China has widened the lawsuits over a property tax, a move that pits President Xi Jinping against vested interests deeply rooted in an economy fueled for decades by real estate development.
The state council, the Chinese cabinet, will expand pilot programs to tax residential and commercial property in cities, according to an announcement by the National People’s Congress – the approved legislative body – on Saturday. The locations were not disclosed, but rural households will be excluded.
Reform is likely to be far more difficult to implement and affect more people than a regulatory assault that was launched over the past year in the world’s second-largest economy. A property tax could change China’s economic model, reshape government revenue streams from land sales to taxes, and discourage real estate speculation.
Xi privately asked economic planners in August to move forward with the development of a land tax, the next step in his broader “common prosperity” reforms, which aim to redistribute wealth and ” regulate excessively high incomes â.
But the proposals have raised concerns among some ordinary Chinese, whose savings are entangled in the value of the property they own. Others fear that it is too risky and that it could cause a real estate crash.
How would a property tax work?
Proposals for the introduction of a property tax have been debated for nearly 20 years. The tax is envisioned as an annual levy on home ownership and would be set and collected by local governments.
Yilin Hou, professor of public policy at Syracuse University who advised Beijing on the tax, said the tax base should be “as broad as possible” but with relief measures for the economically vulnerable.
âIf the tax is efficient and fair, adequate and transparent, then it will be much easier to collect, collect and apply. This way the tax will be. . . also be politically acceptable, âHou added.
Many tax scholars and economists believe it will also help local governments shake off their chronic reliance on selling and leasing public land to developers. This relationship has contributed to widespread real estate speculation and has pushed land and house prices up in a cycle that many experts find unsustainable.
According to an analysis by Capital Economics, the research group, an effective tax rate of 0.7% of the total property value would have generated 1.8 billion Rmb (282 billion dollars) last year in China. , against 1.6 billion Rmb for land sales.
The tax and the ensuing pressure on prices could also help reduce the attractiveness of real estate investment, redirecting private capital to sectors such as high-tech exports and services that stimulate domestic consumption, according to his supporters.
What stands in the way?
Many believe that previous efforts to tax residential property have failed due to resistance from wealthy and politically connected elites, especially in cities like Beijing, Guangzhou, Shenzhen and Hangzhou, as well as local government officials across the country. country.
Some experts say that a potentially bigger problem for Chinese leaders is the fear of instability that could be caused by a stock market crash.
âIn speculative markets, once prices stop going up, they tend to go down. If this were to happen to Chinese real estate prices, it would not only harm the banking system terribly, but it would also reverse the main source of wealth accumulation among Chinese households, âsaid Michael Pettis, professor of finance at the Peking University. “How are social, financial and economic institutions adjusting after 40 years of relentless price hikes, during which the conviction grew that Beijing will never let house prices fall?”
China’s real estate industry has been propelled into the global spotlight by the fate of Evergrande, the world’s most indebted real estate developer with $ 300 billion in liabilities.
Official data released this week showed the first monthly drop in new home prices in 70 of China’s largest cities in more than six years, indicating that a slowdown is already rippling through the housing market.
The slowdown has increased pressure on Beijing executives, who introduced debt rules last summer to limit the amount developers can borrow. The measures were introduced at a time when rate cuts and an industrial boom to counter the economic blow from the pandemic had raised fears of asset bubbles.
Xi’s desire to move forward with the tax reflects growing confidence in Beijing that China could handle a plethora of acute housing market problems and other economic risks despite the potential blow to near-term growth said Gan Li, professor of economics at Texas A&M University. .
âThe president himself has said openly that we need to establish a property tax,â Gan said. âWe have all learned that we have to take it very seriously. What he says he will deliver.
When would it be implemented?
Beijing has not said when the tax will be rolled out, or where it will be introduced.
Some economists would like the tax to be rolled out nationwide as soon as possible, but the consensus is that trials in Shanghai and Chongqing, underway since 2011, will be gradually expanded, starting with the wealthier cities.
“By our design, a good tax system is one that grants local governments the power to collect this tax,” Hou added. âThey decide if they want to start now or years later. They decide for themselves the tax rate, the tax rate.
Despite reports of political opposition, the chances of a national tax being implemented are much higher than previous attempts, said Mark Williams, chief economist for Asia at Capital Economics.
âInsider opposition is not new. The correlation between party membership and ownership of multiple properties is probably quite high, âhe added. âBut demographics mean the 25-year real estate boom is coming to an end. Land sales are no longer a sustainable source of government revenue. A modest property tax could be.
What do the Chinese think of the tax?
Interviews and online discussions reflect a clear division over the tax in China.
âNo one likes taxes, but it won’t have too much of an effect on me because I’m not a real estate speculator,â said a businessman from Zhejiang province.
Some believe the levy will be ineffective in tackling inequality, is simply used as another source of government revenue, or both.
Others are betting that house prices will continue to rise in the medium to long term, with local authorities unlikely to implement a tax that goes directly against their own interests.
“Because the class that owns the most property is in fact the bureaucracy, it is highly likely that the property tax will become a formality and ultimately have no real effect,” said a business leader in Beijing. âI will continue to invest in homes.
Additional reporting by Emma Zhou in Beijing