Opinion
Balancing wealth distribution
By Zhang Monan (China Daily)
Updated: 2011-04-25 13:28
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Property tax urgently needed to bridge the widening gap between the haves and have-nots and improve social services
The State Council's planned increase of the individual income tax threshold from the current 2,000 yuan ($306) a month to 3,000 yuan symbolizes an important step toward narrowing the gap between the rich and the poor and resolving the country's income distribution disparity.
However, a property tax, a tax aimed at taxing people's accumulated wealth, is more desperately needed to reverse the country's wealth distribution momentum.
By the end of 2009, the number of families with more than $1 million had reached 670,000, ranking the country third in the world for millionaires, only the United States and Japan had more. However, wealthy families in China only account for 0.2 percent of the country's total number of households, a proportion that is far lower than that in other countries. For instance, the proportion is 4.1 percent of households in the US and 8.4 percent in Switzerland.
A recent survey jointly conducted by China's Merchant Bank and Bain & Company, a global management consulting firm, indicates that in 2010, 500,000 Chinese people were able to make an investment of 100 million yuan or above, and they held combined investment-capable assets of 15 trillion yuan. The survey also shows that China's wealth flow to wealthy people is accelerating at an annual growth rate of 12.3 percent, twice the world's average.
Accelerating wealth distribution imbalances will cause more damage to society than disparities in personal income distribution. Not only will it further widen the wealth-accumulation gap between different groups in society it will also pass such wealth imbalances on to the next generation.
According to a survey conducted by the Boston Consulting Group, the number of people with personal property worth more than $1 million increased 14 percent globally in 2009. It increased 31 percent in China, the fourth highest growth rate in the world. The large volumes of financial assets owned by wealthy people in China will unavoidably widen the wealth gap between the rich and the poor.
To effectively avert the intensified Matthew Effect in social wealth distribution, where the rich get richer and the poor get poorer, China should launch comprehensive institutional reforms.
Undoubtedly, the increased individual income tax threshold is an important step toward reforming the country's taxation system, which is meant to regulate the wealth gap and promote a reasonable distribution of social resources. However, regulation of personal income distribution alone is not enough. What the country should do more urgently is improve its property reporting system and levy taxes on all kinds of properties of a person, including his or her real estate, capital earnings, inherited property, and donations.
In developed countries, a set of well-developed property taxes has been established as a major means to correct and regulate wealth distribution imbalances. Statistics show that in the US, Britain and Canada, property taxes account for more than 9 percent of their fiscal revenues. The proportion is 5 to 7 percent in Japan, New Zealand and Australia. Even within the Organization for Economic Co-operation and Development (OECD) members, property tax accounts for 3.1 percent of fiscal revenues. In China, however, the proportion is much lower, meaning the tax fails to play its due role in regulating social wealth distribution.
In many developed countries, property taxes are mostly used to develop the social security system. For example, the lion's shares of property taxes in the US are used for education.
China should also optimize its taxation management system and moderately shift its taxation power from the central government to lower-level governments to extricate some local governments from their excessive dependence on "land-based" revenue policy. Statistics show that China's local governments earned a total of 2.7 trillion yuan from selling land in 2010, an increase of 69.4 percent on 2009. The income from land sales accounted for 71 percent of local governments' fiscal revenues, 22.2 percentage points higher than the previous year.
To free local governments from their land-dependent revenue, the current fiscal policy that is excessively tilted to the central government should be changed, a move that would help local governments assume more responsibility for offering public services.
China should try to set up a taxation system based on the accurate evaluation of the value of people's properties as soon as possible. This will not only help China ease its ever-widening gap in wealth distribution, but will also help gradually establish fair and highly-efficient central and local fiscal systems.
The author is an economics analyst with the State Information Center.
(China Daily 04/25/2011 page8)
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