The implementation of the property tax must be smart
Property taxes represent a small share of government revenue in countries around the world. Foreign practices notwithstanding, and given China’s current or even future situation, it is unlikely that property tax will also become a major source of tax revenue in China.
However, the property tax is important in itself. The property tax often guiding discussions these days generally targets residential real estate. To some extent, this is a completely new type of tax category in China, and something that has never been implemented before.
Now that residential property tax must be collected, it may not be defined and understood simply from a textbook perspective. This can create a divergence from the fiscal and economic reality.
As a type of tax, property tax has fiscal, economic and social attributes. To know whether residential property tax can be introduced, collected and implemented smoothly, and whether it can serve the intended purpose, we need to pay attention to what people think about it, i.e. what type property tax is acceptable to society as a whole.
The conception of property tax must be seen in the context of what is happening in China. We have to think in terms of reality, not just in terms of textbook examples.
In the past, the real estate sector has long been regarded as a pillar industry of the Chinese economy, as well as a guarantee of livelihood. Real estate was also seen as an important channel for the accumulation of wealth.
Obviously, the real estate sector is very important not only to generate economic growth, but also in people’s lives. Yet will such importance continue? It seems like it’s time for a change.
If a family’s wealth is based primarily on real estate, the risk will become greater and greater. The urban homeownership rate is currently 90 percent, and there are a lot of vacant homes. According to the principle that “houses are meant to be lived in, not for speculation”, a residential property should be considered a consumer good and is not meant to be vacant.
When the large number of vacant homes sit idly by for their prices to rise to become a channel of wealth accumulation, then they become assets with strong financial attributes and a means of wealth accumulation.
So what kind of “distribution expectations” will this lead to? If the accumulation of wealth is mainly achieved through the purchase of real estate, everyone will convert more income into real estate and then the housing will be used for speculative purposes.
Now we are using various indicators to measure if there is a bubble in real estate. When real estate takes on too many functions, enormous public risks to economic growth, sustainable development and common prosperity will emerge in its wake.
The housing tax should help solve macroeconomic problems and allow the housing sector to return to a good state of consumption. Housing should not be seen as the primary vehicle for individuals and families to accumulate wealth, or as a vehicle for accumulated wealth, at least not as the primary vehicle.
With this in mind, owning real estate should not become too accessible. If it becomes progressively more difficult, the behavior of real estate investing may be changed. Residential property tax should have an adjustment function to promote the restoration of residential assets into consumer goods and dilute their status as financial assets.
Financial attributes cannot be completely removed by the imposition of a single tax, but this tax must at least play a positive role by forming a synergy with other policy measures.
Once properties become financial assets, speculation leads to vacant homes and wasted resources. Although residential property tax is a kind of beneficial taxation in the textbooks, it does not necessarily correspond to reality. Homebuyers buy real estate in the name of consumption, but often turn those purchased properties into investment assets.
To regulate such speculative buying behavior, the residential property tax should be a tax on consumption behavior. This type of tax does not have the same equivalents targeting one-time home buying behavior among consumers, because as long as a home purchase is made, the tax will be paid annually thereafter.
In this regard, the residential property tax should be introduced to adjust the home buying behavior, prevent and dissolve the risks accumulated in the real estate sector and promote the transformation of the real estate market, thereby promoting the development of the mode of economic growth and making advancing the global economy and social transformation.
Under the current rural-urban dual system in China, there are still differences between public services for migrant workers and local citizens. Therefore, social transformation is slower than economic transformation.
While residential property tax alone cannot solve such an important problem, its introduction can help to some extent.
While city dwellers primarily rely on real estate to accumulate wealth, farmers have little to do with such real estate-based wealth accumulation. On the contrary, farmers’ houses are built on family land and begin to depreciate on the day of their construction, resulting in increasingly large wealth gaps with their urban counterparts.
Social transformation must first consider offering farmers more opportunities to accumulate wealth. Without more opportunities for farmers, the gap between rich and poor in this dual structure will be more pronounced.
The residential property tax is not simply a means of regulating the distribution of income and the distribution of wealth, but rather a means of regulating the accumulation of wealth.
The ripple effect of this tax could be significant, as it can play an obvious role in changing distribution expectations.
Some only consider the impact of property tax on economic growth, but we cannot just think of these immediate concerns.
If we depend on real estate to stimulate economic growth, the economy will become unsustainable and it will be difficult to achieve high-quality development. An important aspect of economic transformation is not relying on real estate to achieve continued economic growth. For this, the property tax can play a role in the long term.
In the short term, the levy of a residential property tax will have a limited impact on property prices. Like throwing a stone in a pond, the waves of such an impact will not last long and will gradually subside.
However, in the medium and long term, the impact of a housing property tax is significant and beneficial, and the probable short-term impact of the tax on property prices should not prevent us from recognizing the Overall positive long-term impact impact on promoting transformation, improving dual social structure and achieving common prosperity, although these impacts are also marginal.
Residential property tax is a local tax, and central authorities should establish a legislative framework to set the basic principles and then delegate more autonomy to local authorities, allowing them to make their own decisions.
This is not only because the residential property tax is a local tax, but also because of the huge differences from place to place over the vast Chinese land.
If the regulatory rhetoric of central authorities according to which residential property tax is a local tax are too detailed, it will be difficult to implement regulations according to different local situations.
Since the residential property tax is a local tax, and given the differences in development in China and the situations varied from place to place, it is better to leave the specific implementation plans of the tax to the local authorities in order to unleash the creativity and enthusiasm of local conditions.
More decentralization, that is to say more delegation of power to residents, can help promote the adoption of the new property tax in a healthy and regular manner.
The writer is the head of the Chinese Academy of Tax Sciences.
Opinions do not necessarily reflect those of China Daily.