China should raise its general tax levels to finance its expanding welfare and public expenditure, according to a Nobel laureate.

James Mirrlees, who won the Nobel Prize for economics in 1996, also said China still has room for further growth.

The increasing need for more spending in areas such as social security, healthcare and education "will mean that much more tax revenue has to be raised," said Mirrlees, who is famous for his theory on optimal taxation, in an interview with China Daily.

The Cambridge University professor was in Beijing to attend a recent conference on China's public finance organized by Peking University's School of Economics.

China's taxes are currently equivalent to 25 per cent of its gross domestic product, and that is not necessarily high, Mirrlees said.

He said he is in favour of cash subsidies for low-income earners in addition to other government-funded public spending in areas such as education and healthcare.

But management must be strict if cash subsidies are involved as the potential for corruption increases, Mirrlees said.

He also said that China should raise its threshold for personal income tax, which last year was raised to 1,600 yuan (US$200) from 1,200 yuan (US$150), and impose higher income tax on middle-income earners.

"The exemption level is quite low. That should be higher," Mirrlees said.

China now has progressive rates for personal income tax, ranging from 5 per cent to 45 per cent as taxpayers' income grows.

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