China’s long wait for a tax everyone likes to hate

IF SUN YAT-SEN if he had succeeded, China would have been a bold pioneer in real estate taxation. During his exile in Europe from 1896 to 1898, the Republican revolutionary fell under the spell of Henry George, an influential American journalist who believed that a single property tax should replace all the others. Sun hoped that pre-industrial China could adopt such innovations more easily than the West, because it was “not hampered by the opposition of entrenched capital,” as one scholar put it.

Instead, China has become a timid procrastinator in the taxation of real estate, especially property built on the land, as opposed to the land itself. He first proposed a recurring property value tax in 2003. And he introduced a half-baked pilot project in the cities of Shanghai and Chongqing in 2011. The tax was included in the five-year legislative plan of the city. ‘National People’s Congress (NPC), the Chinese parliament approved in 2015. But things did not go further. Reform, it seems, has been hampered by the opposition of well-established interests, including no doubt many officials who would prefer not to declare their properties, let alone pay taxes on them.

But in August, Xi Jinping, Chinese President, expressed his support for a property tax as part of his campaign to curb excessive wealth and promote “common prosperity.” And on October 23 the NPC said the pilot projects would be extended to new cities (although he did not specify when or which).

Such a tax is absolutely necessary. China takes little money from its personal income taxes, which are too easily avoided. Indirect taxes, such as value added tax, are more lucrative but regressive. Local governments, in particular, lack a stable source of income, making them heavily dependent on land sales and transfers from central government. Although China imposes a variety of property taxes (including one on the purchase of land), these levies weigh more heavily on the construction and trading of real estate than on owning it. As the Chinese real estate market matures and its economy moves beyond rampant urban expansion, housing construction and sale will provide less feathers to pluck.

The tax could also alleviate some of the perversities of the Chinese economic model. About a fifth of its urban dwellings were vacant in 2017, according to the China Household Finances Survey, conducted by Li Gan of Texas A&M University. A property tax would make it more expensive to buy a second home or second home and keep them empty, in the hope of reselling them at a higher price. It could therefore discourage speculation and boost China’s underdeveloped rental market.

But a property tax will also be unpopular. It’s the tax that “everyone loves to hate,” as Jay Rosengard of Harvard University put it. These taxes are not discreetly withheld from a paycheck or incorporated into the price of a product. Payments can be lumpy, flashy, and boring, especially if the taxpayer doubts bureaucrats are spending the money well. While house prices have outpaced incomes, many homeowners may also be “wealthy in assets” but relatively “cash poor”. In 2019, for example, a property tax of 1.2% would have swallowed up more than 10% of the average disposable income of a city dweller.

There are also concerns that the tax will blow up the market. It seems unlikely. It will take some time before any income is actually collected. And the tax is not the only lever that policymakers can pull. Chinese cities impose a variety of other barriers and disincentives to buying real estate, including large down payment requirements, limits on the purchase of additional apartments, and rules that require buyers to present a contribution history. local social security. If a property tax weighed too heavily on the market, these prudential limits could be relaxed.

The greatest danger is that the tax does too little, not too much, to cool speculation. The Chongqing tax, which is levied mostly on individual and high-end properties and exempts the first 100 square meters of space, has lowered prices by 2.5% per year, from where they would have been, according to a 2015 study by Zaichao Du and Lin Zhang of the Southwestern University of Finance and Economics in Chengdu. But prices have still increased on average. The Shanghai tax had no effect on prices.

Progress and procrastination

To make them more acceptable, the Chongqing and Shanghai pilot taxes were both uneven and complicated. New pilot cities should try cleaner designs. Any defect, defect or misguided exemption can be difficult to correct later. Indonesia, Rosengard said, has decided to keep its effective property tax at a meager 0.1% while collecting better data on ownership and property values. Yet even after improving the data, it was difficult to increase the rate. British property tax in the 1980s was based on increasingly anachronistic rental values. But the government was so reluctant to update them that it introduced a disastrous “survey” tax instead. Ontario in Canada spent 30 years talking about reforming its property tax, before finally taking the plunge in 1998, as Richard Bird and Enid Slack of the University of Toronto detailed.

Sun Yat-sen hoped that the late start of China’s economic modernization would help her avoid some of the mistakes of the countries that came before her. China’s late debut in property taxation gives it many other examples to avoid. â– 

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This article appeared in the Finance and Economics section of the print edition under the headline “The Long Wait for a Tax Everyone Loves to Hate”