Fairer cake-sharing

Relationship among the three major modes of wealth distribution should be balanced

With institutional issues such as regional coordination, urban and rural planning and the sectoral balance effectively resolved, wealth distribution has become the focus for promoting common prosperity. There are three aspects to this: the primary distribution emphasizes efficiency with the consideration of fairness; redistribution promotes fairness along with efficiency; and the third distribution is based on voluntary and moral considerations. Primary distribution is the basis, redistribution is the key, and the third is supplementary.

In the primary stage of socialism, wealth distribution according to labor is dominant, but that co-exists with a variety of other modes of wealth distribution. For farmers, their incomes come not only from farming, but also from the transfer of land. In addition, farmers can enjoy the right to earn money from their properties, such as homesteads and contracted farmlands. They should be allowed to obtain loans by mortgaging their lands, and thus be able to have capital revenues, which will increase their incomes. The income distribution as a result of land transfer is part of the primary distribution. The conclusion is that the primary distribution should not only be based on labor, but also on multiple distribution modes of elements.

One typical problem is how to use the capital market to optimize primary distribution. China could learn from developed countries in this regard. For instance, in the stock market of the United States, about 63 percent of the market value is owned by institutional investors, and various mutual funds account for about one-third of the value. As a major capital source of the mutual funds, pensions which make up 30 percent of the $30 trillion in market value, coupled with the 40 percent of market value owned by strategic investors, have formed a capital market dominated by long-term and institutional investors and supplemented by short-term and individual investors.

Such a capital market allows ordinary workers to enjoy the benefits of growth in market value. China should allow a larger share of its social security fund to be invested in the capital market, which will enlarge the capital market while bringing ordinary people more benefits from the growth of the stock market. In addition to pension and social security funds, housing provident funds and enterprise annuities (supplementary pensions) should also be invested in the capital market on a larger scale to seek long-term higher returns.

While the primary distribution is mainly market-oriented, according to the laws of the country and the market mechanism, redistribution is led by the government, and aims to promote fairness. Redistribution comprises taxation, the social security system and transfer payments.

It is necessary to give favorable tax policies to small and micro-sized enterprises, which account for 80 percent of all market entities and provide employment to 70 percent of the labor force. In July 2018, China's Ministry of Finance and the State Taxation Administration rolled out a three-year tax reduction policy for small and micro-sized enterprises. For those with a taxable income of less than 1 million yuan ($156,900), only 50 percent of the corporate income needs to be taxed, at the rate of 20 percent. Such policies should be incorporated into law to stabilize the expectations of small and micro-sized enterprises.

Also, China has launched a pilot property tax in some areas, which is expected to be promoted nationwide. And the levying of an inheritance tax and a gift tax have also been proposed.

Third distribution refers to donations made on a voluntary basis. At present, many rich people who wish to give back to society find it inconvenient to make donations due to incomplete tax regulations and lack of supervision in the charity sector. The country should reform and improve the charity sector through tax reductions or exemptions to encourage more people to donate to philanthropic causes. Some improvements have been made in this respect.

According to the country's Corporate Income Tax Law, enterprises' expenditures on donations for public welfare purposes, if not exceeding 12 percent of their total annual profits, can be deducted from income before tax; and according to the Personal Income Tax Law, individuals' donations in areas such as education and poverty alleviation, if not exceeding 30 percent of their total taxable income, can be deducted from their income before tax. In addition, some charity donations that meet certain requirements can enjoy tax exemption, and the restrictions on recipients of donations have also been eased.

The introduction of these policies indicates that an increasingly transparent and law-based charity donation system is taking shape in China. If these policies on income tax deduction in third distribution are combined, it could not only make primary distribution more efficient, but also incentivize various market players, particularly the high-income groups and enterprises, to make more donations to charity, thus making more contributions to achieving common prosperity.

The author is chairman of the Academic Committee of the International Finance Forum and a distinguished professor of Fudan University. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn