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China OKs sweeping tax reforms to tackle inequality

A family arrives at Beijing West Railway Station February 5, 2013. REUTERS/Jason Lee
A family arrives at Beijing West Railway Station February 5, 2013. REUTERS/Jason Lee

By Lucy Hornby and Xiaoyi Shao

BEIJING (Reuters) - China unveiled sweeping tax reforms on Tuesday to make wealthy state-owned firms, property speculators and the rich pay more to narrow a yawning gap between an urban elite and hundreds of millions of rural poor.

The plans approved by the State Council - China's cabinet - also included commitments to push forward market-oriented interest rate reforms to give savers a better return and more security.

Chief among the reforms is a requirement to raise the percentage of profits contributed by state-owned firms to the government by about 5 percentage points by 2015.

Together with measures to raise wages and improve households' return on assets, the reforms signal an attempt to shift economic growth towards increased consumption and away from the current reliance on investment spending.

"The State Council is not just talking about the gap between rich and poor, they're talking about the whole economy and how income is distributed among various actors - the households, the corporations and the government," said Andrew Batson, research director of GK Dragonomics, an economic consultancy in Beijing.

"It's about changing the entire flow of income around the national economy."

One key change will make interest rates more flexible. Interest rates on savings deposits have lagged inflation for many years, depressing returns for households and pushing those who can afford it to more speculative investments.

"Push forward market-oriented interest rate reform, appropriately expand the floating range for interest rates on deposits and loans and protect depositors' interests," the announcement said.

It also called for "building a long-term mechanism" to boost rural incomes, and reiterated previous pledges to raise incomes, particularly for the poor.

Citizens would see more opportunities to earn money from assets, including increasing fund products, and expanding income from rents, dividends and bonuses.

And rural migrants will get more opportunity to transfer their official residency to cities, where wages and social services are better.

PRESSURE ON STATE-OWNED FIRMS

Trimming the power enjoyed by state-owned firms was top of the list of structural reforms submitted by think-tanks ahead of the November change of leadership in the ruling Communist Party.

State-owned firms generally transfer only a small portion of their profits to the state, but have come under increasing pressure from reformists who believe they benefit from too much support which the private sector does not share.

These profits are seen as a potential source of funding as China builds pension, health insurance and other systems to create a social safety net for its citizens.

Raising the dividend payout from state-owned enterprises will also go some way to curbing criticism from China's trading partners that Beijing unfairly supports its state-backed firms by giving them numerous tax breaks and access to cheap capital.

"For state-owned companies in some industries with overly high income, we will strictly implement the two-tier controls on firms' total salary and wage level to gradually reduce the salary gap between different industries," said the circular.

The announcement also took on powerful state-backed monopolies, calling for "enhanced supervision" to avoid improper access to public resources at low or no cost. Oil companies and others have long resisted attempts to increase the amount they pay the state for natural resources.

REINING IN THE RICH

Decades of economic reform have made some very rich and brought prosperity to an urban middle class. But many, particularly in the countryside, have been left behind.

Efforts to build a progressive individual income tax system have been stymied by undeclared sources of wealth, while pilot plans to introduce a property tax have been wildly unpopular.

The National Bureau of Statistics this month released an updated estimate that the country's Gini coefficient, a measure of income disparity, had reached 0.474 - well above the 0.40 level considered a trigger for social discontent.

"The urban-rural gap and the difference in citizens' income is relatively large, income is irregularly distributed, there are obvious problems of grey income and illegal income, and some of the masses live in difficult conditions," the circular said.

Tax reforms included expanding a pilot property tax to more cities, adjusting a property transaction tax, levying a number of luxury taxes and "studying" an inheritance tax to be introduced "at an appropriate time".

(Reporting By Xiaoyi Shao and Lucy Hornby; Editing by Nick Edwards and Stephen Nisbet)

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