By WANG ZHIPENG

Tax collection in grass-roots tax bureaus is being computerized.

Beijing's revenue from personal income tax in 2001 was 8 billion yuan, an increase of 42 percent, and the amount of tax received from high-income earners increased 2.6 fold. From September to November 2001, high-income earners paid taxes of 60 million yuan they had previously evaded. In the first half of 2002, Beijing defined its key taxpayers, that is, those with an annual income exceeding 100,000 yuan. According to this definition, the tax-paying situation of at least 30,000 people is under control. Revisions to the Individual Income Tax Law, which has been under discussion for a year, are approaching their end, and individual income has again become the focus of attention.

Rapid economic development has resulted in a widening gap between the rich and the poor, and personal income tax, while increasing by large margins, has failed to play its due regulatory role. In 1980, China collected only 160,000 yuan in personal income tax, but this figure jumped to 99.6 billion yuan in 2001, making income tax fourth highest of China's tax revenues. However, within personal income tax, the proportion of high-income items, such as remuneration from personal services, and from production and operation, increased at a lesser, slower rate. Statistics indicate that of China's 7,000 billion yuan personal bank savings, 80 percent belongs to less than 20 percent of the depositors, and the income tax they pay amounts to less than 10 percent of total personal income tax. Also, the GDP proportion of personal income tax lags far behind that of other low-income countries. Generally speaking, China's taxation system is ineffective in collecting personal income tax, and most of those on high income do not pay the appropriate amount of tax.

Two main factors have caused difficulty in the collection of personal income tax. On the one hand, the system of primary distribution is not standardized, a system of personal credit has not been established, and the taxation system is flawed. The existing mode of tax classification is inequitable, and tax evaders are not severely penalized. All of this has resulted in serious tax evasion. On the other hand, according to the current taxation system, it is difficult to calculate and effectively monitor personal incomes. As a result, not all due taxes are collected. Methods of collection are backward, and procedures are complicated. According to the current system, tax rates vary according to different categories of income, so the amounts of tax imposed on similar levels of income differ. For instance, the highest tax rate on salaries is 45 percent, and the highest on property income is 20 percent. The tax rate for income from hard labor is, however, much higher - an obvious shortcoming. At present, the greater portion of personal income tax is withheld by the workplace, which is most easily controlled by tax authorities. As a result, wage earners become the absolute main body of taxpayers, while most high-income earners evade taxes by diverse means, such as opening accounts in several banks, and cash transactions. This is completely unjust, and its negative influence has caused huge losses in social efficiency.

Deficiencies in the personal income tax system have aroused the Chinese government's attention. Revision of the Individual Income Tax Law was put on the legislative work agenda last year, and governments at various levels are intensifying their efforts to penalize tax evasion. Liu Xiaoqing, famous TV and film actress and millionairess, is currently under judicial investigation for tax evasion, which demonstrates the government's determination to crack down on such violations. With the approaching election of the new administration, the revised Individual Income Tax Law will not be promulgated in a short period of time, but reforms to the current tax system are inevitable. They have two aims. First, to increase government revenue; and second, to narrow the income gap. The latter is more important than the former. The polarization between the rich and the poor in China is a source of great concern, and it is imperative that this gap in income be narrowed. The solution to this problem will effectively kill two birds with one stone.

The narrowing of gaps in income will help stabilize society. In general, the middle-income bracket constitutes a strong foundation for the country's steady economic development, and maintaining a suitable parity between high- and low-income groups encourages innovation and competition. In the past five or six years, enterprise reform has resulted in large numbers of workers becoming unemployed, thus broadening the gap between rich and poor, and causing disturbances in certain localities. According to statistics provided by the Ministry of Labor and Social Security, low-income households in China's cities and towns represent 31.79 percent, and lower middle-income households 32.36 percent, their combination making up 64.15 percent. This proportion is too large, so the ratio of middle-income households should be increased by means of re-distribution of income. The system of personal income tax should be improved to regulate high-incomes, and to maintain social stability.

An increase in the proportion of the middle-income bracket will promote economic growth. The role of the pro-active financial policy implemented by the government becomes more limited day by day, and due to recession of the global economy, promoting economic growth through expanding exports is not satisfactory. In China, the most populous country with the largest potential market, the lack of consumption power is without doubt a huge drawback, and relates to the current pattern of income distribution. The high-income bracket with the greatest purchasing power makes up only a small proportion of the population, yet they have low consumption motivation, while the majority of the population that is bent on high consumption lacks purchasing power. Increasing the proportion of middle-incomes will, therefore, effectively promote consumption. It is only by emphasizing both investment and consumption that China may realize rapid economic development in the long term.

WANG ZHIPENG is studying for a doctorate at the Economic Management School of Tsinghua University.