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Why Is the Gap between Rich and Poor Narrowing in China, and Criticism Is Increasing?


An interview with a researcher at one of China’s top universities on how the Common Prosperity concept seeks to make China’s labor laws, tax code, and state-owned enterprises more consistent with the basic principles of socialism.

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The Fifth Plenum of the 19th Central Committee of the Chinese Communist Party (CCP) adopted common prosperity as a long-term goal of achieving modernization by 2035. At the recent 10th meeting of the Central Financial and Economic Commission, the central government once again emphasized that common prosperity is the essential requirement of socialism and an important feature of Chinese-style modernization. It also proposed to improve the distribution mechanism according to work as the main body of distribution mechanism, the construction of the primary distribution, redistribution, and third distribution, forms a complete set of basic system arrangement.


At present, there is a lively discussion among all sectors of the country about achieving common prosperity. How to read the goal of common prosperity proposed by the central government? How to achieve social equity through the distribution system? Han Zhu, a researcher at the China Research Institute of Fudan University, was interviewed by Guancha Syndicate to discuss how to achieve “common prosperity” from the distribution system. The interview is divided into two parts, and this article is the first part.


Guancha: “Three distributions” is a concept put forward by the economist Li Yining in the On the Road of Economic Development of Common Prosperity in 1991. At that time, China had just begun reform and opening up, the economy was still recovering, and there was no social wealth outbreak, the gap between the rich and that poor, these issues that had emerged today. With the completion of the market-oriented economic reforms, the battle against poverty, and the march toward the second century, is it reaching the time to propose the “three distributions” to promote common prosperity? How to read the central government’s great emphasis on common prosperity recently? 


Han Zhu: Let me first talk about the social background of the central government’s current goal of common prosperity, which is important for a deep understanding of the central government’s current proposal for common prosperity. This year is China’s year of poverty eradication, and the total eradication of absolute poverty in China is an important indicator of narrowing the gap between the rich and the poor. Why does China immediately take the achievement of common prosperity as an urgent strategic goal when it fully enters a moderately prosperous society and makes important progress in narrowing the gap between the rich and the poor? 


First of all, we must avoid the misconception that the focus of the past decades was on development, and it is only now we are beginning to speak of common prosperity. This view is one-sided. In socialist China, development and common prosperity are inseparable. 


In theory, common prosperity is what socialism should be. In fact, from the very beginning of China’s reform and opening up, China has taken common prosperity as a goal. Deng Xiaoping, the chief architect of reform and opening up, made it very clear: let some people get rich first, then bring along others to get rich, and eventually we will achieve common prosperity. Moreover, from the 1980s to the 1990s, Deng Xiaoping repeatedly stressed on various occasions that common prosperity is the essence of our socialism and that we must eliminate polarization. If our reforms lead to polarization, then the reform has failed. Therefore, to simply emphasize development in the past, and not on common prosperity, is not in line with China’s reality. 


Looking back on the path taken by the Chinese Communist Party over the past few decades, we can see that China has always adhered to the socialist path and the socialist system. China has never given up on narrowing the gap between the rich and the poor, eliminating polarization, and achieving the goal of common prosperity. If China does not adhere to the goal of “common prosperity,” it means that China has not truly adhered to socialism. 


Second, from a practical perspective, at what point in time was the gap greatest between the rich and the poor in China? Has the gap between the rich and the poor narrowed over the past decade? According to data of the National Bureau of Statistics, the largest gap between the rich and the poor in China was around 2008. The Gini coefficient published by the National Bureau of Statistics has generally been narrowing in the past few years, although the reduction is not significant. 


Moreover, according to the World Bank, China’s Gini coefficient varies between 0 (complete equality) and 100 (maximum inequality) on a consumption-based basis, reaching a peak of 44 in 2011. After 2016, it gradually declined to 38. World Bank data showed that the gap between the rich and the poor was the largest in 2011, and it has been declining ever since.


Judging from the curve trend of the gap between the rich and the poor in China, the data from China’s National Bureau of Statistics and the World Bank are generally in line with each other. They both show that China’s Gini coefficient is indeed relatively high; however, the gradual narrowing of the gap between the rich and the poor is a big trend over the past decade.


Poverty eradication, on the other hand, was an important measure toward narrowing the gap between the rich and the poor. Over the past 40 years, China has unswervingly taken strong measures to reduce poverty. Over the past decade, China has implemented large-scale poverty alleviation programs for approximately 90 million people living in poverty and announced in July of this year that it had completed its initial 100-year target of eradicating poverty and moving out of poverty and entering into a moderate prosperous society.


In addition, from the perspective of the labor income gap in China is narrowing in terms of workers’ wages and the pace of economic development. The wages of Chinese workers have grown faster than GDP in the last decade.


The above information shows that, although the gap between the rich and the poor in China is still very large, it has generally been narrowing over the past decade. However, this data seem to be different from what people generally feel. In recent years, people have been criticizing the phenomenon of the gap between the rich and the poor, criticizing capitalism more and more vigorously, and social calls for narrowing the gap between the rich and the poor have grown. Why is the gap between the rich and the poor narrowing in China, but the voices of public criticism are getting louder? This issue requires further detail analysis. 


I think there are several reasons why ordinary people feel that the gap between the rich and the poor is increasing. 


The first and most important reason: China’s economic development has slowed down. China’s economy has shifted from high-speed growth to medium to high-speed growth, and personal income growth has gradually slowed from rapid growth. The slowdown in the pace of socioeconomic development has led to growing concern about the gap between the rich and the poor. 


If we make a graph of China’s GDP growth over the past 20 years, we will find that since 2000, China’s GDP growth rate has increased year by year, peaking in 2007, and then began to decline year by year. Last year, the GDP growth was almost 6 percent, which is relatively low. 


The people’s perception of the gap between the rich and the poor is largely related to the pace of economic development. Ordinary people usually do not involve in surveys of the wealth gap and rarely look at this data, where their feelings mainly derive from their income status. When a society develops rapidly and the cake expands rapidly, even if the gap between the rich and the poor widens, it is difficult for ordinary people to feel it as the rapid expansion of the cake makes the shares that they get correspondingly grow rapidly. This is the reason why when China’s Gini coefficient was at the highest point around 2008, ordinary people were far less critical of the phenomenon of the wealth gap than they are now, because that was the time when China’s economy was growing at its fastest pace. 


After the society of China changed from rapid development to medium to high-speed development, the cake has still expanded, but the rate of growth has declined. At this time, low- and middle-income groups have felt more and more strongly about the gap between the rich and the poor. This is a common phenomenon that most countries experience. This is not only in China, but in any country around the world where after rapid economic growth, once the development pace slows down, people’s perception of the gap between the rich and the poor becomes more and more obvious. This is because when everyone’s cake is expanding rapidly, few people pay attention to and consider the problem of the gap between the rich and the poor. When the rate of personal cake growth slows down, expectations for future income will lower, and the feelings about the wealth gap and social injustice will become stronger. 


Judging from the popular vocabulary of recent years, such as “X-silk” and “lying flat,” in fact the entire society has become increasingly dissatisfied with the gap between the rich and the poor over the years. The Chinese government’s current vigorous proposal for common prosperity truly responds to the needs of society and the people as well as conforms to the trend of historical development. 


Looking into the future, after passing a period of high economic growth, China will face criticism of the gap between the rich and the poor for a long time. Therefore, China must increase its efforts to narrow the gap between the rich and the poor. China’s ability to achieve a national renaissance by the middle of this century will depend to a large extent on reducing the gap between the rich and the poor and whether fairness and justice can be achieved in the distribution. 


The second reason is that both the income-based and consumption-based Gini coefficients of China’s National Bureau of Statistics and the World Bank’s consumption-based Gini coefficients are very one-sided and do not fully reflect the reality in China. While the income of laborers in China has exceeded GDP growth over the past decade, and while the World Bank’s Gini coefficient based on consumption statistics is also decreasing year by year, neither the National Bureau of Statistics nor the World Bank statistics reflect a fundamental reality. This means that the income from labor in China in the past 10 years is lower than the income from capital. In fact, the gap between China’s rich and poor has not been fully reflected in the Gini coefficient. From the actual situation of China, in addition to the gap between the rich and the poor, between personal income or personal consumption, Chinese residents’ capital income, including financial investment, real estate income, and poor distribution of educational and medical resources, these various factors have caused the gap between the rich and the poor to be more serious than the general statistics. 


The Institute of Weidao Risk Research in Shenzhen recognized the unilateral nature of the Gini coefficient and released the Mongoose Social Equity Index report in 2018. The Mongoose Social Equity Index measures China’s equity status, showing that in 2002-2004, China’s social equity was at a relatively high level. Since 2005, China’s social equity index has declined significantly. This is mainly due to the increase in the gap between the rich and the poor by the stock of wealth, which is dominated by real estate. Moreover, the financialization of assets has made the wealthy population richer, while those with fewer assets have their wealth shrunk in the process of financialization, further widening the gap between the rich and the poor. It can be seen that in recent years the imbalance in social equity has been exacerbated mainly by the widening gap between the rich and the poor.


In comparison, the Mongoose Social Equity Index reflects the gap between the rich and the poor in Chinese society more comprehensively, as well as a greater gap between the rich and the poor than metrics based on personal income or consumption. To give the simplest example, a person invested in two homes 10 years ago, and the value appreciated in these two homes has far outweighed the increase in his salary over the past decade. If we interpret the added value of a home in the 10 or 15 years as capital investment income, its growth rate far exceeds the growth rate of labor incomes, and more than doubled. 


A similar situation has emerged in the field of education. Some people continue to invest in good school districts and good schools, and rich people can live in good school districts and go to good schools. This Matthew effect is increasing the gap between the rich and the poor. 


These changes and differences are difficult to assess through the Gini coefficients we mentioned earlier, and it is also difficult to reflect them through data. However, new class differences have gradually emerged in these three areas, and it is becoming increasingly clear that, if not addressed promptly, the gap between the rich and the poor will solidify. The income of capital far exceeds labor income, and the drawbacks of education and healthcare in the distribution of resources have made people feel increasingly aware about the disparity between the rich and the poor, and also strongly stimulated the nerves of ordinary people. 


The third reason is the change in social consciousness. Over the past decade, the Chinese Communist Party has strengthened its socialist ideological education for the whole society. Socialist fairness and justice have become more deeply rooted in the hearts of the people, and the social mentality has undergone relatively large changes. People’s expectations of common prosperity have also increased, and people’s criticism of the widening gap between the rich and the poor and the disorderly expansion of capital has become louder. 


I believe that these three reasons have led to the growing dissatisfaction of Chinese society with the issue of the gap between the rich and the poor. The central government’s proposal to achieve common prosperity at this time reflects this social demand. As China’s ruling party, the Chinese Communist Party has traditionally paid great attention to the needs of the people. From this perspective, the needs of the people are the foundation, and the Chinese government’s policy is to respond to the needs of the people. This is the main reason why the central government proposed to achieve common prosperity. 


Guancha: After the discussion on the concept of “three distributions,” there are two general doubts: the lack of mandatory charities and the imperfections of the existing legal and social systems. In your opinion, what are the supporting measures and policies needed for the third allocation? 


Han Zhu: Strictly speaking, distribution is a productive relationship, an economic system. In addition to the public ownership system as the main body of socialist production relations, the most important thing is its distribution methods. In other words, distribution methods, as a productive relationship and economic regime, are mandatory and must be observed. 


After the central government proposed to narrow the gap between the rich and the poor through three allocations, a lot of attention was paid to the third distribution. Because primary distribution and secondary distribution are not new topics, there are not many people discussing them in depth. As of this year, some universities and scientific research institutes have organized many seminars devoted to the third distribution issue, and quite a few articles have been published in this regard. My understanding of the third distribution is rather superficial, and I can only raise a few questions in the hope that it will lead to further in-depth discussion from all sectors.


Distribution is a productive relationship and an economic system. In addition to the public ownership system as the main body of socialist production relations, the most important thing is its distribution methods. The three distributions currently proposed by the central government are all concretized by the constitution of the socialist “distribution system in which distribution is the main subject and multiple distribution methods coexist”; that is to say, all three modes of distribution must reflect the nature of socialism. But what is the relationship between the third distribution and the familiar primary and secondary distribution? How to institutionalize a voluntary charitable act? This needs further discussion. 


My understanding is that compared with developed countries, China’s current personal donations rate is relatively low, and this is largely due to a lack of policies to mobilize people to participate in philanthropy, which has resulted in charitable organizations not being able to play their full role in encouraging a culture of public good and guiding personal donations. Therefore, China urgently needs to establish a standardized and encouraging socialist charitable system. This is the main reason for the central proposal for the third distribution. The system here refers mainly to the legal regulation of social and individual charitable behavior. This legal norm does not require individuals or enterprises to perform charitable acts. On the contrary, such laws and regulations protect and encourage charitable acts by individuals or enterprises. Charity is a voluntary act, which is the most fundamental principle. This should not be forgotten at any time. 


My personal view is that the third distribution should not be a kind of social act of haste and profit, but rather a long-term institution-building and cultural construction. In philanthropy, China should carry forward its excellent cultural traditions. China is a country with a very long tradition of philanthropy, which emerged as early as the Warring States period, and has since spread throughout China in various ways. Contemporary society should further explore China’s traditional philanthropy spirit and carry it forward. We now have laws and charities, but we need more institutional construction. 


Moreover, philanthropy in all countries of the world, especially developed countries, is also worth learning from. Especially in terms of charity and legal systems and charity and taxation systems, developed countries started earlier than us, providing us with much to learn from, but also to prevent capital from turning philanthropy into a profitable model. 


However, the role of the third distribution in narrowing the gap between the rich and the poor in the society is limited compared to the primary distribution and the secondary distribution. After the central government proposed to narrow the gap between the rich and the poor and achieve common prosperity, many people have focused on the third distribution, even thinking that the third distribution is the strategic gripper in resolving the gap between the rich and the poor. I think this view is biased. Voluntary philanthropy does have a role to play in narrowing the gap between the rich and the poor, but it is, after all, limited. The fundamental solution to the gap between the rich and the poor lies mainly in the mandatory distribution system, namely, the primary and secondary distribution. 


How to Balance Efficiency and Fairness in the Primary Distribution


Guancha: China currently implements a distribution system based on labor distribution as the main body, and a variety of distribution methods coexist. Distribution by work reflects the fact that the labor factor is the most important part of various factors. However, under the conditions of a market economy, the income of workers is largely based on market principles. How to protect the basic rights and interests of workers under the conditions of a market economy? We also know that in recent years, we have criticized 996 and overtime culture. In your opinion, what problems do we currently have in the primary distribution? 


Han Zhu: First, as you said, China’s Labor Law has not been fully implemented, and workers are not well protected. Strictly speaking, 996 conflicts with the Labor Law. The labor laws stipulate those workers cannot work overtime for more than three hours a day and 36 hours a month, but in practice, there are many cases where the overtime hours are exceeded. We currently have a working system of eight hours a day and 40 hours a week, which is not really implemented in many places.


Indeed, in terms of time, labor wages in China are lower than what we currently understand in the market. For example, an employee’s official salary is 3,000 yuan a month, but the company will tell him that he can get 6,000 a month, but he needs to work overtime. A lot of people would think earning 6,000 a month is not bad, but in fact, 3,000 of them need to work overtime. 


When a worker’s total income has increased, he seldom calculates how many more shifts he has added. In this case, overtime has become the norm for many enterprises. Even in many enterprises, employees take the initiative to work overtime to earn more money, because without overtime pay, the salary will be very low, and only through overtime can they earn enough money. Enterprises glorify forced overtime work into labor initiatives as if employees themselves want to work overtime—to avoid the responsibility of the enterprises. In fact, the reason why employees have to work overtime is that enterprises are suppressing wages. If they can earn decent wages without working overtime, employees will not want to work overtime. Therefore, I feel that there is still much to be done to fully implement the Labor Law, determine the minimum wage, and ensure labor security. 


Second, state-owned enterprises should reflect China’s socialist nature in the production process. Why do we say that state-owned enterprises are socialist enterprises? This question is really difficult to answer simply, and it needs to be viewed from two perspectives. On the one hand, because we are a socialist country led by the Chinese Communist Party and have a socialist political system; all enterprises funded by the socialist state are socialist enterprises. According to this view, because the state invests in state-owned enterprises, in other words, their investors are socialist countries, so they are naturally socialist enterprises. 


Strictly speaking, this statement is not in line with the basic principles of Marxism. This view is based on the use of the superstructure to determine the foundation of the economy, and it goes against the basic principles of socialism. It cannot be said that the socialist nature of the state determines the socialist nature of enterprises. On the contrary, it is the socialist nature of the enterprise that determines the socialist nature of the country. According to the logic just now, the new China should have been a socialist country since its establishment in 1949. In fact, after the completion of the three major reforms in 1956, rural areas have realized cooperation, urban industry and commerce realized public-private partnerships, and rural and urban cooperation, the economic units have a socialist nature before China claimed to have entered a socialist society.


Before the reform and opening up, we said that the working class was the owner of the enterprise, such as having workers congress, etc., but this was difficult to implement. Many attempts were made, including the Angang Constitution, workers’ participation in management, etc. But in the current state-owned enterprises, except in that they are funded by the state, the entire production and operation process is not, strictly speaking, so different from private enterprises. The current employment system has no more than three forms: direct employment, labor dispatch, and labor outsourcing. Through the restructuring of state-owned enterprises, the latter two methods have led to a change in psychological perception: few workers in state-owned enterprises now say that they are the owner of the enterprise, and they have a simple employment relationship with the enterprise. 


This is where the issue of the initial distribution is concerned. Many enterprises through labor outsourcing and then outsourcing, outsourcing layer upon layer, and in the end, the labor income has been suppressedThis may be understandable because it is linked to the market, but enterprises also eliminate their responsibilities, such as labor security and minimum wages. All labor dispatch and outsourcing, according to the word of the industry, is aimed at avoiding risks. The so-called risk avoidance is to avoid responsibility. In some state-owned enterprises in infrastructure industries, some even have only management with no or very few workersthe production process is outsourced. 


State-owned enterprises must embody the socialist nature, and the society must pursue public prosperity, they must fully implement the Labor Law, further narrow the income gap in the three employment methods, reflect the basic principles of socialism, provide labor security, and cannot turn labor outsourcing or dispatching labor into a disguised method to shirk responsibility.


Guancha: Here comes the issue of “efficiency and equity” that we often refer to in the primary distribution. In the past, social production would pay more attention to efficiency, and even believed that the pursuit of fairness might reduce the vitality and motivation of the entire society, thereby reducing efficiency. How to balance the relationship between the two? 


Han Zhu: The first thing we need to do is to follow the principle of fairness among the three forms of direct employment, labor dispatch, and labor outsourcing, and reduce the differences between them. For example, employees in the establishment now have many benefits, which can be translated into a portion of income, leading to a certain gap within and outside the establishment that should be narrower. Otherwise, benefits of the underlying labor will be compromised.


I think one particular point should be paid attention to, that is, to safeguard the basic rights and interests of more than 200 million migrant workers. This is the most important thing. Because migrant workers have low requirements, their rights and interests to enjoy labor security are often canceled or reduced in disguised form by employers in the form of labor dispatch and labor outsourcing. We must not be allowed to treat migrant workers in this way. There must be legal regulation for this layered outsourcing form of employment. Neither state-owned enterprises nor private enterprises can shirk their responsibilities. 


Guancha: But capital is profit seeking; it is difficult to achieve a balance between efficiency and fairness through the self-regulation of enterprises. What can be done at both the enterprise and the state level? 


Han Zhu: Fairness and efficiency between the grasp and balance, the main body of the enterprise. To improve efficiency and competitiveness, enterprises should focus on technological innovation. Science and technology are the primary productive forces, and companies should study how they can become competitive through technological innovation rather than simply reducing labor costs. Of course, both efficiency and fairness are needed, but in socialist countries, there should be priorities. This is the case even this is placed in the world, technological innovation and technological breakthroughs are the main factors to improve productivity. If it is only labor costs that are constantly reduced, enterprises cannot upgrade and develop. 


On the first distribution, the government can only do very little, because, in the final analysis, we are still in the early stages of socialism, so between fairness and efficiency, we often tend to involuntarily tend toward efficiency. At the national level, more policies and measures should be taken to encourage innovation in enterprises, and this is now being done, including tax reductions and exemptions for innovation. At the same time, the government should also play a supporting role. It should draw the red line and not sacrifice the rights and interests of workers. 


In general, the first distribution should be carried out taking into account our national circumstances, and we are still in the early stages of socialism, as a developing country, taking into account efficiency. However, the first distribution alone cannot change the disparity of the gap between the rich and the poor, because per our current economic structure, which is based on public ownership as the main body and multiple methods of business development, the gap between rich and poor will inevitably increase per the characteristics of our current pursuit of efficiency, so we have to carry out a second distribution. 


Redistribution, the Reform of the Tax System Is the Key 


Guancha: Redistribution is government-led, mainly through taxation to narrow the gap between the rich and the poor. What problems still exist in our country’s tax system at present? How to play the role of tax mediation? 


Han Zhu: The second distribution, like the minimum wage and labor security allocated for the first distribution, is institutional and compulsory. But I think the reason why China is constantly talking about narrowing the gap between the rich and the poor is that we are a socialist country, but so far the gap between rich and poor is still very large, even larger than in some capitalist countries. Compared with countries such as the Nordics, we have a larger gap between the rich and the poor, which is clearly not a phenomenon that a socialist country should have. What is the reason? It is that the second distribution is not doing well enough, and the underlying reason lies in the problem of our tax system.


1. Corporate taxes are too heavy, personal taxes are too low, and the leverage of the country’s secondary distribution is limited. 


China’s taxation system was established very late, and it existed only after reform and opening up. Before the reform and opening up, the part that enterprises paid to the country were not called taxes but profits. The output value produced by an enterprise in a year, in addition to the maintenance and expansion of reproduction, the rest is profit and should be handed over to the state. In 1983, the introduction of the change of profits into a tax, called the “profits to taxes,” thus established China’s taxation system. Therefore, China’s taxation system had a weakness from the beginning: because it was converted from profits, it paid in large amounts. It is a recognized fact that Chinese companies are heavily taxed. But this phenomenon leads to the lack of powerful levers to adjust the country’s secondary distribution. 


The Chinese government relies heavily on tax revenues from businesses. In 2018, the government’s tax revenue was 15.6 trillion, of which personal income tax was 1.4 trillion, while nearly 90 percent of the tax revenue was taxed by enterprises, including value-added tax, consumption tax, and corporate income tax. In 2020, China’s personal tax threshold is 5,000 yuan a month, and the nominal number of people paying taxes nationwide is about 60 million. In 2020, the proportion of personal income tax in China accounted for only 6.89 percent of the country’s total tax income, which is relatively low. 


As I said earlier, the second distribution is to regulate the gap between the rich and the poor through the taxation system. And the entire tax revenue is only 6.89 percent. Although there is a progressive tax, the total amount is too low, and the country lacks strong leverage in its hands. How can this be mediated? 


Some people will say that to tax enterprises is to tax capital, but in fact, everyone ignores that a heavy tax on enterprises must mean a heavy tax on the poor of the whole society but also means that low-income people should not pay tax on the tax. Quite simply, a substantial portion of a company’s tax will eventually be passed on to the price of its product or service. China’s current implementation of the in-price tax, their prices contain tax components, a part of the tax paid by enterprises must be transferred to the price. Therefore, part of the corporate tax is actually paid by the whole society through the purchase of goods by consumers, most of whom are low-income people who should not have to pay tax. 


In addition, enterprises also have non-tax revenue: China’s share of non-tax revenue in fiscal revenue rose gradually before 2016 (reaching 18.3 pecent in 2016), gradually falling in the past two years to 14.7 percent in 2018, but is still higher than in many countries. Numerous administrative charges are one of the main reasons why Chinese companies feel the tax burden is heavier. A significant portion of these costs for businesses is transferred to the price of the product or service, which is ultimately borne by consumers in society. 


There are only about 60 million people in China who pay personal income tax in name, and the state mainly relies on enterprises to collect taxes. As a result, everyone is paying taxes when they shop and spend, and social injustice arises. As the low-income people at the bottom consume at the same price as the rich, the tax rate in the price is the same, so the fairness principle that low income should not pay tax and high income should pay double tax is eliminated, thus widening the gap between the rich and the poor. 


2. The proportion of direct taxes must be increased and indirect taxes reduced. 


In 2018, China accounted for about 40 percent of direct taxes and over 60 percent of indirect taxes. In 2018, China’s direct taxes accounted for about 40 percent, while indirect taxes accounted for more than 60 percent. Direct tax is generally levied on income and wealth, which is not easy to shift, so it is considered to be more direct in adjusting income distribution. 


To effectively achieve fairness and justice in secondary distribution, China’s taxation system must be improved. First, we should reduce the proportion of corporate tax in the national fiscal revenue, increase the share of personal taxation, and truly achieve those low incomes that do not pay taxes and the rich pay more. Second, increase the share of direct taxes and reduce the proportion of indirect taxes. Third, minimize non-tax fiscal revenue as much as possible and reduce the non-tax burden on enterprises. 


Guancha: The public is generally focused on the fairness of personal income tax reform, such as reducing the tax burden on low and middle-income people, while increasing the tax burden on high-income groups is very popular.” We have reformed taxes many times, constantly increasing the levy point and special subsidies. According to our discussion just now, is there a problem with this as well? 


Han Zhu: As I said just now, at present, China’s personal taxes only account for about 6.89 percent of total tax revenue. There is no way to use it as a powerful lever to adjust the gap between the rich and the poor. Relatively speaking, in many developed countries, the situation is largely reversed, with personal taxes accounting for the bulk of tax revenues. If personal income tax can account for more than 60 to 70 percent of the national finances, then the country will have relatively large leverage, and it will be easy to adjust the income gap. 


As we continue to raise the threshold, fewer and fewer people pay nominal taxes, resulting in failing to increase the proportion of individual income tax. The correct process should be reversed, corporate taxes should be reduced, and the personal tax ratio should be increased. Of course, many people would say that they were not paid much and that they had to pay more taxes, and it would be difficult for them to accept it. But let us not neglect that our daily consumption behavior, including the purchase of goods and services, are paying taxes, but they are relatively hidden and not easily felt and noticed directly by everyone. I think this is extremely unfair to the poor. From this point of view, it is not the less taxable, the better. 


Guancha: Taxing the rich is also the direction of global reform. There are also discussions on property tax, inheritance tax, and capital gains tax. Why hasn’t it been pushed forward? 


Han Zhu: To implement property tax, there will be certain difficulties: what kind of house to collect tax on, what not to collect tax on, should it be calculated by the number of sets or by square, by value? In the past, there were plots of real estate tax at a local level, but none of them succeeded. This shows that the implementation of the real estate tax is quite complicated and requires full preparation. But in the general trend of common prosperity, the real estate tax is imperative. However, it needs to be fully prepared and implemented gradually, depending on the conditions. 


But another tax is easier than a property tax to address high housing prices and narrow the gap between rich and poor: a capital gains tax. For example, 10 years ago, you bought a home for 2 million and sold it for 10 million this year, and you earned 8 million as a result. The taxation on the 8 million is called capital gains tax, which is your investment income, not labor income. Taxes on capital gains are very high, generally around 20-30 percent in countries. This tax does not benefit the rich, but it benefits the country and the poor. As mentioned earlier, China’s current capital income far exceeds that of labor. If capital income is not taxed, it is to widen the social gap between the rich and the poor, contrary to the socialist principle of fairness and justice. If China also levies a capital gains tax, objectively it can discourage the wealthy from going to real estate speculation. 


If there is no capital gains tax in a society, it is easy to form an unearned rentier, contrary to the socialist principle of distribution according to work. In addition to some people who become rich rentiers by investing in real estate, the rich lack relevant taxes to adjust their income from all kinds of investment, stock income, and interest income from bank deposits. In 1999, the Chinese government introduced a bank interest tax at a rate of 20 percent, which is the normal rate for general capital gains tax. But the rate of bank interest tax fell to 5 percent in 2007, and in 2008 the Chinese government simply stopped imparting bank interest tax. 


The third is the inheritance tax. This question is reasonably simple, so I won’t talk too much about it. 


These three taxes are actually directed to the capital and the rich. We talk about the rich leading others to get rich and that we achieve common prosperity, but some of those who get rich first have very weak awareness of common prosperity. Through such institutional arrangements, we try to bridge the gap between the rich and the poor as much as possible, and not leave the rich behind. 


However, the implementation of tax reform in China needs to be cautious and gradual, and people’s psychological characteristics and social stability must be taken into account. Much of the current taxation system is invisible to individuals. If one were to change to direct collection from individuals, although it is beneficial to ordinary people at the end, most people would still feel that they did not need to pay taxes in the first place and that they now have to pay taxes after reforms. There will inevitably be a psychological rebound; a slight carelessness can easily cause social unrest. In addition, the implementation of real estate taxes, capital gains taxes, and, in particular, inheritance taxes, will all have different resistance. Since these taxes relate to personal property, they must be implemented with caution. Any reform of the taxation system needs to take into account the psychological endurance of the people. All need the arguments of scholars and experts, and all must do well in guiding public opinion in advance. 


In terms of social stability and healthy development, an olive-type structure with a large middle and two small ends is best. Among the three distributions, the primary distribution is to protect the basic interests of low incomes, the third distribution encourages the philanthropy of profitable corporations and the wealthy, while a reasonable second distribution is the main means of adjusting the gap between the rich and the poor and becoming a big middle class. 


In the process of realizing common prosperity, the three distributions are all very important, but the primary distribution mainly relies on laws and regulations to protect the interests of workers; the third distribution is mainly a tax on the wealthy. The secondary distribution involves all members of society, and tax policies are the most complex. But when the secondary distribution is performed well, a stable middle class will gradually be formed. Therefore, in the process of achieving common prosperity, the secondary distribution is the most important, and reform is also the most difficult, and it requires the greatest effort put into it. 


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Cite This Page

寒竹 (Han Zhu). "Why Is the Gap between Rich and Poor Narrowing in China, and Criticism Is Increasing? [为什么中国贫富差距在缩小,批评声音却在增大?]". CSIS Interpret: China, original work published in Guancha [观察者网], September 7, 2021

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