The first-ever legislative hearing held by China's top legislature yesterday was a step towards enhancing transparency in the policy process.

With taxpayers being fully informed of law makers' plans, the public hearing on the adjustment of the personal income tax deduction threshold shed light on a long-overdue taxation update. The reform has aroused interest ntaionwide as it affects everyone.

Law makers and officials from taxation and finance departments clearly explained to the 20 individual participants selected out of some 5,000 applicants from across the country why the decade-old threshold of 800 yuan (US$99) per month should be raised and by how much.

Ever since personal income tax was introduced in 1980, the deduction cut-off point has remained unchanged. Yet, since the personal income tax law was adjusted in 1993 to unify taxation for domestic and foreign taxpayers with an equal deduction of 800 yuan, the country's price index has soared by more than 60 per cent. This alone justifies a major increase in the threshold, not to mention the sharp rise in average income level that has immensely broadened the tax base.

Representatives from government departments have also backed the proposal to raise the deduction threshold to 1,500 yuan (US$185) with an initial calculation of the immediate cost of the reform. As the fourth largest source of tax revenue, such an adjustment would result in a decrease of about 20 billion yuan (US$2.5 billion) in personal income tax collected relative to 2004 statistics. Given the double-digit growth of the country's total tax revenue, this price is affordable.

Holding the public hearing was recommendable simply for demonstrating that law makers and government departments concerned respect taxpayers' right to know, but the active response from public participants may be even more helpful to the legislature and related government departments as they strive to carry out their work more effectively.

The request for an even higher deduction threshold by most taxpayer representatives at yesterday's hearing may sound too demanding to the country's finance officials. After all, according to their own calculations, the proposed tax adjustment will allow as many as 60 per cent of salaried workers to forego paying any income tax. Currently only the lowest 30 per cent of earners are exempted.

But participants' views were at least welcomed not only by legislators but also by government officials in charge of public finances.

On the one hand, the opinions expressed by representatives of various taxpayer groups will provide important insights for the top legislature as it amends the personal income tax law.

On the other hand, these calls for a bigger deduction reveal a pervasive public concern about the function of taxation and public finances.

The widening income gap between the many and the few has led a lot of people to push for drastic reductions in the tax burden on low and middle-income groups. But a blanket rise in the tax threshold will do little to narrow the income gap.

Soaring prices for housing, education and medical care have also driven many taxpayers to hope for more deductions to cover these expenditures. Unfortunately, the proposed tax adjustment has seemingly failed to take these factors into account.

Hence, though some public demands for higher deductions may be fiscally unviable at present, the underlying causes deserve thorough consideration by related government departments.

The ultimate goal of personal income tax reform should be the creation of a redistribution system that effectively promotes social equity. The adjustment of the deduction threshold is just the beginning.

(China Daily 09/28/2005 page4)