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Xi Jinping wants ‘common prosperity,’ but China’s regressive tax codes favor the rich

October 26, 2021, 11:31 AM UTC

One of the paradoxes of China’s “socialist” economy is that its tax system heaps privilege on owners of capital.

Unlike “capitalist” economies such as the U.S., Japan, Germany, or the United Kingdom, China doesn’t tax property or wealth passed from one generation to the next.

True, China’s income tax system is nominally progressive, with a top tax rate of 45% (that’s higher than the U.S. rate of 37%, lower than the Japanese rate of 56%, and about the same as the top rate in Germany and the U.K.). But, as Brad Setser pointed out last year in this excellent analysis on the Council on Foreign Relations’ website, China’s income tax is highly fragmented and “only really kicks in at the top of the income distribution.”

The result: China’s tax regime generates very little government revenue.

Indeed, the International Monetary Fund calculates that China collects about 1.3% of GDP in personal income tax—far less than the U.S.’s ratio of around 10%. Instead, China generates the bulk of its tax revenue from two levies that fall disproportionately on the poor: value added taxes on consumer goods and social insurance taxes.

The IMF concludes that, all told, the bottom 50% of Chinese households, as measured by income, are taxed at a higher average rate than the next 45% of households. Only China’s wealthiest 5% endure a higher tax rate than earners in the lower half, since their pay checks breach the highest threshold on income tax.

What that means is, in contrast to tax policies in major Western economies, China’s tax system does virtually nothing to offset rising disparities between the country’s rich and poor.

That’s a crucial piece of context in the debate about Chinese president Xi Jinping’s new emphasis on building common prosperity” and reducing income inequality.

Under pressure from government regulators, Chinese tech giants including Alibaba Group Holding, Tencent Holdings, and Meituan have recently pledged multi-billion dollar contributions in support of government efforts to reduce poverty and expand the nation’s middle class. But there would be far less need for Beijing to badger businesses into making these ad hoc donations if the state itself had a more progressive tax system overall.

My colleague Grady just published an excellent piece examining Xi’s effort to tackle one of the most glaring deficiencies of China’s broadly regressive tax regime: the absence of a property tax.

The State Council, China’s top executive body, will soon begin expanding pilot programs to tax residential and commercial property in cities, according to an announcement Saturday by the National People’s Congress, China’s rubber-stamp legislature. The statement said the tests would run for five years; notably, though, it didn’t specify which cities have been selected as pilots.

Leaders of China’s ruling Communist Party have tried but failed to implement a nationwide property tax system for more than 20 years.

The reason for that failure, as several recent analyses have noted, is straightforward: backlash from the Party’s rank-and-file, most of whom own multiple properties themselves and won’t be able to pay taxes on those properties on the basis of their official income—much less explain how they earned enough to acquire multiple properties in the first place.

The Wall Street Journal, citing “people familiar with the deliberations,” reports that, in internal party debates, “the feedback to [Xi’s] property-tax plan from both the party’s elites and its rank-and-file members has been overwhelmingly negative.”

Grady suggests that Xi, China’s most powerful leader in a generation, may have the clout to finally push a property tax through. But he also notes the political dangers. In addition to antagonizing members of his own party, Xi risks the ire of China’s middle class homeowners, many of whom already fear that the travails of Evergrande Group, one of the nation’s largest property developers, has jeopardized the value of residential properties nationwide.

Eastworld will take a break on Thursday and return next Tuesday.

More Eastworld news below.

Clay Chandler
clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Yvonne Lau. Reach her at yvonne.lau@fortune.com  

Eastworld News

Olympic quarantine

Participants of the Beijing 2022 Winter Olympic Games—athletes, team staff and others—must be vaccinated at least 14 days prior to their arrival or face a strict three-week quarantine, the International Olympic Committee (IOC) announced on Monday. Medical exemptions may be granted on a case-by-case basis, but will include a “rigorous review” by an IOC-selected expert panel. All vaccinated participants will still be subject to daily COVID-19 tests during the Games, and must remain within a “closed loop” system that will isolate them from the rest of Beijing. Wall Street Journal

Net zero by 2050

Australian prime minster Scott Morrison has pledged that the country will target net zero carbon emissions by 2050, he announced on Tuesday. Australia, a major exporter of fossil fuels, will funnel nearly $15 billion into green tech development in the next two decades and rely on consumers and corporations to lower emissions reductions. But the country doesn’t plan to limit the use of fossil fuels, and heavy industries like mining, will “stay open, remain competitive and adapt, so they remain viable for as long as global demand allows,” said Morrison. Fortune

Flying cars

Chinese electric vehicle maker Xpeng released its design for an electric flying car on Sunday. Outfitted with wheels and wings, Xpeng’s vehicle will be capable of flying in the air and driving on roads. The company plans to roll out the hybrid machine in 2024 at a retail price of $157,000. The catch? China has minimal regulations in place to manage flying automobiles and doesn’t have roads wide enough to accommodate the vehicle’s propeller blades. Yet one analyst says that XPeng’s real purpose in announcing its flying car prototype is to “be known for… being the most technologically advanced ‘mobility’ company.” Fortune

Banks vs. Hong Kong government

In a Monday letter, the Asia Securities Industry and Financial Markets Association (Asifma)—the region’s largest financial industry lobby that includes the likes of BlackRock and J.P. Morgan—warned the Hong Kong government that its “highly restrictive” COVID-19 quarantine policies are jeopardizing the city’s status as an international hub and could hurt Hong Kong’s long-term economic prospects. On Tuesday morning, Hong Kong chief executive Carrie Lam announced that the city will further tighten quarantine measures—by cancelling most quarantine exemptions—in a bid to reopen to mainland China more quickly. Fortune

Markets and Movers

Kuaishou – Shares of TikTok rival Kuaishou, the Chinese video app, have rebounded by over 30% since Oct. 18 as investors take advantage of low valuations and wager that the worst of China’s tech crackdown has passed. Kuaishou stock more than doubled in the weeks following its February IPO, but then plummeted by 84% in August, making it one of the worst casualties in this year’s China tech rout.

Tesla – Tesla has opened its first overseas R&D center in Shanghai as it continues to grow its footprint in the Chinese market, it announced late on Monday. Engineers at the R&D center will focus on software, electronics, materials and charging. The electric vehicle maker has also built a data center in Shanghai, which will store its local operation's data. Tesla’s market cap surged past $1 trillion Monday after the company inked a deal with rental car company Hertz, which will order 100,000 Tesla cars by the end of 2022.

Modern Land – Chinese developer Modern Land became the fourth mainland property firm to miss dollar bond payment deadlines this month, following Fantasia Holdings, Sinic Holdings, and China Properties Group, highlighting the pressure that’s spreading across the sector. The indebted developer failed to pay the interest and principal due on a $250 million bond, it said in a Tuesday filing with the Singapore Stock Exchange. Embattled developer Evergrande avoided a default last week, but faces another major repayment deadline this Friday.

Citibank – U.S. banking giant Citibank will shut down its South Korean consumer banking operation after failing to find a buyer, it said on Monday. The move follows from Citi’s April announcement that it will pare down operations in 13 countries—including five in Asia—to refocus its business on investment banking and wealth hubs in key markets. Banks operating in South Korea are facing a bevy of challenges including tighter regulation, tech competition and the limited growth of retail business. Citi Korea’s profit dropped nearly 40% in 2020 from 2018.

South Korea – South Korea’s economy grew by 0.3% in this year’s third quarter—its slowest rate of growth in five quarters—as private consumption contracted even as exports recovered. South Korea’s exports in Q3 rebounded to 1.5% growth, up from a 2% decline in Q2, due to solid semiconductor and petroleum product sales. But private consumption—which accounts for almost half of Korea’s GDP—slumped to a 0.3% contraction this quarter after a 3.6% uptick last quarter.

Final figure

2.7

The world will warm by 2.7 degrees Celsius by 2100—a "catastrophic" level of global warming—if countries don’t “urgently redouble their climate efforts,” according to a United Nations report released on Monday. The UN’s Intergovernmental Panel on Climate Change estimates that limiting global temperature increases to 1.5 degrees celsius by the end of the century will require emissions reductions of 40% by 2030. World leaders will meet at COP26, the UN Climate Change Conference, from Oct. 31 to Nov. 12 in Scotland to discuss their 2030 emissions reductions targets that align with reaching net-zero by mid-century. Indian prime minister Narendra Modi will attend the summit and likely face pressure to promise speedy emissions cuts. But India has said that it will be difficult to give up coal and completely pivot away from fossil fuels; the country is the world's second-largest coal consumer. Chinese President Xi Jinping is unlikely to attend the summit but has promised peak coal consumption by 2025.

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