Can China Levy Inheritance Tax?
Inheritance tax has once again become an issue of public concern. In the document On Deepening the Reform of the System of Income Distribution approved by the State Council, it opens the possibility of introducing an inheritance tax “at the appropriate time”.
Why would Chinese government impose inheritance tax in future? To follow the international practice is one of the answers. As we can see, inheritance tax is levied in the major economies all over the world. Since its beginning from 1916 in the United States, the government taxed the second generation of the rich for their unearned riches to reduce the wealth inequality. In accordance with the laws of the United States, after the death of a U.S. citizen or a permanent resident, no matter where his inheritance is, his heirs (except the part of the statutory exemptions) should hand in the gross estate according to the tax to the federal government of the United States.
Of course, only taking international practice as a reason for levying inheritance tax is not persuasive. Since inheritance tax can be used to reduce the gap between rich and poor, the great wealth inequality in China nowadays makes imposing such tax as an unavoidable measure. According to China’s Gini coefficient released by the National Bureau of Statistics, the number has arrived to 0.474 in 2012 which exceeded the warning level of 0.4. In such circumstances, many people think government should play Robin Hood, and it is just the right time to impose the inheritance tax to redistribute the wealth from the rich to the poor.
But the problem is, after taxing the rich in the form of property taxes, can the poor benefit from it? In fact, there are already many taxes on property income in China in the name of “taxing the rich to help the poor”, and the most typical one is the progressive tax rate of personal income tax. But, after all the taxes are put into the government's pocketbook, whether these resources can be transformed to the income of low-income people and thus achieve an effect of a more equitable income distribution?
Before the inheritance tax comes into effect, we might as well check the effect of regional fiscal transfers for example. Under the current institutional framework, fiscal transfer is an important means to balance fiscal revenues between the developed areas and the undeveloped areas. But what’s the result? Fan Ziying, a professor in Huazhong University of Science and Technology had found: as provinces got more central fiscal transfers, their overall economic growth rates are slower. Although the subsidies promote economic growth in underdeveloped provinces in the short term, the impact is negative in the long run. Of course, for this conclusion, many people will say that it is because these provinces have weaker economic basis than developed areas, therefore it is inappropriate to compare their economic growth rates with the developed areas. Well, we can look where the fiscal transfer money has gone to. According to Fan Ziying’s research, a unit of fiscal transfer will make the government support level raise 0.6-1.3 units, while it only makes GDP or the residents’ income grow just 0.1-0.2 units. That is to say, the consequence of more fiscal transfer is the expansion of the size of government, while the local residents cannot enjoy more benefits from it.
Since the fiscal transfer can’t help the poor as expected, how we can guarantee the government will give the inheritance tax revenue to low-and middle-income class, rather than the self-expansion of the size of government? From this point of view, any attempts to regulating income distribution through inheritance tax should be greatly discounted.
Countless practices have proved the non-government investment is more efficient than government’s, and it is able to create more positions and higher incomes, so it’s not a good way to let government gather a huge amount of fiscal resources for redistribution. Rather, it’s better for Chinese government to cut taxes and fees. One might argue that, although the government is less capable than private people in creating wealth, it can do many things that many companies are reluctant to do by using the wealth concentrated in the hands of the government, for example, poverty alleviation and disaster relief. It sounds very reasonable, but if we carefully ponder, it is not the same thing. Although government makes great effort to support the low-income group, if we look at from a global perspective, we can see there are many organizations are doing the similar things, and their performances are not worse than government. We might as well analyze the experience of Carnegie, a steel magnate in the United States in twentieth Century for example.
Carnegie has a famous saying which is popular in modern society, and that is “The man who dies rich, dies disgraced”. His actions really proved what he said: prior to his death in 1919, Carnegie gave a total donation of $ 350,695,653. Carnegie believed that wealth should not be passed to their offspring. He set his last words before dying and wanted to donate all the remaining $ 30 million.
Where does such a large amount of money have gone to? In 1911, Carnegie used $ 150 million to found the Carnegie Foundation of New York which is the first foundation for charity in the modern history. In fact, before setting up the special foundation, he had already invested a lot of material resources to social welfare undertakings. Carnegie believed that he benefited greatly from libraries, so he donated libraries after being a successful person, and hoped to benefit the community by doing so. From the first donated library in 1881, in the subsequent 16 years, he donated a total number of $ 12 million to set up libraries which nearly three thousand and his libraries were not only in the United States, but also distributed in Canada, the United Kingdom, Australia, New Zealand and other countries. What library to community is really like what Carnegie said, “When you build a library for the community, you introduce an inexhaustible flow streams for desert” from which many people benefit.
In fact, Carnegie's charity work was not limited to the library. His trace could be seen in the field of education, science and technology and health etc. Carnegie was a microcosm of that era, and a majority of American wealthiest would donate most of their money into social welfare undertakings, form Carnegie, in the end of the 19th century to Bill Gates, at present. It is the private sectors which maintain great enthusiasm and enormous amount of financial support to the social and public affairs that allow the contradictions among the various classes not too sharp and make the whole society full of creative vitality. Therefore, the expansion of the size of government will not happen, because the non-governmental organizations are acting as a mirror for the government, from the other hand, it helps to reduce the burden of private companies.
With 30 years of economic development, the Chinese folk also accumulated a large amount of fortune, but why none of these tycoons donate their wealth to charity like Carnegie? In my opinion, the deficiency in the charity system is a very important aspect: establishing charities needs approval; there are a variety of constraints in different fields. In this case, there is a certain degree of difficulty for the richest in China to donate their fortune to various charities like the richest in the United States.
In my point of view, instead of levying inheritance tax as a means of income distribution reform, we should take reform for folk public welfare to attract a variety of non-governmental sectors donating in this field, and offering a variety of skill services for low-and middle-income classes. The history of United States has proven that the development of the public service sectors can help ease social conflicts, while the unsuccessful experience of the past fiscal transfer payments in China has also proven this point: we should distribute the wealth to our people, rather than concentrate the resources in government. In this sense, inheritance tax should be put into practice later or not put into practice.
Originally published on China Times | 2013-2-15
