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Economy

China ready to tackle wealth gap with real estate tax -- or is it?

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High-rises loom over a ramshackle community in the inland city of Guiyang, Guizhou Province.   © Kyodo

TOKYO -- Chinese leaders know they can ill afford to ignore the massive rich-poor gap in the country. But one of the government's most promising tools for addressing inequality, a real estate tax, faces stiff opposition from local governments as well as the country's rich and well-connected vested interests.

Never for some

Even moderately affluent Chinese tend to own several apartments, which they buy as speculative investments. But things are much different for the massive population of the country's poor.

     For them, home ownership is forever just a dream. It is common to have families share a residence with strangers. Many live in cramped, dimly lit basement homes.

     

A survey by China's central bank released in March showed that more than 60% of respondents found soaring housing prices "unacceptable."

     The real estate tax is seen as a powerful means of addressing the wealth gap. The proposed levy could help suppress speculative property buying, and the funds raised would allow the government to redistribute wealth.

     The website of China's official Xinhua News Agency cited April 23 a local newspaper report that said Beijing's excess housing supply has reached nearly 70,000 units, a new record. This is a growth of more than 10,000 units in just over two months, the article said, noting that Beijing housing prices could very soon enter a correction phase.

New laws, eventually

China's real estate market appears to be cooling. In March, new-home prices declined from the previous month in four of the country's 70 major cities. Prices in other cities showed slower rates of increase.

     The real estate tax could further cool the market. The government would like to gently slow growth to a stable pace, which means any avoidance of measures that could roil the property market and cause a sharp decline in growth.

     The government has proved remarkably indecisive on introducing the real estate tax. In a March 5 speech to the National People's Congress, Premier Li Keqiang stated that the government would try to prepare legislation for the levy as part of this year's tax reforms.

     Efforts have not been progressing smoothly. At a news conference about two weeks later, a Finance Ministry official emphasized that the government is not yet ready to expand the scope of the real estate tax beyond places like Shanghai, where it is being tested.

     Specifics of the tax and its collection will be decided in the lawmaking process, the official said, suggesting that the stage has yet to be set for implementing the tax in earnest.

Privileged naysayers

Beijing's hesitation is not just out of consideration for the potential negative economic effects that could result. Local governments are expected to push back against such measures as well.

     The central government controls most tax revenues. This makes any funds related to buying and selling land a precious source of income for local governments. While it is not yet clear where the proceeds from the real estate tax would end up, it is hard to imagine local governments approving of a system that threatens to knock out a pillar of their revenues.

     Vested interests, including party and government officials, are also sure to resist the tax. While President Xi Jinping has attempted to impose a form of austerity on bureaucrats to curb their luxurious lifestyles, he has not taken steps that would reduce their incomes across the board.

     Even if the government allows some debts to default, only a very small portion of vested interests would be hurt. Tax reforms, on the other hand, would cut broad and deep.

     The root cause of the wealth gap lies in the unequal rules governing Chinese society and the economy born of Communist Party autocracy. But as long as the party seeks to maintain its position, redressing inequality is imperative.

     Though this deepening contradiction may be a holdover from the era of former President Hu Jintao, it is now Xi's task to address. If the current president cannot solve it, it will bode ill for the future of the entire party.

 

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