From the late 1970s to the early 2010s, China was successful in achieving double-digit annual GDP growth. Since 2013, the country’s growth rate has slowed to between 6 and 7 percent, which is still very high compared to that of most other countries yet much lower than the growth it experienced in the prior three decades. This segment of relatively low growth is dubbed the “New Normal” in the country’s official language; academics call the pattern an “alternative gear in growth,” hoping that China will succeed in operating this new gear and sustaining high single-digit growth rate for many years to come.
The huge successes of the 30-plus years of high economic growth include, among others, two aspects that are closely related to the theme of this monograph: urbanization and large-scale housing construction for urban residents. In 1978, only about 18 percent of the country’s population lived in urban centers—in China’s official terminology and by its household registration system, these include all cities, county seats, and established townships. By the end of 2015, this urbanization rate had risen to 56 percent, with a resident population of 770 million (State Statistics Bureau).1 In 1978, the average floor space per urban resident was a mere 3.6 square meters (Chen 2010); by the end of 2014, this number had risen by almost eightfold to 28.7 square meters, with urban housing stock at 21.5 billion square meters in over 250 million housing units. At the average family size of 2.85 persons, the total resident population comprises approximately 260 million households, each having close to one housing unit of 85 square meters (Ren 2016).2
The urbanization rates of advanced economies typically stabilize between 75 and 90 percent. By this benchmark, China still has 20–30 percentage points to achieve under the “New Normal” pattern of growth—though at a slower rate than in previous decades. If we can say that over the past several decades, the demand for more housing units had been in the context of smaller households during that period,3 then the change in population policy to encourage two births per couple will increase the demand for larger and better housing units. Either way, the country’s urban residents with fast-growing incomes will expect and demand increasingly better public services. Further, these key services are expected to be adequate and provided equitably to all residents. Thus, China faces a significant challenge that daunts all local governments: how can they finance these increasing service demands from revenue sources that must be sustainable in the long run?
This monograph offers an analysis, as a case study, of China in its muddling through of financial reforms toward adopting a local real property tax. This research is designed to serve three purposes. First, it is an effort to provide an independent perspective on an urgent public policy under consideration by the Chinese government and to reflect upon this policy’s process of formation and evolution, which started over a dozen years ago and yet is still in the fermenting stage with slim sight of full fruition in the near future. Meanwhile, this analysis is also intended to share China’s experience with other developing and transitional countries, so they can discern the difficulties China has faced and understand what may help disentangle these or similar difficulties in the modernization of their taxation systems. Of course, as said in the Preface, this analysis will also serve to provide new and fresh thinking to the improvement, even reform, of current real property tax schemes in advanced economies that are now burdened with problems.
To achieve these purposes, this monograph is organized as follows. The Introduction offers some broad background into the “why” of this project. Chapter 2 starts with a fiscal system’s approach to taxation and uses this approach to explain why the real property tax should be an inherent part of any country’s tax system. Then, this chapter reviews the evolution of taxation in China before and after the year 1949 as a contrast, which is followed by a description of China’s financial reforms since the country’s grand opening and reform program in 1978. These financial reforms are taken as forerunners of subsequent socio-economic reforms. This monograph depicts the adoption of the real property tax as a reshuffling of the country’s current intergovernmental fiscal relations, not merely the introduction of a new tax. To more vividly describe the challenges China faces in adopting the real property tax, this monograph uses an analogy of
the “window paper effect.” The connotation of this term is that though the window paper seems sturdy enough to resist even strong winds, once the paper is broken purposely or a crack occurs by any means, the removal of the whole window paper takes no huge efforts. This analogy of resistance losing steam will be used as a hidden line throughout the monograph as our expectation for future development.
Chapter 3 first traces the context of the country’s housing provision system and uses it as the background to the 1990s housing reform; then the chapter examines the subsequent burgeoning of the real estate sector as a pillar of the national economy, particularly for economic growth. The huge volatility of the real estate sector naturally causes the government to ponder mechanisms to stabilize this sector—a process that we term “muddling through” and “ad hoc preparations” for the real property tax. The chapter concludes with observations of the pilot residential property tax of year 2011 in two megacities: Shanghai and Chongqing.
Chapter 4 elaborates on why a real property tax is necessary, given that the real estate sector has become so strong in the country. If our answer to why China should adopt a local real property tax is “yes,” then what are the rationales? Since at least 2003, the academic and policy communities in China have debated this question without achieving consensus. This chapter offers an empirical analysis of the tremendous inequity and inefficiency of the current scheme of education financing in the absence of a local property tax. The analysis uses capitalization data of basic education and is based on micro-level housing data in central Beijing that illustrates how the differential treatment of tiered schools, coupled with school attendance by rigid proximity plus the household registration system, is the root cause of these problems.
Chapter 5 offers an analysis of the institutional obstacles to adopting the local property tax, including the property right and use right to urban land. It traces the turnover from private to public ownership of land in rural and urban areas around the founding in 1949 of the People’s Republic of China and subsequent changes, which inspires insight into this problem unique to China. The chapter then taps into why local governments can capitalize on the state ownership of urban land to build infrastructure and how they did it within a two-decade period, as well as the problems involved in doing so.
Chapter 6 first combs through the ongoing debate among policy experts (including some former high-ranking officials) and academic scholars about the design of the real property tax; the chapter then deliberates on a set of six principles to consider and apply when designing the tax. They are equity, efficiency, feasibility, transparency, adequacy, and stability. These principles compose an analytical framework for evaluating any design to see whether it fits the generic political economic theory as well as the practicality of public finance, in particular at the local level. A strong rebuttal of three current (and widely circulated) exemption proposals for the real property tax is based on their failure to meet most of these principles.
Even if created optimally, the design of a tax is only the first and relatively easier phase. The next step is much more difficult: determining how to implement the new tax, efficiently, effectively, and in an orderly and smooth manner poses numerous challenges in every aspect of tax administration. Given the conundrums the government has been struggling with—the deep-rooted centralization tradition, for example—Chap. 7 looks into possible strategies that are practical in China’s context for adopting the property tax. These include central authorization for local implementation, local discretion with no uniform scheme, and a window for adjustments by households. This chapter also encapsulates the proposed tax scheme for China into four basic elements, four execution measures, and three related institutions.
Chapter 8 then takes the forthcoming adoption of the real property tax in China as a natural social experiment, estimating the potential ability and willingness to pay the property tax by Chinese urban households and simulating the tax burden distribution and the redistribution effect of the tax under several exemption proposals. The chapter uses a publicly available survey data set to calculate ability-to-pay indexes and willingness-to-pay measures; then, based on the indexes and measures, it conducts simulations. The results show that under the tax scheme proposed by the authors of this book, the broad-base, low-rate local property tax is affordable to the great majority of homeowners, that low-income families get more net benefit than high-income families, and that this tax design is horizontally and vertically equitable, thereby politically acceptable; it is also efficient and administratively feasible. We can conclude that this design will generate adequate revenue to provide public services.
The final chapter concludes the monograph. It first offers lessons learned from the case of China in multiple aspects of this complicated socio-political and economic issue; it then points to challenges that lie ahead. Despite the seemingly unsurmountable obstacles inherent in China’s adoption of a local property tax, this monograph ends on an optimistic tone regarding the property tax’s ability to help the country achieve balanced and harmonious development and improve local governance.
References
- Chen, X. B. (2010). Retrospective: Mid-1990s reform of the housing provision system (1990年代中期住房制度改革回顾). 陈学斌(口述)汪文庆 刘一丁(整理)(中国共产党新闻网, July 15, 2010).
- Ren, Z. P. (2016). A study of Chinese real estate cycles. 任泽平《中国房地产周期研究》. Available at http://business.sohu.com/20160225/n438434787.shtml
Footnotes
1
The term “resident population” is a translation from the Chinese term “城镇常住人口” which refers to people who have stayed in an urban center for an extended period of time (usually more than half a year) with regular income and residence, with or without an urban status by the household registration system. China’s 13th Five Year Plan stipulates this rate to reach 60 percent by the year 2020.
2
According to the 2010 Census, the total number of urban households was 221 million (of which, 207 million are families and 14 million are collectives, i.e., clustered by their work units). Ren (2016) extrapolates from this census that the number of households was 250 million at the end of 2014; thus, he further estimates that each household had over 1 housing unit. Here he does not distinguish owning from having.
3
The several censuses clearly show the decreasing trend of family size: the average family size was 4.41 persons by the 1982 census; it was 3.44 by the 2010 census; and it further declined to 3.1 by the 2010 census.