The Economist Circle recently spoke to Yao Yang, dean of the National School of Development, Peking University, on issues such as common prosperity. The following is the full text of the interview.

Economist Circle: What do you think about common prosperity? 

Yao Yang: “Common prosperity” is not a very new term. You may not have noticed that the leaders mentioned common prosperity at the 14th Five-Year Plan during the Fifth Plenary Session of the 19th Central Committee. It would be that there was quite a lot of content on the 14th Five-Year Plan that people did not take notice of. This time, on August 17, the 10th meeting of the Central Financial and Economic Commission was dedicated to this meeting. It has some different significance, that is, it involved the issue of how to implement it.

 China’s wealth gap had been rising until at least 2010. At that time, the Gini coefficient, per the National Bureau of Statistics, was about 0.49. The data from our Peking University China Household Tracking Survey was 0.52 in 2010. This gap was mainly caused as the Bureau of Statistics did not survey the top 1 percent of the people with the highest income, nor did it survey enough people in the lowest 10 percent of income. So, it is equivalent to a sample cutting off both ends. Our sample included some poorer people, so our Gini coefficient was higher. But since then, the Gini coefficient has been declining, and it has fluctuated slightly over the past few years where it may be 0.47 to 0.48 at the present, so the income distribution is still very uneven. 

Wealth is also unevenly distributed. According to the National Statistics Office, 10 percent of the population accounts for more than 40 percent of the wealth. But our survey shows that 10 percent of people own 70 percent of the country’s wealth. I think it may be due to different statistical methods, as we count, for example, the current price of real estate, which widens the wealth gap. Since the housing prices in first-line cities are very high, the top 10 percent of the people with the highest incomes are actually located in the first-line cities, so they also have more wealth, while many rural residents’ real estate is basically worthless. Our statistics show the highest 10 percent of income is about 85 times that of the lowest 10 percent, while people in the bottom 10 percent only account for 0.5 percent of our total income.  

Under current circumstances, the proposal of common prosperity is also a process step. In the past, we mainly engaged in GDP, increasing the GDP, and then wanted to eliminate absolute poverty, but the gap in relative poverty was still very large. Deng Xiaoping proposed to let some people get rich first. Now, this goal has been achieved, so it is natural to achieve common prosperity. But it should be noted that income and wealth are essentially outcomes, where the fundamental reason is that of a large difference in income capabilities. Currently, if you want to enter a wealthy family or middle class, it is almost impossible without a good education as labor-intensive jobs are almost gone.  

Therefore, education comes first, but the gap in our education is huge. Here are a few statistics. The first is the average education level in rural areas, where young people have an average education level of just over nine years, which is lately happened, that is, they just graduated from junior high school, which means that there are still people who have not graduated from junior high school. Twelve-year education has been attained in the cities, but they are better than the rural areas. The level of education is higher in the big cities where universities have reached the stage of universality. 

On the other hand, we see that intergenerational mobility has declined shapely, and we generally use the correlation between one’s education level and that of the father; the higher the correlation coefficient, the worse of the social mobility. Using our data through Peking University, the correlation coefficient between the education level of a person born in the 1930s and his parents’ education level is somewhere between 0.6 and 0.7, and then it begins to decline. For those born in the 1950s, it dropped to the lowest level of 0.35, the level of developed countries, and then it began to rise again, and now reaches between 0.5 to 0.6, that is, it has gone back 50 or 60 years. Let’s take a closer look at that data. Among those born in 1985, about 8 percent have not completed primary education, and they are now in their 30s, but 8 percent are semi-illiterate. Hence, under this circumstance, it is conceivable that the income gap is widening, as the education gap is so big. This is the general picture of the gap between the rich and the poor in our country.  

Economist Circle: What criteria do you think our country should meet to achieve basic common prosperity in the world?

Yao Yang: It depends on whether it is a high standard or low standard. If it is a high standard, such as Taiwan and South Korea, their Gini coefficient is 0.35. It is very difficult for us to reach this standard in mainland China, but can we set the current target between 0.4 and 0.45, or lower, say, between 0.4 and 0.42?

Economist Circle: What’s your understanding of the third distribution? 

Yao Yang: I expect that some policies will be put in place to encourage people to donate, such as setting up a trust fund for philanthropy. This may be encouraged as it is not yet allowed in our country, where there may be policies in the future and legal documents that allow people to do so and encourage many people to donate. 

China currently has a high tax rate, with corporate income tax as high as 25 percent. If a business owner profits out, he must still pay personal income tax, with the top rate of 45 percent, so many people do not take it out. Although his own assets are large, in fact the portion that they can enjoy is relatively small. So, after the last round of deleveraging, we saw some companies die. You would find that he appeared to have some real “liability,” as all his assets were in the company, and he became poor overnight. And this is quite common. If we allow, for example, the establishment of a trust fund, then use the trust fund to do philanthropy without tax payment, it will encourage a lot of people to do philanthropy. 

But there is one point I think in the interpretation of various WeChat groups and we-social media that is wrong. It is believed that the third distribution should force everyone to donate, especially  that some enterprises should immediately take the lead in donating hundreds of millions of yuan, it seems that they are compelled to donate more. 

However, compared with the United States, the proportion of total donations from Chinese entrepreneurs is much higher than that of the United States. The majority of U.S. donations come from ordinary people, and ordinary people donate a lot of money. Many of their think tanks are funded by ordinary people, which you can get an annual membership where you pay a certain amount each year. They think, “I believe in you, so I am going to support you and I am willing to donate, say $500 or $1,000 a year,” where every bit adds up. Therefore, there are a lot of donations in the United States, and it is not mainly because of people like [Warren] Buffett are donating; it is that ordinary people are donating.

I think we should not misread the third distribution: it is not to target all our entrepreneurs; it is not to say, “I’m sorry, you have a problem if you don’t donate.” Some people even say that we have reached a stage where we are going to socialize our assets again, and these understandings are completely wrong. 

The original purpose of this meeting was to study some policies and then encourage people to make charitable donations. 

I think property tax is a must, as the lands in various places are slowly sold out, and the property tax can become its source of funds. Taxing of real estate will not affect everyone’s motivation to work as this is a pure consumer asset. Of course, the collection of property tax will not affect ordinary people; he will have a tax allowance, so ordinary people do not have to worry about it. For example, my family of three has a house of 90 to 100 square meters; I estimate that basically there is no need to pay taxes or pay very little tax, so there is still an income adjustment effect.

But be careful with the estate tax because it does not fit well with Chinese culture. Because in our culture it is produced in a family unit, where the relationship between my children and me is sometimes unclear. For example, a father is going to give his assets to his son, and the son has to pay taxes, but the son says that is wrong for him to have to pay tax as he also had a contribution. It is possible that his father did not give him a share before. Therefore, the estate tax does not fit well with our family-oriented culture. 

Houses in the first-tier cities easily cost 5 million to tens of millions. How much do you pay for the estate tax? Say, 20 percent, right? It does not make sense to charge it low, then 1 million needs to be paid for a 5 million house. A young man has nothing, and he has to first pay 1 million to inherit a house. How would he have the money?

This problem has arisen in the United States, that is, to give the house to the next generation and then he cannot inherit it. The child says, “I don’t have any money, can I sell the house first?” The government says, “no, you have to transfer it to your name first and pay taxes before you can sell it off.” Therefore, you still have to borrow money to pay taxes and when you sell your house. This is difficult to make sense of in China, thus there is no need to levy an estate tax.

Many countries have found that estate taxes eventually cannot be levied. In the end, ordinary people find all kinds of loopholes, and the government does not collect much in the end.

Economist Circle: What other measures are there to achieve common prosperity? 

Yao Yang: The most fundamental way to achieve common prosperity is to improve the productive capacity of all people; that is to say, give a man a fish or teach a man to fish, that is, whether you give him fishing gear or give him the fish directly. 

It is obvious that Chinese people attach great importance to education, but in the current fierce competition, such as the emergence of “Ji Wa” [parents’ arrangement of aggressive learning schedule for children to excel], there is a differentiation that middle-class families and above are investing increasingly more in their children, but the poor are investing less. We are talking about “lying flat” [young Chinese reject rat race and embrace being a couch potato], where 50 percent of the lowest-income people may be already lying flat. They don’t even “Ji Wa” at all. You can go to the countryside to see how many families carry out the act of Ji Wa where they arrange the like of tutoring classes for their children. The fact is, it is not that they do not want to do so, it is that they do not have the ability to do so. Hence, this gap widened. 

There are, of course, other measures to achieve common prosperity, and I think the most important thing is to improve the education of the children in families in the lowest 50 percent of income, but our investment in this area is far from enough. 

We now have a very high concentration of educational resources. I recently heard a paper mention that the more public education investment, the greater the education gap. The authors find that most of our public education resources are invested in the schools, and if we take a closer look at the schools, the investment is also concentrated in the few so-called premium quality schools. 

When you go to a city, a province, you find it invests money into good schools. While good schools are getting increasingly better, bad schools are getting increasingly worse. We all know who goes to bad schools and who goes to good ones, but this is a big problem. Therefore, Beijing is now requiring teachers to take a rotation: you stay in a school for three years, and then move to another school for three years, so that is very good as the distribution of resources will be even out. Besides, this has the added benefit of reducing anxiety as there is no more competition.  

Investment in rural education is too low. On the economics 50 forum, I showed a picture of my elementary school where a physical education teacher teaches children to play basketball, and I said, you know, this male physical education teacher also teaches math. This is not a joke, it is true. 

So, I think that when common prosperity is just connected with the current educational reform, and with our collective focus on education, it will be better than doing anything else.