China should cut the extra high tax rate levied on labor income as it tries to engineers a soft landing, the World Bank suggested in a recent report.

The average tax rate for Chinese labors stood at 45 percent in 2008, higher than the average level in other OECD members and even beating those in higher-income counties including 15 EU members, and Australia and the United States, according to the China Quarterly Update, released on Thursday.

The income-to-GDP ratio for Chinese residents was 48 percent in 2008, which was “extra low” according to Ardo Hansson, the bank's lead economist for China, the 21st Economic Herald reported.

The figure fell to 47 percent from 59 percent in the 1995-2006 period while most of the OECD’s 34 member states saw the ratio above 60 percent during 1978 to 2008, some even at more than 90 percent, a report compiled by Renmin University showed.

The so-called average tax rate on labor income is the gap between the labor costs paid by employers and employees’ tax-deduction income.

Unlike western countries, the rate surged in recent years in China, from 2000’s 26.9 percent to 45.3 percent in 2008, according to a research by Zhao Liping, an expert in Guagndong Business College.

A faster growth in social pension funds and tax revenues than that of labor payment could partly explain the rise of the tax, and “the hike in social security fund has been the major driver,” said Zhao.

China should cut the rate substantially, World Bank recommended in the report. It also suggested Beijing reduce the base of payments to social security funds, including reserved funds for home purchasing and renting, unemployment and endowment insurances, while introducing new taxes such as property tax.

Source:caijing