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The interest levy on personal banking deposits was controversial when it was first imposed in 1999. Seven years later, opposing voices are still heard and are growing ever louder. However, an immediate move to annul the tax or to modify its design is unlikely. A more feasible scenario is to make it part of the growing reform of the personal tax system. Indeed, the levy has proved futile in stimulating consumption, which formed the primary goal for introducing the tax seven years ago. In 1999, the economy was troubled by weak domestic demand. Even though it is still weak now, the overall situation is better. All possible means, including the introduction of the tax, were enlisted to spur investment and to stimulate consumption. The tax was expected to discourage people from saving their money by encouraging spending. To the disappointment of the designers of the interest tax, between 1999 and 2005, growth rate in personal banking deposits kept surging, from 11.6 percent in 1999 to 18 percent last year. Meanwhile, the growth rate of domestic consumption hovered at a steady 10 percent. Chinese people are still saving much of their income because of the soaring cost of education and healthcare, and the lingering sense of uncertainty caused by the lack of a social safety net. In the countryside, stagnant income growth is also to blame for the lackluster growth in consumption. Until these issues are addressed, Chinese consumers will remain relatively thrifty. A tax could not change that by even a small margin. So, if judged by the initial goal of driving up consumption, the interest tax has certainly failed. To make matters worse, the tax was also accused of eating into the savings of low-income earners, thus contributing to the widening wealth gap. In light of this, some argue that if the tax is allowed to exist, a threshold must be set to target the tax only at the rich. These are all justified arguments for making a change. However, a proposed overhaul of the personal tax system will address taxpayers' various financial conditions and needs such as the expenses of family and education and make the relevant deductions from the taxed amount. Income in the form of interest on savings may form part of the taxed amount. A threshold for the taxed interest is also feasible in that frame. After all, imposing a levy on interest can be a reasonable practice provided the tax has the right target and design. Still, this history can serve as a lesson for policy-makers about the need to conduct sound analysis concerning the prospects of a new economic policy in meeting its required goals. (China Daily April 10, 2006) |
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