Monday, July 18, 2011

Inequality and tax in China - new report

For those interested in China's tax system, and in the impact of personal income taxes on inequality in countries more generally, this new paper by Richard Krever and Hui Zhang (hat tip TaxProf), looks interesting. It's called Progressive Income Taxation and Urban Individual Income Inequality, and its introduction notes:
"To date, China has not been able to use the personal income tax effectively as a redistribution tool. . . . the tax system has an almost insignificant impact on income redistribution, with post-tax incomes not varying significantly from pre-tax incomes. These findings stand in contrast with those commonly found in more advanced market economies."
Income tax is a relatively recent phenomenon in China (TJN wonders whether this has weakened the potential of the tax system to act as a brake on authoritarian tendencies through the 'no taxation without representation' channel. The article notes, and provides a handy graph illustrating, that
"With the notable exception of the United States, there is a very strong inverse correlation between a country’s reliance on income tax as a percentage of total taxation and the level of inequality in the nation. As income tax drops in relative weighting to other types of tax revenue, inequality rises. China stands apart from more advanced economies in terms of its limited reliance on income tax relative to other types of taxes and this no doubt inhibits its ability to use income tax as a tool of redistribution."
The paper discusses why China's income tax system might not be working and suggests - surprise, surprise - that one factor might be
"evasion by higher-income persons. There is evidence that a range of income types including income from stock market manipulation, property deals, vast bonuses from state- owned firms enjoying monopoly positions, large “gifts” received by powerful officials and their relatives, and income from corruption, abuse of power, exploitation of public resources, and dealings in land development projects and other monopoly interests go undetected by revenue authorities."
The secrecy jurisdiction of Hong Kong will have had an awful lot to do with that. But as the paper notes, a lot more research is needed in this crucial area.


Blogger Physiocrat said...

China has a tradition of land value taxation. The French Physiocrats learned about this from Jesuits who had been in China in the eighteenth century. In the twentieth century, Sun Yat Sen was a firm advocate. Hong Kong provides a high quality infrastructure through the use of 40 year leases - all land then reverts to the state on expiry. This is not quite land value taxation but the concept is similar. Taiwan uses straight LVT.

China would do well not to put itself through the mill of income tax. Land values are spread over a wide range, being very low away from the main centres of population. Taxes that take no account of geographical differences hit the margin hard.

Governments should collect what rightly belongs to the community ie the rental value of land, which arises as a result of the presence and activities of the community. By the same token, they should keep their hand off what does not belong to them ie that which is the product of human labour.

Further, the notion that employees pay income tax is based on a misconception regarding the incidence of taxes. The incidence of income tax falls on the employer. It adds to labour costs and encourages the replacement of labour by capital.

How income tax causes unemployment

1:46 pm  
Blogger TJN said...

I don't know why you are so obsessed with LVT to the exclusion of all else. It is a good tax - as is the income tax. Land is important, but there's much more to life than land, land land. the income tax is the result of decades, even centuries, of democratic bargaining and is one of the pillars of the modern nation state.

2:08 am  
Blogger Derek said...

For many of us our obsession with Land Value Tax comes about because we have looked at many other forms of taxation and come to the conclusion that LVT has the most advantages. Including the potential for the virtual elimination of tax evasion and avoidance. I don't deny that income tax is one of the better taxes -- certainly better than sales or payroll taxes -- but it is relatively easy to avoid most of it for those who can afford to employ clever, expensive accountants without morals.

As for modern nation states, I think you'll find that land tax played a bigger part in the formation of modern nation states like the UK, the US, Meiji Japan, Denmark and Revolutionary France than you might realise at the moment. It's a very interesting topic when you start looking into its history.

Lastly I apologise if you find our raising of the LVT topic irritating. Believe me that those on the Koch Brothers anti-tax "Libertarian" Right find it even more irritating than you do since those who fund it know how much damage an unavoidable (and potentially high) tax like LVT would do to their sponsors' unearned income.

9:28 pm  

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