The Economist October 30th 2021 Finance & economics 85HousinginChinaThe long wait for a tax everyone
loves to hate
I
fsunyat-senhadgothisway,China
would have been a bold pioneer in the
taxation of real estate. During his exile in
Europe from 1896 to 1898, the republican
revolutionary fell under the spell of Henry
George, an influential American journalist
who believed a single tax on land should
replace all others. Sun hoped preindustri
al China could adopt such innovations
more easily than the West, because it was
“unimpeded by the opposition of en
trenched capital”, as one scholar put it.
Instead China has become a timid pro
crastinator in the taxation of real estate,
particularly of the property built on top of
land, as opposed to the land itself. It first
proposed a recurring tax on the value of
property in 2003. And it introduced a half
baked pilot scheme in the cities of Shang
hai and Chongqing in 2011. The tax was in
cluded in the fiveyear legislative plan of
the National People’s Congress (npc), Chi
na’s rubberstamp parliament, in 2015. But
things went no further. Reform, it seems,
was impeded by the opposition of en
trenched interests, including no doubt
many officials who would prefer not to de
clare their properties, let alone pay taxes
on them.
But in August Xi Jinping, China’s presi
dent, expressed support for a property tax
as part of his campaign to curb excessive
wealth and promote “common prosperity”.
And on October 23rd the npcsaid pilot
schemes would be expanded to new cities
(although it did not say when or which).
Such a tax is sorely needed. China raises
little money from its personalincome tax
es, which are too easily avoided. Indirect
levies, such as the valueadded tax, are
more lucrative but regressive. Local gov
ernments in particular lack a stable source
of revenue, which leaves them heavily reli
ant on land sales and transfers from the
central government. Although China does
impose a variety of propertyrelated taxes
(including one on the purchase of land),
these levies fall more heavily on the con
struction and trading of real estate than on
the possession of it. As China’s property
market matures, and its economy moves
beyond breakneck urban expansion, hou
sebuilding and selling will provide fewer
feathers to pluck.
The tax could also ameliorate some of
the perversities of China’s economic mod
el. About a fifth of its urban housing stood
vacant in 2017, according to the ChinaHouseholdFinance Survey, led by Li Gan of
Texas a&m University. A property tax
would make it more costly to buy second or
third homes and keep them empty, in the
hope of selling them on for a higher price.
It could therefore discourage speculation
and invigorate China’s underdeveloped
rental market.
But a property tax will also be unpopu
lar. It is the tax “everyone loves to hate”, as
Jay Rosengard of Harvard University has
put it. Such taxes are not discreetly with
held from a paycheque or embedded in a
product’s price. Payments can be lumpy,
conspicuous and irksome, especially if the
taxpayer doubts that bureaucrats will
spend the money well. As property prices
have raced ahead of incomes, many home
owners may also be “assetrich” but rela
tively “cashpoor”. In 2019, for example, a
property tax of 1.2% would have eaten up
over 10% of the average urban resident’s
disposable income.
Some people also fear that the tax will
crash the market. That seems unlikely. It
will be some time before any revenue is ac
tually collected. And the tax is not the only
lever that policymakers can pull. China’s
cities impose a variety of other impedi
ments and deterrents to property purchas
es, including hefty downpayment require
ments, limits on the purchase of addition
al flats, and rules that oblige buyers to
show a history of local socialsecurity contributions. If a property tax were to weigh
too heavily on the market, these prudential
limits could be eased.
The bigger danger is that the tax will do
too little, not too much, to cool specula
tion. The Chongqing tax, which is levied
chiefly on detached and highend proper
ties and exempts the first 100 square me
tres of space, depressed prices by 2.5% a
year, relative to where they would have
been, according to a study in 2015 by Zai
chao Du and Lin Zhang of Southwestern
University of Finance and Economics in
Chengdu. But prices still rose on average.
Shanghai’s taxhad no effect on prices at all.Progress and procrastination
To make them more palatable, the Chong
qing and Shanghai pilot taxes were both
patchy and complicated. The new pilot cit
ies should try cleaner designs. Any flaws,
kinks or illjudged exemptions can be diffi
cult to fix later. Indonesia, Mr Rosengard
has pointed out, decided to keep its effec
tive property tax at a meagre 0.1% while it
collected better data on property owner
ship and values. Yet even after the data im
proved, it found it difficult to raise the rate.
Britain’s property tax in the 1980s was
based on increasingly anachronistic rental
values. But the government was so reluc
tant to update them that it introduced a
disastrous “poll” tax instead. Ontario in
Canada spent 30 years talking about re
forming its property tax, before eventually
taking the plunge in 1998, as detailed by
Richard Bird and Enid Slack of the Univer
sity of Toronto.
Sun Yatsen hoped that China’s late
start in economic modernisation would
help it avoid some of the mistakes of the
countries that went beforeit.China’s later
start in property taxationgives it plenty
more examples to avoid.nH ONG KONG
The government will at last roll out a property tax