them to go into effect.

"If the lowest tax bracket starts at 3,000 yuan (US$456) compared with the current 2,000 yuan, approximately 20 percent of working people will be liable for income taxes, a reduction from the current 50 percent," said Ping Xinqiao, a professor from the School of Economics at Peking University. "At present, the majority of taxpayers are from the low-and middle-income groups."

Shi Zhengwen, a professor at the Center for Research in Fiscal and Tax Law at China University of Political Science and Law, believes taxation is the most effective way to achieve income distribution reform.

"Although raising income has some effect, the income distribution is determined mostly by the market according to production fact," he said. "If the income is regulated by administrative measures, it will have a negative effect on the allocation of resources in the market. In that case, the taxation, an adjustment measure according to citizens' income, is the most effective way."