[Column] Why China has no property tax, but might soon

Posted on : 2021-09-19 09:45 KST Modified on : 2021-09-19 09:45 KST
Xi’s push for “common prosperity” is raising speculation over whether China will introduce taxes on the real estate market, a nexus of growing inequality in the country
Park Min-hee
Park Min-hee

By Park Min-hee, editorial writer

Chinese President Xi Jinping’s new policy goal of “common prosperity” is the subject of keen interest and vigorous debate.

The Chinese government has already imposed sweeping regulations on Big Tech platforms, private education, the gaming industry, and media entertainers under the slogan of “adjusting excessive income.” Now, attention is focusing on whether the Chinese government will target the real estate market, the nexus of inequality in the country.

To start with, the Chinese authorities have placed a 5 percent cap on yearly rent hikes and taken measures aimed at tamping down the demand for homes in good school districts, known as “xuequfang” in China.

But many experts think the litmus test for Xi’s common prosperity is whether China will impose inheritance and property taxes.

Real estate prices in China’s biggest cities, including Beijing and Shenzhen, are among the highest in the world. Housing prices there start in the millions of dollars, yet many in the affluent class own dozens of luxury properties. That’s due to the lack of tax obligations in China, which doesn’t tax property or inheritance.

China privatized the real estate market in 1998 along with a raft of reforms at state-owned enterprises. Prior to that, people had rented houses from state companies for a nominal fee. But the reforms allowed them to buy those houses at a price much lower than market value. The government even threw in subsidies and interest-free loans.

That constituted the largest transfer of wealth from the state to the individual in history.

In the following years, housing prices skyrocketed amid China’s lightning-fast growth, creating immense wealth for residents of China’s big cities. The urban middle class and elite, who reaped the most benefits from the privatization of the real estate market, effectively became the most reliable base of support for the Chinese Communist Party (CCP).

On the other hand, migrant workers from the countryside and those who were unable to buy houses during the initial phase of privatization were permanently excluded from those benefits.

Property-owning members of the urban middle class — particularly the families of senior cadres of the CCP — who own dozens or even hundreds of homes, have been the primary force preventing the implementation of property and inheritance taxes.

On an ideological level, the state ownership of land remains a crucial variable. Some claim that imposing property taxes or inheritance taxes would undermine state ownership of land, which is regarded as the bedrock of socialism.

Local governments that are financially dependent upon real estate development are opposed to property taxes, which would cool down the real estate market and thus reduce their income from land sales and erode their budget. In 2020, land sales accounted for 30.8 percent of revenue for local governments.

The debate over tax reform has continued for more than 20 years. Property taxes were implemented on a trial basis in Shanghai and Chongqing in 2011, but they only apply to a tiny fraction of the market, such as high-end villas.

Given the recent emphasis on “common prosperity,” some expect this trial program will be expanded to other parts of China this year, though not the entire country.

Inheritance taxes are an even more serious issue. As a result of the one-child policy, young people in China’s urban middle class are inheriting at least three properties — one from their parents, one from their paternal grandparents, and one from their maternal grandparents. That would mean a married couple will end up with at least six properties, and all without paying a cent of tax.

“This is the biggest challenge for ‘common prosperity.’ To resolve it, Chinese authorities will need to consider the option of limiting inheritance through the state ownership of land,” predicted Jee Man-soo, director of the international financial research team at the Korea Institute of Finance.

Some are cheering China’s common prosperity as the realization of socialism while others are worried that it represents a second Cultural Revolution. But the fact is that China is struggling to even adopt the basic market principles of property and inheritance taxes.

Surging real estate prices have made wealth inequality a highly sensitive political issue — both in China and South Korea.

Please direct questions or comments to [english@hani.co.kr]

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