Stimulus from the US tax cuts passed last November is expected to boost economic growth by about three-quarters of a percentage point in 2018 and 2019, the Federal Reserve said in May, which is why the S&P 500 index finished just 3.8% below its record high on Tuesday, despite rising trade tensions with China.
Now Beijing is looking at similar reforms. It is considering the first major change to the country’s income-tax system in seven years. It plans to lift the tax-free threshold on personal income from 3,500 yuan ($540) a month to 5,000 yuan a month. It will permit deductions on top of that for education, health care and housing costs, Xinhua reported on Tuesday.
It is a policy direction Beijing can well afford to move in. Unlike the US federal government, which raises about 80% of its taxes from individual earnings via income and payroll collections, Beijing is largely bankrolled by corporate and sales taxes.
Individual income taxes amounted to about 6.6% of the 900 billion yuan ($139 billion) collected in 2015, according to government figures.
Personal-income-tax revenues have been growing rapidly – 19% last year – providing ample room for cuts.