I read many articles saying that there is a higher individual income tax rate in China than in the U.S. Having worked in both countries and being familiar with both tax systems, I can say that the statement is mostly true but misleading. A Higher income tax rate does not necessarily equate to a higher income tax. I will explain the reasons and show you some numbers in this post.
First of all, let’s make a comparison in Table 1 below. Both countries use progressive tax system and have seven tax brackets. Please be aware of that the income tax on salaries and wages in China is calculated and paid based on monthly taxable income whereas the U.S. income tax is based on annual taxable income. The exchange rate between USD and CNY is about 6.6 ($1 = ￥6.6) as of 11/26/2017.
Table 1: 2017 Individual Income Tax Table Comparison between China and the U.S.- Single
It is clear from the tax tables that the individual income tax rate in China is higher than the federal tax rates in the U.S in most of the tax brackets.
However, apart from the tax rate, taxable income is the other component of tax calculation. Taxable income is calculated by deducting certain allowable deductions and exemptions from the gross income. One of the significant differences is that social security/insurance taxes can be deducted from the gross income when calculating taxable income in China but not in the U.S. Let’s look at the difference in numbers below. To keep the comparison simple, I only included mandatory deductions and exemptions. Optional deductions in the U.S., such as retirement accounts contributions, are not included in any tables. Different cities in China have the same type of deductions, but the mandatory amount may vary.
Table 2: 2017 Taxable Income Comparison between China and the U.S.- Individual
Assumptions for Table 2, 3 and 4: 8% endowment insurance deduction, 2% medical insurance deduction, 12% housing provident fund deduction, and ￥3,500 monthly exemption in Beijing, China. $6,350 annual standard deduction and $4,050 annual personal exemption in the U.S. in 2017.
Unlike the tax rates, Table 2 shows that the taxable income in China is lower than the federal taxable income in the U.S. for an individual who earns a salary.
Well, how much income tax does the individual have to pay in Beijing, China and in California, USA respectively?
Table 3: 2017 Estimated Income Tax Comparison between China and the U.S. - Individual
From Table 3, it is clear that the estimated annual income tax in Beijing is almost the same as the combination of federal and California state income taxes. California is one of the states with the highest state income tax rate in the U.S. Seven states currently don’t have state income tax.
We gave an example of an individual earlier. You may wonder if it is going to be different for a married couple. Please check out the table 4 below. I assume the couple earns the same salary.
Table 4: 2017 Estimated Income Tax Comparison between China and the U.S. - Married Couple
From Table 4, you may find that the estimated annual income tax in Beijing is actually lower than the total income tax in the U.S. including both federal and state income tax. Why? It is because the individual income tax in China is calculated separately for each person. But under the U.S. tax system, the couple filing joint return is required to combine their taxable income to calculate the tax.
Lastly, let’s get some basic understanding of the differences in tax filing responsibilities between China and the U.S. In China, as an employee, the income taxes are deducted from your monthly paycheck by your employer automatically. You don’t have to worry about it or file anything to the government unless you make over ￥120,000 a year, receive salaries from two or more employers, or earn money from foreign countries. Only if you meet the exceptions including but not limited to the three most common one mentioned above, then you have to file income tax returns to the government directly even you don’t owe any income taxes. In contrast, even though employers are also required to withhold income taxes from your paychecks in the U.S., the withholding amount is just an estimate rather than the actual taxes you owe to the government. You still have to file both federal and state income tax returns every year to figure out whether the withholding amount can fulfill your income tax liability. The burden of figuring out the income tax is definitely higher in the U.S. However, it also creates a lot of opportunities and flexibility at the same time. Unlike in China, there are so many tax planning strategies you could take advantage of to lower your income taxes in the U.S. You could either take time to learn it by yourself or just pay for professional help.
After all these comparisons, it is probably more accurate to say that there is a higher individual income tax rate in China than in the U.S at the federal level. But it doesn't indicate that the individual income tax in China is necessarily higher than that in the U.S.
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