rate structure on wages and salaries. The structure has relatively wide income brackets, as well as a large personal allowance of RMB 42,000. The personal allowance is about twice the level of the average wage, implying that most workers are outside of the tax net (IMF, 2018). Relative to its regional comparators, China's marginal PIT rates are generally applied to lower income levels (Appendix Figure A1). However, the opposite is the case when comparing China to its high-income comparators, especially for the top tax rates. For instance, in China the marginal tax rate of 30 percent applies only to those with wages that are about 12 times the mean nominal wage. That threshold is much lower for several high-income countries where that level of marginal tax rate applies, on average, to workers with just 1.8 times the mean nominal wage.

**Table 2: Personal Income Tax (PIT) rates on wage/salary income, China 2018**

||**Taxable Income Range**<br>**(RMB per year)**||**Marginal Tax**<br>**Rate**|
|---|---|---|---|
|[|0 ,<br>18,000|]|3%|
|[|18,001 ,<br>54,000|]|10%|
|[|54,001 ,<br>108,000|]|20%|
|[|108,001 ,<br>420,000|]|25%|
|[|420,001 ,<br>660,000|]|30%|
|[|660,001 ,<br>960,000|]|35%|
||More than 960,000||45%|
|With s<br>of RM|tandard personal allowance<br>B 42,000|||

_Source_ : Detailed Rules for the Implementation of the Individual Income Tax Law <u>of the People's Republic of China, 2011</u> The **value-added tax (VAT)** is levied on goods or services at points at which value has been added, including during the processes of sale, service, and importation. This tax is the largest source of tax revenue in China, accounting for 50 percent of total tax revenue in 2018.<sup>6</sup> In addition to the VAT, China has a **consumption tax** that is imposed on the purchase of items such as fuel, tobacco, alcohol, cosmetics, fine jewelry and precious gems, firecrackers and firework, refined oil, auto tires, motorcycles, automobile, golf equipment, high-end watches, yachts, disposable wood chopsticks, hardwood floor, batteries, and coating materials.<sup>7</sup> Due to data limitations, we only include consumption tax of fuel, tobacco, and alcohol.

Contributions to **social security** vary depending on the program covered. The **employee’s system** (also known as _Urban worker scheme)_ requires employers to cover five insurance programs for their employees (pension insurance, medical insurance, work-related injury insurance, unemployment insurance, maternity insurance) plus the housing fund. The contributions to each program are made by both employers and employees. Contribution rates vary at the local level, but the degree of variation is relatively minimal. Table 3 shows the contribution rates for some of the

> 6 In recent years, there has been a series of reforms relevant to the VAT. Our measure of VAT includes the reform that replaced business tax with VAT. This reform was piloted in several industries and several provinces/municipalities since 2012 and fully implemented in 2016. Soon after that, in 2017, the four-rate VAT scheme (17%, 13%, 11% and 6%) was adjusted to a three-rate scheme (17%, 11% and 6%) to lower the VAT burden.

> 7 There has been a series of reforms relevant to this type of tax in recent years.  Some of the adjustments are aligned with reducing environmental and health impacts. For instance, battery and coating materials started to be subject to consumption tax in 2015 while environmentally friendly batteries were exempted. That same year the consumption tax levied on the wholesale process of cigarettes increased from 5% to 10%, plus 0.005 yuan/item. Other reforms took place soon after. Starting in 2016, regular cosmetic products were exempted from consumption tax and the rate for high-end cosmetic products was reduced from 30% to 15%. Also, an additional 10% of consumption tax was levied on the retail prices of ultra-luxury automobiles.

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