[awsedr58479]

Disclosure: using a throwaway giving the sensitive nature of the topic

I've always found very curious to not hear more about taxes in China.

It is a mystery to probably no one who have spent a certain amount of time in China that a very few amount of people are actually paying taxes. There is a few regular patterns on how they achieve evasion, but in short it is a mix of large amount of cash/cash payments, and close to 0 actions on whatever personal bank transactions. The later has always amazed me. While some countries will start tracking each transfer > $1,000, Chinese banks will probably not even bother contacting you for a transaction of $10,000 (in RMB, foreign currencies being quite regulated) or even probably more. And yes, you can buy a car or a house with this money, in Cash. No question asked. There are also some easy ways to use some complex/criminal networks of money laundering in order to get the RMBs out of China through shell companies often in tax heavens.

We all know that China's CCP is gathering a very consequent amount of data about virtually everyone entering the territory (or more). But they seem to struggle at implementing actions.

This would explain the government's efforts to reduce the amount of cash circulating in the country, and encouraging (via strong investments) mobile payments (wechat/alipay). This would also explain the very short upcoming of the "social credit score" and I've found astonishing that no one every mentioned taxes on that matter.

Now, open list of [somewhat naive and genuine] questions: - Where does the government's money comes from? [it appears to me to be mostly inflation, on an underlying crazy monster bubble] - Can a government subsist with a population not paying taxes? [apparently not, i.e social credit score] - How will the people react when they will realize they have to give away XX% of their pay when they never gave any $$? - [last but not least] Is that somewhat comparable to, say, the US [or other western countries] few generations earlier? If yes, are we paying the bill for these generations? If yes, should we start worrying? [Are taxes going to keep raising indefinitely along with debt?]

I'm sorry for a not so organized answer but I wanted to express a few comments about things I've seen myself. The [] answers of the questions are personal guesses/notes and I would love to hear more accurate answers from people with better knowledge on the topic.

[adinobro]

I'm living in China at the moment. Feel free to ask any questions.

Here are some points that you might find interesting:

1. There is an income tax but there is no income tax return. If you pay too much you don't get anything back. You can pay a fine if you don't pay enough. This means you have to work with finance and do lots of paperwork to reduce your taxable income. Not always worth the effort.

2. You can choose to pay sales tax or not. It is optional. Generally, individuals don't pay sales tax while companies do. Companies have to prove that they spent money and they do this by collecting "tax receipts". Some companies give everyone a tax receipt. Some companies only give it on request. The machine that makes the tax receipt takes money from the company in real time and transfers it to the government. This cannot be faked BUT they can be traded ... sometimes. VAT/Sales tax is also different for different industries (I think food is about 5% while electronics is more)

Basically, individuals have more freedom than many western countries BUT companies have a lot more restrictions. It is a very clever system that "mostly" works.

[Buge]

If you can choose whether or not to pay sales tax, why would anyone ever choose to?

[larrysalibra]

VAT is different than sales tax.

Sales tax is charged on the sales price while VAT is charged on every step of the production process.

VAT is very hard to avoid. All of the inputs to your business have to have VAT charged on them - if your business didn't pay VAT on your business expenses in China, you can't deduct them as expenses, which increases the business tax you pay.

Several years ago, when I still had a business in China, you'd actually have to paste physical tax invoices into a paper book and submit it with your accounts to the relevant taxation authorities.

Chinese consumers pay very high taxes on consumption both because of the VAT system which is essentially invisible and hard to avoid and because of very high import taxes.

It was always interesting that they think they don't pay much tax but are also obsessed with buying things overseas where the prices are usually cheaper.

As other posters have noted, payroll taxes are an income tax. Places like the USA split payroll taxes 50-50 between the employer and the employee. In China, payroll taxes - called "social insurance" - are skewed towards the employer. It's been 5 or 6 years since I've employed people in Mainland China, but if I recall correctly, the company "contribution" to social insurance was on the order of 21% while employees only had around ~6% of their paycheck withheld to cover their portion of the tax.

From the business's perspective, all of these taxes are part of the employee's pay. If an employee asked to be paid 10000, she might only take home 8000 after social insurance and income tax withholding while she'd cost the company 12000. In reality she was being paid 12000 and the government was taking away 4000 of her money each month. (Rough numbers)

It was common earlier in the decade to have potential hires ask for a certain salary after tax and then expect the company to pick up the extra. This was because many businesses at the time would pay cash under the table to avoid these tax expenses.

If you're interested in learning more about tax invoices in China, you can check out a post I wrote about them ~10 years ago: https://www.larrysalibra.com/10-things-you-didnt-know-about-...

[rtpg]

No sales tax => no receipt

I went to a restaurant and they offered us a drink at the end of the meal in exchange for no asking of receipts

[jacquesm]

That goes a lot further: no receipt: no taxes at all, not just no sales tax.

[zhte415]

Because the poster is presenting in perhaps a difficult way to understand. Listed prices are inclusive of VAT/sales tax, there's a single price listed. Companies can reclaim VAT/sales tax from the tax office on presentation of valid receipts. Depending on product, sales taxes vary from 4% to 1Xs%. Pretty similar to how reclaiming VAT works in the EU.

Individuals could, for example, request a discount from a restaurant for not requesting a tax receipt (discount being in the form of some free Sprites or other small token). Smaller places might accommodate this, larger ones would not.

[adinobro]

If it is a business expenses then to get reimbursed from work you need a tax invoice. For personal sales you don't need one and generally don't bother getting one.

[jopsen]

> 2. You can choose to pay sales tax or not. It is optional.

Is it optional by law? or is it just that many sellers opt to not collect sales tax if you don't ask for a receipt?

> Basically, individuals have more freedom than many western countries BUT companies have a lot more restrictions. It is a very clever system that "mostly" works.

More freedom how?

[simonh]

>More freedom how?

From what I've seen (I have family over there), it's much less restrictive in most ways in terms of regulation and licensing. It is a very regulated society in some ways, but a wild west caveat emptor laisez faire anarchy in others. Also what regulation there is can often be circumvented by the right payments to the right people, which is a form of freedom if you squint at it right.

There's also little in the way of consumer rights. Of course if the anarchy gets too disruptive, in go the police and it gets bad for everybody. It's Big Stick regulation. The only stick they have is a big one, so they tend not to use it often, but when they do....

Take the baby powder doped with Melamine. There is no real enforcement of quality controls, but when the scandal went public and there was a huge scandal they tried and executed - actual shot in the head killed - some executives. A few months later it transpired that the confiscated baby milk powder had 'dissapeared' and was back on the market. By that time the public outcry had died down though.

[dullgiulio]

Having to bribe people to avoid rules is not freedom, however you look at it.

[simonh]

I agree completely, but many over there don't have the same expectations. As a naive participant, how do you distinguish between freedom and toleration? As a practical matter large swathes of their economy are based on that implicit model. In fact selective application of the rules is one way they stack the deck against foreign competitors operating within the country.

[coldtea]

It's just not a state approved freedom automatically given to everyone, but it's a freedom nonetheless. You get to do X which elsewhere it's impossible.

[adinobro]

You often don't have to bribe people. Just talk and explain the situation.

Laws are often strict but loosely enforced unless it is a priority.

[adinobro]

Optional by law. You often have to go out of your way to get the tax invoice. It is mainly for business rather than individuals.

As for freedom there are fewer regulations on individuals. It isn't really possible to understand until you experience it. Oppressed in some ways. More free in others.

[ovi256]

>individuals don't pay sales tax while companies do

This is the reverse of how VAT is supposed to work. End-users pay the VAT - companies can be end-users, but usually aren't, whereas individuals always are.

[adinobro]

Basically it is cheaper for the government to enforce and needs fewer people to oversee.

Also it doesn't apply to small companies only large companies.

[losvedir]

> There is an income tax but there is no income tax return.

The "tax return" is the form you fill out that computes your taxes. The "tax refund" is the money you get back if you had overpayed. Do you really mean there's no tax return? If so, how is that calculated and how is the money taken? In the US something like 80% of tax returns could be calculated by the government on behalf of the tax payer, but for whatever reason that hasn't been implemented. Is it something like that?

[pc86]

> In the US something like 80% of tax returns could be calculated by the government on behalf of the tax payer, but for whatever reason that hasn't been implemented.

The reason is that the USG doesn't have a prior knowledge of material facts that may change your return, most notably deductions and charitable donations (especially small monetary donations, in-kind contributions, used goods such as clothing, etc). You're probably right that a vast majority of returns could be accurately calculated on January 1 because they don't have a 10K, Schedules A or C, but they don't know which returns fall into that category.

Simplification of the tax code could go a long way toward increasing that percentage but I'm not sure it could ever be enough to have the government simply tabulate a bill or refund for every citizen.

[count]

The reason is that the income tax prep industry has lobbied intensely to avoid a 'if you don't file, well just use your defaults on a 1040 that we would charge you with anyways' as your filing.

For most 40-hr/wk, full time employees with one job, they should net a '0' refund, and the return should be automatically completed based on their employers weekly/quarterly filing of payroll tax records.

[pc86]

> For most 40-hr/wk, full time employees with one job, they should net a '0' refund, and the return should be automatically completed based on their employers weekly/quarterly filing of payroll tax records.

Only with eliminating the distinction between the standard and itemized deductions, and only for employees who work no overtime and earn no bonus. Who also don't have any post-tax activities that affect their tax liability (IRA contributions outside of an employer-sponsored 401(k), charitable contributions, 529 plan contributions). Who also don't have any out-of-pocket healthcare expenses beyond that threshold.

[count]

Most 40-hr/wk full time employees don't make overtime. And bonuses are usually/always taxed. And with the recent change in things, the threshold at which itemization becomes worth while has become significant.

Most. Not all. None of your exceptions changes things. The IRS should assume a net-0 based on tax records, and if the person wants to do something else, they're free to file a return.

[seanmcdirmid]

Many countries don’t require foreigners to fill out tax returns. China doesn’t have a tax return per say, but there is a complicated self reporting income process that you just do yearly. How extra income would be reported I have no idea, it was all in Chinese and I filled it out via work given PowerPoint instructions.

[oh-kumudo]

I don't think I can directly answer your questions, but few facts:

1. Chinese enterprises have really high taxes.

2. China has VAT, which is 16%, quite significant.

3. Chinese consumption tax directly factored into the end product price, everyone is paying taxes everyday, they just don't feel it.

[continuations]

The Chinese government also has other sources of income:

1. Land sales. This is a major one especially in big cities

2. State-owned enterprises. These are immensely profitable because they are often oligopolies. Imagine the US government owning Goldman Sachs, Morgan Stanley, AIG, Citigroup, Bank of America, JPMorgan Chase, Wells Fargo, Fidelity, AT&T, Verizon, Comcast, T-Mobile, Exxon Mobile, Chevron, ConocoPhillips, Philip Morris, etc etc

[oh-kumudo]

There is also a big distinction as regards to which tax goes to central government which goes to local(provincial) government. I believe the land sales mainly goes to the latter, while VAT is split between those two.

[seanmcdirmid]

Not all SOEs are profitable, especially those typically owned by local governments. Some of them only survive through continuous loans. Anyways, SOEs that are profitable try to keep as much of their profits as they can through various games.

[chvid]

Exactly.

People forget that high levels of income tax in the western world is actually a fairly new thing.

Denmark for example introduces income tax withheld by the employer in 1970 (kildeskat).

Before that the situation looked much more like China today. And the size of the Danish public sector was much smaller.

[arghwhat]

Important elaboration: kildeskat ("source tax") changed when and how the income tax was collected, from being something done privately and retrospectively for the previous year, to being something your employer takes care of before paying you, thus increasing collection efficiency. It also significantly simplified calculation.

It did not introduce the concept nor change the size of income tax, which some might interpret the comment as stating.

[benj111]

Britain introduced an income tax in 1842 I believe. It was supposed to be temporary.

[cmdkeen]

1799 originally, as a temporary tax to help pay for the Napoleonic Wars.

[benj111]

Yes but that time it actually was introduced temporarily. The date I gave was when it was introduced permanently.

[arghwhat]

Nothing is more permanent than a temporary solution.

[dsfyu404ed]

I hope at some point people smarten up and realize that "temporary" government revenue streams are never really temporary.

[xmly]

Finally, someone knows the history and common sense.

The income tax history is really short. Even in US, the income tax was not significant until recent 50-70years. https://en.wikipedia.org/wiki/File:Federal,_State,_and_Local...

The China economy is behind US probably 20-30 years. Its GDP is large because its population is huge.

Why the Economist publishes this kind of low-level article?

[mijamo]

Based on your graph the income tax became significant in 1943, which was 75 years ago. It was significant in France 30 years before that and in Germany and the UK 100 years before that.

This is actually pretty old and much earlier in development than what China is at right now.

[awsedr58479]

1- and this is precisely my point. If they start enforcing it, it would kill the smaller businesses in the current situation - and probably put thousands (millions?) of people in the street.

[oh-kumudo]

China is an interesting case. Where they are not enforcing it in a strict sense, but at the same time they are not completely leaving the regulation on the book. So the end result is a system that selectively enforcing its own regulations. In short, everyone is violating the regulations in some sense, but if the government doesn't come to your door, you are probably fine. But they would start campaigns now and then to check upon on you, and once they do, and you are not prepared, you probably will end up in trouble.

I too wonder how well such system works, but I guess China is in high growth mode for many many years, and we all know that growth can cover up problems. Once it slows down, it might be the beginning where things start to get interesting.

[seanmcdirmid]

This is also known as rule by law, where laws are selectively enforced to rule the people, vs rule of law, where the goal is to enforce laws uniformly to protect the people.

[jacquesm]

One reason for sloppy tracking and sloppy enforcement is usually that the powers that be use those very same routes to get their own money out of the country. It's pretty rare for a corrupt official to keep their own money in a bank account in their own name in their own country. So it makes good sense that such routes exist.

[echevil]

> Where does the government's money comes from

Looks like many people are interested in this. Combining some information from Chinese websites, the main sources of Chinese government includes the following:

- Tax income: The top categories of tax income are value-added tax and business tax.

- Operation income of state-owned companies.

- Income from state-owned properties. e.g. A chunk of income of local governments come from selling lands to real estate companies.

- Government debt.

These may not be super accurate, but just to give an idea.

[cm2187]

> How will the people react when they will realize they have to give away XX% of their pay when they never gave any $$?

The birth of a Chinese Republican party...

[pjc50]

Good luck with that in a one-party state.

[z3t4]

Interesting idea to use inflation for tax means. China however doesn't appear to have much inflation compared to other countries.

[_kxbd]

If this is the case, why wouldn't the state be in favor of strict AML regulations? Aren't they very afraid of Uighur terrorism? I'm not sure about the real risk of funding separatism, but I'd be surprised about the perceived risk not being realized by the state.

[awsedr58479]

I have a few guesses here. Firstly because the CCP is quite old Mao-style structure, old and bureaucratic. Lots of "regulations", little actions.

Other guesses like it's being setup, they're trying to avoid mass reactions from people, etc.

Just as a note, I'm quite sure Uyghurs have their bank account heavily tracked and wouldn't go away with transactions the same way Han Chinese would.

[onetimemanytime]

>>If this is the case, why wouldn't the state be in favor of strict AML regulations? Because their families might get caught in the billion dollars corruption schemes. And as others said, it may choke growth. USA wasn't always this strict with ML.

>>Aren't they very afraid of Uighur terrorism? No doubt that they are under heavy scrutiny.

Aren't they very afraid of Uighur terrorism?

[onetimemanytime]

They are and they aren't. Everything is monitored and probably xx% of Uighurs rats on their neighbors. It has happened before in Communist /East European countries. Brother against brother, neighbor against neighbor, son against father...