A professor from one of China’s leading universities has called for the introduction of an estate tax and reforms to state-owned enterprise remuneration in order to deal with the country’s mounting wealth disparities.
The surging wealth gap that has emerged in China ever the launch of the reform and liberalisation period has re-emerged as a focal point in domestic political life, with Xi Jinping recently calling for the deepening of reforms to the country’s income allocation system.
Figures from China’s National Bureau of Statistics indicate that the country’s 2016 Gini co-efficient was 0.465, with little sign of abating in future.
According to Li Shi, the executive head of Beijing Normal University’s Wealth Allocation Research Centre, a slew of reforms are urgently needed in order to shrink China’s wealth gap and escape the middle-income trap that’s hampered so many developing economies.
Speaking to Economic Information Daily, Li said that the wealth gap has increased continuously as average Chinese incomes have risen, prompting the central government to introduce a number of reform measures over recent years targeting urban-rural disparities in particular, and leading to occasional dips in the country’s Gini co-efficient.
Li notes that curbing the wealth gap plays an instrumental role in escaping the much dreaded middle-income trap that has foiled the growth of a number of developing economies.
Research conducted by Stanford University points to a sharp difference in the Gini coefficients during the 1970’s – 80’s of developing economies that subsequently became high-income countries, and those that became stuck in the middle-income trap.
While the Gini co-efficient of the former group was 0.33 on average, for the later is was 0.47, which is barely above the current figure for China.
Li advocates a series of macro-reforms that should prove effective as reducing wealth gaps in China, including reforms to the taxation system, the introduction of an estate tax, and caps on SOE pay.
With respect to taxation, Li calls for measures to improve scrutiny of the real incomes of Chinese citizens, including reductions in cash transactions, and greater sharing of bank account information with taxation authorities.
He also advocates expansions to asset taxes, property taxes and estate taxes, and a greater focus on direct taxation.
“China’s direct tax proportion tends to be low and the indirect tax proportion tends to be high, yet indirect taxes do not help adjust income allocation, and can only expand the wealth gap,” said Li.
“For this reason, it is necessary to focus on reductions to indirect taxes, including value-added taxes and consumption taxes, and increase the share of direct taxes.
“This not only includes raising personal income taxes, but also includes real estate tax and estate tax…it’s even more important that supervision and regulation be increased of tax levies on high-income groups, to ensure the reasonable payment of taxes by the wealthy.”
Li calls for the immediate reform of estate taxes, which have been an area of focus in a circular recently issued by the State Council on reforms to income allocations, and were first mooted as a key reform issue by the government over two decades ago.
“At present, advancing estate tax reforms is a matter of extreme importance and the opportunity is ripe,” said Li. “The conditions are basically there, and we only need to abide by the basic principles on estate taxes, resolve to remove impediments, and properly design a system that matches reality, in order to successfully advance this reform.”
With respect to state-owned enterprises, Li calls for continued improvements to a “salary restriction system” for senior executives and strong controls on their incomes, as well as improvements to systems for the disclosure of assets owned by officials as well as mechanisms for monitoring their assets and income.
