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Chinese Government Fights Tax Evasion

3 min readBy: Alicia Hansen

There has been much talk of the ‘tax gapThe tax gap is the difference between taxes legally owed and taxes collected. The gross tax gap in the U.S. accounts for at least 1 billion in lost revenue each year, according to the latest estimate by the IRS (2011 to 2013), suggesting a voluntary taxpayer compliance rate of 83.6 percent. The net tax gap is calculated by subtracting late tax collections from the gross tax gap: from 2011 to 2013, the average net gap was around 1 billion. ” in the U.S., or the difference between taxes owed and taxes paid. Some people evade taxes purposely, others fail to pay the correct amount simply because of the complexity of the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code, and still others look for every possible loophole without actually breaking the law.

This may seem like the sort of problem that would not exist in a country with less freedom than the U.S. but a recent Wall Street Journal article (subscription required) describes the challenges the Chinese government has been facing, not only with tax evasion but also with a general societal antipathy toward income taxes:

Surging growth in China’s tax revenues is masking the government’s difficulty in getting individuals to pay income taxes, a problem that could eventually hamper official promises to expand health and social programs.

Years of big gains in the tax take have helped the government increase spending and trim its already small budget deficit, but the increases have come largely from taxes paid by big companies.

. . .

Those concerns are behind a push to expand the reach of the income tax, starting with the top earners. The potential payoff is large. Like many developing countries, China gets little money from the personal income tax, which provides 6.5% of government revenue. Most Chinese have never filed a tax return. By contrast, the income tax made up about 45% of the U.S. federal government’s total tax take in the fiscal year that ended in September.

. . .

Yet expanding the income tax is technically complicated and politically sensitive. Most government revenue has long come from state corporations, leaving individual Chinese feeling as though they have little direct stake in government finances. An income tax changes that, and officials realize that casting a broader tax net will inevitably generate new demands for government accountability.

“If you take part of a taxpayer’s income, they will certainly ask ‘What are you doing with this?’ This is an issue for the government,” says Jin Dongsheng, a researcher for the State Administration of Taxation’s in-house think tank. “Public spending needs to provide some benefits, some return to the society. Only in this way will taxpayers voluntarily pay taxes.”

Another perspective on this problem can be found in a 2002 article on the website of the Chinese Embassy, titled “China fights tax evasion by rich people”:

Tax avoidance has become one of the social “cancers” of China. Though a group of well-known enterprises, including the Legend Computer Group and the Bank of China, were recently cited as examples of upfront taxpayers, there were at least 200,000 enterprises in Beijing whose employees paid no individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. last year, an official from the municipal taxation department has disclosed.

The evasion of enormous amounts of personal income tax has done great harm to the country’s economy. China has always tried to create a sound social environment which honors the honest payment of taxes and has set up new management systems for levying taxes.

Beijing Municipality, and Zhejiang and Guangdong provinces, famous as “cradles of the wealthy”, have all improved their management of the collection of individual income taxes.