September 12, 2018 / 1:57 AM / 7 months ago

Breakingviews - Beijing’s confused tax message will strain growth

A man collects recyclablesr from an alley as smoke billows from the chimney of a factory in rural Gaoyi county, known for its ceramics production, near Shijiazhuang, Hebei province, China, December 7, 2017. Picture taken December 7, 2017. REUTERS/Thomas Peter

HONG KONG (Reuters Breakingviews) - Beijing’s confused tax messages will strain growth. A major fiscal overhaul should leave China’s workers with extra cash to spend. Companies, however, could find themselves chased to pay into the social safety net. The government says the move won’t increase costs, but the confusion has left officials scrambling.

    The country’s legislature last month passed its first major change to personal income taxes in seven years, hoping to spur consumption. The new rates, which go into effect in October, mean salaries need to hit 5,000 yuan ($728) per month before payments are due – a higher threshold than 3,500 yuan today. That will slash the proportion of urban workers who pay tax to just 15 percent from 44 percent. Add in a raft of new deductions included in the overhaul, and the changes will amount to around 320 billion yuan ($47 billion) per year in savings for taxpayers.

    Other changes have overshadowed the consumer boost, though. In particular, companies are fretting about a decision announced in July to transfer full responsibility for collecting social security contributions to the country’s powerful tax authority, from 2019. Many Chinese companies – perhaps the majority – pay their dues late, or only in part. A fastidious watchdog will prompt tougher enforcement. Worse, some fear, it could demand payments for past evasion.

    Worryingly for Beijing, the combined impact is likely to be negative. Personal income rate cuts may boost nominal growth by 0.2 percentage points, estimate analysts at Nomura. That would be more than offset by the social security crackdown, which could knock 2.5 percent off corporate earnings and slow growth by 0.6 percentage points.

    Such an outcome would be embarrassing. The central government has called for a “more active” fiscal policy, including tax cuts, to support the economy. In their present form, the proposed changes could unwittingly result in the opposite effect.

    Officials are responding. A State Council meeting last week promised to keep existing collection policies unchanged for now and to investigate ways to lower the headline rate so the burden on companies would not increase. Absent more guidance from Beijing, jittery managers may put investments on ice.


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