How to levy a fair tax on luxuries?
By Pan Helin
China.org.cn, February 22, 2015
The huge imbalance in luxury consumption between overseas and domestic purchase in 2014 should inspire China to lower its tax on luxury goods to a reasonable level.
According to the China Luxury Report 2014 published recently by the Fortune Character Institute, China's consumers bought 76 percent of their luxury purchases overseas and this outflow of luxury consumption is becoming very serious. One reason is surely that, in the domestic market, the number of counterfeit goods is six times higher than authentic ones.
This raises an important question: How should we levy tax on luxuries?
As reform of the consumption tax keeps progressing, there are differing opinions on the desirability of imposing a higher or lower tax on luxuries. Those supporting a tax increase think it only right for the rich to pay more for their consumptions of luxury items to boost the nation's fiscal income, which can also be a subsidy for the less fortunate in society. This move will achieve more fairness in taxation. The opposing view is that restraining luxury consumption can hardly help to promote more reasonable consumption and narrowing the gap between the rich and poor.
I think the fact that 76 percent of total consumption involving overseas purchase, which means an outflow of US$81 billion is an important reminder: If you want to raise taxes merely to increase fiscal revenue this may eventually affect economic vitality; Thus, China needs to lower the luxury tax to a more reasonable level.
This is becoming a matter of some urgency. A high tax will limit the increase of domestic consumption. The outflow of consumption will cause other various additive bonuses to flow out, which will not be good for boosting economic development. Research has shown that the overseas prices of luxuries are far lower than those prevailing on the domestic market, naturally encouraging overseas consumption.
This year, there has been a widespread lowering of expectations for a GDP increase, due to adaptation to the national economy's "new normal;" however, weak consumption is a very important factor. Luxury consumption is part of China's domestic consumption; the huge outflow every year will be very bad for GDP growth. According to the tax efficiency principle, the government's tax levy, including the tax system, policies and management, all should follow the efficiency principle. This means the tax levy should be in favor of improving economic efficiency or, at least, have only a minimum bad influence.
The luxury tax has space for adjustment. Statistics show the prices of luxury goods on the Chinese mainland are far higher than overseas, as previously mentioned. The exorbitant tax levy is the major reason for the price differences. In China, luxuries are high-end imported goods, which should pay 6.5-18 percent import duty, 30 percent consumer tax, and 17 percent value-added tax. If we include shipping costs and insurance, a product that eventually costs 10,000 yuan will have attracted 8,800 yuan in various duties and taxes during the import procedure.
A reasonable tax rate may solve the huge price difference between domestic and overseas markets, which will prevent the outflow of funds to some extent. But it doesn't mean everything will be okay ever after. The government still needs to maintain luxury market order, and crack down on fake and counterfeit products.
Some countries also have tax free policies to encourage foreign consumers, and clearly the domestic luxury market cannot go that far. So, when the foreign luxuries go through customs, we should certainly levy some additional duties on them. The custom authorities should strengthen their enforcement; otherwise, for domestic clients, it is not fair.
The writer is a postdoctoral fellow at Research Institute for Fiscal Science, Ministry of Finance.
I think Germany has high social welfare, but China not yet ... so inside tax still less (might increase in the future).
