Direct action

A comprehensive taxation system needs to be built to narrow the income gap

Despite the fact that China realized the goal of building a moderately prosperous society in all respects in 2020, the country still has a wide income gap between the rich and the poor. In many Western countries, income redistribution mechanisms based mainly on direct taxes have been established to narrow the wealth gaps to some extent. In comparison, China's fiscal revenue remains heavily reliant on indirect taxation, which cannot effectively redistribute income to reduce the wealth gap.

China's current personal income tax is mainly levied on wages and the remuneration of middle-income residents, such as academics and other professionals. Salaried workers and middle-income people now shoulder the bulk of individual income tax, which is supposed to target high-income people. Moreover, individual income tax only accounts for about 6 percent of the country's total tax revenue, and there is still a long way to go for it to play its due role in income redistribution.

In many countries, property tax is usually collected to reduce the income gap. But in China, property tax accounts for a negligible share in the total tax revenue. To ameliorate the income redistribution mechanism, China needs to enlarge the proportion of property tax－including vehicle and vessel tax, real estate tax and urban land use tax－in the total tax revenue. Real estate tax, a type of property tax levied on owners of immovable property such as houses, is an important source of fiscal revenue, and plays a key role in adjusting income distribution and regulating the housing market. Currently, the collection of real estate tax is being piloted in two cities in China－Chongqing and Shanghai－and the tax applies to only newly purchased houses, thus having limited effect on the housing market.

Inheritance tax and gift tax target high-income people who obtain huge amounts of wealth without any personal effort. The introduction of the two types of tax can reduce the income gap resulting from accidental causes or the differences in family background, and thus encourage people to make money through hard work or innovations. China has not yet put on its agenda to levy inheritance tax and gift tax, though a plan to study the issue is being discussed. The collection of inheritance tax requires a mature property ownership system and a real-name property registration system, including the establishment of a property declaration and disclosure system for officials. Meanwhile, the levying of a gift tax should also be planned, and, accordingly, more efforts should be made to enhance the establishment of standardized regulations for the management of charity foundations.

The function of consumption tax in adjusting income distribution also needs improvement. In China, consumption tax targets some selected items of consumer goods. In recent years, the adjustment of consumption tax has been largely aimed at protecting the environment and curbing unreasonable consumption, but the tax's role in wealth redistribution is not given due attention. Some luxury goods are not yet covered by consumption tax. In the future, the coverage of consumption tax should expand to more goods and tax rates should be increased.

China should build a comprehensive taxation system－comprising a value-added tax, consumption tax, resource tax, environment tax, corporate income tax, individual income tax, real estate tax, inheritance tax and gift tax－to help reduce the income gap through a multi-pronged approach. The various types of tax should be complementary and coordinated in adjusting income distribution. In the taxation system, direct taxes should be responsible for adjusting wealth distribution while raising revenue for the government.

Direct taxes, levied on taxpayers according to their income levels, should be able to make richer people contribute more to government revenue, which is vital for adjusting income distribution and preventing the wealth polarization in society.

In trying to build a modern society, China must establish a modern taxation system in which direct taxes form an integral part. Meanwhile, the country needs to reform its local tax system in a phased manner for which the key is to draft a real estate tax law. The central government has postponed its plan to expand the experimental real estate tax program across the country to accumulate more experience to support legislation over the long term. In addition, the inheritance tax and gift tax should also be introduced. Despite the greater headwinds, China has reached consensus on pursuing common prosperity. Now it is urgent to crack the hard nuts and strive to achieve the largest consensus for the introduction of direct taxes through legislation to establish related institutional frameworks.

Since 2016, China has seen a wave of housing price hikes in major cities, including Beijing, Shanghai and Guangzhou. To cool down the housing market, authorities rolled out a host of control measures, mostly administrative approaches, which only temporarily checked the soaring housing prices but did not solve the underlying problem. Now China faces the challenge of reviving the sluggish housing market. In this context, the country should adjust its housing market regulation policies, and push for the legislation of real estate tax, which will help support the long-term healthy development of the housing sector. Once approved by the nation's legislature, a property tax could be first levied in cities under pressure to rein in their overheated housing markets, which will help prevent their real estate bubbles from bursting and foster a new source of tax revenues for the establishment of a local taxation system. By so doing, it will create favorable conditions for optimizing the tax revenue sharing system between the central and local governments and therefore promoting the reform of the fiscal relations between the central government and local governments.

The author is chief economist at the China Academy of New Supply-Side Economics. 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