(Yicai) July 23 -- The 20th Central Committee of the Communist Party of China has proposed to improve the country's personal income tax system through a series of new measures in the resolution it adopted at its third plenary session.

“The tax structure will be improved to make taxation systems more conducive to high-quality development, social fairness, and the building of a unified market,” according to the Resolution of the Central Committee of the Communist Party of China on Further Deepening Reform Comprehensively to Advance Chinese Modernization, a sweeping reform plan published on July 21.

China will “regulate policies on tax breaks and improve the support mechanisms for key sectors and links,” the sweeping policy document also said.

Unifying Tax Rates on Labor Income

“We will refine the system of direct taxes, improve the personal income tax system, which is based on both adjusted gross income and specific income types, regulate taxation policies on incomes generated from business operations, capital, and property, and unify tax rates for incomes earned through work,” it noted.

China introduced a comprehensive income tax system in 2019 that taxes four types of income earned through work: employment income, remunerations for labor services, royalties, and authorship remuneration. Business income, interest, dividends, profit distribution, rental income, income from the transfer of property, and incidental income are taxed based on other criteria.

Several experts told Yicai that the reference to “unify tax rates for incomes earned through work” means that business income should be included within the scope of the comprehensive income tax system. Business income has both labor and capital income characteristics, according to Shi Zhengwen, director of the Center for Research in Fiscal and Tax Law at the China University of Political Science and Law.

Whether it is suitable to include business income in the comprehensive income tax system still requires further discussion, but from the perspective of reform trends, expanding the scope of comprehensive income is inevitable, Shi noted.

In the long run, labor and capital income should be taxed equally to complete the comprehensive tax system and promote tax fairness, Luo Zhiheng, chief economist at Yuekai Securities, told Yicai.

The resolution also addressed improving the systems for supporting population development and providing related services.

Higher Tax Deductions for Having Children

“We will refine the policy system and incentive mechanisms for boosting the birth rate and strive to build a childbirth-friendly society,” the document also said.

“We will work to bring down the costs of childbirth, parenting, and education, refine parental leave policies, introduce a system of childbirth subsidies, improve basic public services for childbirth and pediatric medical care, and further raise the childcare-related deduction for personal income tax.”

The special addition of deductions for childcare and education could be converted into refundable additional tax credits to support families with more children, suggested Tian Zhiwei, deputy director of the Institute of Public Policy and Governance at Shanghai University of Finance and Economics.

Editor: Futura Costaglione