China Battles Wealth Gap

Chinese city dwellers may face new income and property taxes to curb income inequality.
By Michael Lelyveld
Wealth-Gap-305.gif A passerby talks to a homeless woman on a street in Beijing, July 15, 2010.

BOSTON—China's government is considering sweeping tax changes to narrow the gap between rich and poor.

Measures including new income taxes have been recommended for the next Five-Year Plan in 2011 to deal with rising pressures from economic inequality, state media said on Aug. 24.

The government has released few details of the plans, but a report by the Financial and Economic Affairs Committee of the National People's Congress has urged steps to close the wealth gap "as soon as possible," the official Xinhua news agency said.

Major cities including Shanghai have also formulated plans for property taxes to be approved by the State Council following months of complaints that soaring property prices have squeezed both the poor and the middle class.

David Bachman, a China scholar and professor of international studies at the University of Washington in Seattle, said the government may run a political risk by raising taxes on wealthier citizens to meet the needs of the disadvantaged.

"It's a balancing act, but how severe it is, that's one of those things we'll only know when they've gone too far, when there are protests," Bachman said.

Soaring property prices

The tax question brings together a broad range of the major challenges that China faces as it climbs into second place among the world's largest economies.

Despite China's explosive growth and gains in poverty reduction, the gap between rich and poor has roughly doubled since the mid-1980s, as measured by the Gini Coefficient, an income index used by the World Bank.

The government's solution has been to promote urbanization of rural dwellers and migrants. In March, the National Development and Reform Commission (NDRC) said the country's share of city dwellers will climb to over 50 percent by 2015 from 46.6 percent last year.

In July, the Chinese Academy of Social Sciences predicted that some 60 million rural residents will move to cities during the five-year period. By 2050, 75 percent of the population will live in urban areas, the China Mayors' Association said.

But the massive shift could be blocked by soaring property prices and housing costs.

In the first half of 2010, rural per-capita income was less than a third of income in cities, putting housing beyond the reach of new arrivals.

The government has responded to complaints about housing inflation with a series of measures since April to discourage speculation in real estate.

But so far it has succeeded only in reducing annual price growth of apartments to 10.3 percent in July from 11.4 percent in June. Between May and July, housing prices in major cities declined only 0.1 percent.

Income and property taxes on higher-earners may be the only way reduce inequalities and make cities more affordable for rural dwellers through subsidies.

But the social experiment comes with political risk.

"They're not going to be able to afford urban housing, so the government has to do something about that," said Bachman.

"But they want to do it in a way that minimizes dislocation and also doesn't alienate people who have generally been strong supporters of the regime over the past 10 or 20 years."

Implementation unclear

It is unclear whether the government will raise tax rates, change the threshold for taxes, or try to collect more from urban dwellers by better enforcement. Citizens with monthly incomes below 2,000 yuan (U.S. $294) are now exempt from income taxes, the official English-language China Daily said.

Property taxes have been under discussion for months, but it is uncertain whether they will be implemented in selected cities or nationally.

Officials have sent mixed signals on the assessments. In June, the State Council approved NDRC guidelines to "gradually push the reform of tax on holding of properties."

A week earlier, an NDRC official ruled out residential property taxes "at least for another three years."

Shanghai has proposed residential property taxes for larger apartments, but it is unclear whether the government will approve levies based on size, value, or the number of properties held by a single owner.

Bachman said taxes could have a big impact on residential property prices.

"It would be a very significant step," he said. "It would probably very rapidly puncture the bubble in urban housing prices, particularly at the upper end."

In 2009, residential property prices surged 25.1 percent nationwide, according to the Ministry of Land and Resources.

Taxes targeted at second and third properties would raise the cost of buying for speculation, which has been blamed for much of China's construction boom.

Last year's runaway housing market has also been linked to setbacks in meeting China's five-year energy efficiency targets, because overbuilding has driven demand in power- intensive industries like steel, aluminum, and cement.

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