There’s a Tax Ax Poised to Fall on China’s Wealthy

(Bloomberg Opinion) -- Meat and poison: Tax cuts for some in China are coming back to bite as levies increase on others.

The slowing economy has prompted Beijing to announce a series of reductions this year, ranging from the value-added tax on goods and services to personal income levies. The government also promised a sweeping overhaul of import duties to counter the escalating trade war with the U.S.

On the other hand, officials are getting more out of the rich. This month, China slapped Fan Bingbing, one of China’s biggest film stars, with an order to pay 884 million yuan ($127 million) in back taxes and fines. Airport customs authorities are checking if travelers are returning from trips with undeclared Louis Vuitton bags. And foreigners spending more than 183 days a year on the mainland will soon see their worldwide income subject to Chinese taxes.

This is because the government is facing a mounting struggle to balance its budget — and it still doesn’t have the right blend of revenue streams.

In business circles, calls are growing louder to give China Inc. more relief, and it’s not hard to see why. According to the World Bank, the effective corporate levy is 67.3 percent, the 12th-highest in the world. With profits squeezed and the stock market dogged by one of the worst routs anywhere, Beijing can’t ignore this lobby.  

There are three ways to ease the tax burden on companies: further reduce VAT, cut the 25 percent statutory corporate tax rate, or provide relief on the onerous social-security imposts required of employers. A reduction in the sales tax, in particular, could rekindle animal spirits among manufacturers hurt by the tariff conflict. That sector alone contributes about one-third of total VAT revenue.

There’s a Tax Ax Poised to Fall on China’s Wealthy

But a meaningful reduction in any of those areas would seriously drain the government’s coffers. Together, the three account for about half of Beijing’s total income. So the push to enforce taxes elsewhere is understandable. 

There’s a Tax Ax Poised to Fall on China’s Wealthy

Moreover, China still has the tax mix wrong. Fiscal revenue accounts for about one-third of GDP, in line with the average OECD country. However, while that average economy gets about a quarter of its revenue from personal income taxes, they bring in only 4 percent of Beijing’s total take.

There’s a Tax Ax Poised to Fall on China’s Wealthy

And like most governments, China is struggling to make ends meet. The year began with a tough stance on debt and tighter purse strings: The Ministry of Finance lowered its fiscal deficit target to 2.6 percent of gross domestic product, the first cut since 2013. Judging by expenses so far — even with weak infrastructure spending this year — that goal is likely to be exceeded again.

There’s a Tax Ax Poised to Fall on China’s Wealthy

At this point, cash is king at the finance ministry. Local government financing vehicles, the off-budget shell companies that did much of the infrastructure work for municipalities, have amassed at least 30 trillion yuan of debt, according to HSBC Holdings Plc estimates. Repayment pressure is building.

Last weekend, Beijing gave more details of the income-tax cut, with deductibles for health care, elderly care and children’s education. As a result, individuals earnings less than 10,000 yuan a month will no longer pay income tax, estimates CICC Research. 

Be sure of one thing: Beijing will want to be revenue-neutral. The private bankers who advise the wealthy shouldn’t be getting too clever.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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