China eases tax burden on poor with law change

BEIJING — China's legislature raised the threshold for paying income tax, effectively exempting tens of millions of workers in a new effort Thursday to defuse tensions over surging inflation and a yawning wealth gap.

The change comes on the eve of celebrations of the 90th anniversary of the founding of the ruling Communist Party, which faces public rancor over high prices and corruption and protests over minority and migrant worker rights.

The Standing Committee of China's legislature raised the minimum personal income required to pay taxes from 2,000 yuan ($300) a month to 3,500 yuan ($540).

That will reduce the number of taxpayers from 84 million, or 28 percent of workers covered by the law, to about 24 million, or just 7.7 percent, said a tax official, Wang Jianfan. The income tax law covers about 300 million urban workers but not most of China's hundreds of millions of farmers, who pay tax under a different system.

The change is meant to ease the tax burden on low-income workers, Wang said at a news conference. The official Xinhua News Agency said lawmakers also wanted to "adjust the distribution of income" — a reference to narrowing the gulf between China's elite who have benefited from economic reform and the poor majority.

"It is a serious attempt to maintain social stability and redress the problems of inflation," said Steve Tsang, director of the China Policy Institute at Britain's University of Nottingham.

Inflation jumped to a 34-month high of 5.5 percent in May, driven by a double-digit jump in food costs and some economists forecast a bigger jump for June.

High prices are dangerous for the authoritarian government because they erode economic gains that underpin the ruling party's claim to power. Food costs are especially sensitive because poor families in China spend up to half their incomes on food.

Communist leaders declared controlling inflation their priority this year but prices have continued to climb despite four interest rate hikes since October and curbs on lending and investment.

The government also has promised hefty increases in social spending to help narrow the gap between an elite who have profited from three decades of economic reform and China's poor majority.

Thursday's announcement highlights the extremes of wealth and poverty in a society that had 115 billionaires in Forbes magazine's 2011 list of the world's richest.

The figures cited by Wang would mean only 24 million workers earn more than 42,000 yuan ($6,500) a year, while millions of families get by on less despite rapid economic growth.

The investment bank UBS said this week that June inflation might rise as high as 6.5 percent after the cost of vegetables and pork jumped following floods that damaged crops in China's south and east.

"A steady improvement in living conditions is what people have been led to take for granted" as part of an unspoken "social contract" under which the communists remain in power, said Tsang.

"If you were earning enough to pay tax so you are not at the bottom of the pile but what you can really afford has been eroded in the last couple of years, then this could not have come soon enough," he said.

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AP researcher Yu Bing contributed.