A cut in income tax is, of course, a good new year's gift for Chinese income earners, especially after they have increasingly felt the pinch of rising prices.

But it is no replacement for a complete overhaul of the country's individual income tax system which is long overdue.

A draft amendment submitted on Sunday to China's top legislature for deliberation suggested raising the country's monthly individual income tax levy threshold from 1,600 yuan ($218) to 2,000 yuan.

Its approval will free 70 percent of income earners from paying income tax. The current threshold of 1,600 yuan only exempts 50 percent of tax payers.

Such an effort to ease the burden on income tax payers is badly needed now as accelerated inflation has considerably driven up and will continue to raise living costs.

China's inflation has hovered above 6 percent for four consecutive months and is showing no sign of deceleration. Figures from the Ministry of Finance indicate that the basic monthly living cost of an average urban salary earner will reach 1,586 yuan and will likely rise to 1,745 yuan next year.

While increasing living costs has made it necessary to cut income tax, it is the country's swelling national coffer that has definitely made it possible for such a quick adjustment to happen. The country is set to collect 5.1 trillion yuan in tax revenues this year, up by more than 1 trillion yuan over the previous year.

China has left the personal income tax deduction criterion at 800 yuan unchanged for more than two decades but last year China doubled it and now plans to increase the threshold to 2000 yuan.

The authorities' prompt action to relieve the economic burden of tax payers, especially those medium and low income earners, marks a welcome step forward to improve the efficiency in the use of taxes to serve the people.

However, while applauding such improvement, we should realize that these adjustments are just tinkering at the edges of a taxation system that needs to be significantly updated.

Instead of fine-tuning the personal income tax threshold, it is far more important and urgent to take all the necessary expenditure of a family, not merely a tax-payer, into consideration when determining the tax rate and deduction.

If it is to play a bigger role in helping narrow the country's wealth gap and build a harmonious society, the personal income taxation system should be further reformed to more effectively tax the rich while exempting the poor.

(China Daily December 25, 2007)