The target confusion of property tax in China

Since public policy cannot get rid of the effect of politics, it cannot hold neutral position in values. Therefore few public policies can achieve “Pareto Improvement”. “Pareto Improvement” refers to enhancing welfare of a group of people in society without harming the welfare of others. Property tax cannot be an exception.

Chinese property tax policy discussion usually connects with property price adjustment, which, though seen from the whole world, is rather rare. Generally, property tax is a local governmental income so as to provide public goods and services, which has little relation with real estate price adjustment, a spontaneous market behavior.

In a nation of free movement, residents vote with their feet, allowing competition among places and gaining balance between property tax and public service quality. Usually, a location with higher property tax is of better public services. Take the United States as an example. Residents who care greatly about public service quality will submit high property taxes; while those who cannot bear such high property taxes will move to a location with lower-quality public services.

Residents will express their discontent if the local government fails to fulfill the public service promised at property tax collection. Yet under other conditions, disputes are always around whether the house owner or the renter/ buyer shall bear the property tax. In a rental market with fierce competition, the renter may have to pay the property tax, for the house owner is likely to transfer the tax to the renter by raising the rent. Conversely, in a market where renters choose from house owners, it will be difficult for the owner to transfer the taxes. However, discussion on property taxes is not directly connected to real estate price.

Then how can the tax issue be connected with housing price adjustment in China? On one hand, during the last decade, housing price in major cities rose rapidly. And the government gained great benefit from monopolizing the primary land market. On the other hand, the rapid increase of housing price triggered discontented emotions of middle and low income groups. Therefore, while stabilizing housing price so as to stabilize governmental revenue, the government shall also generally lower housing price. And the property tax policy is trapped in a dilemma.

In the situation with unclear policy target, the philosophy of “collecting property taxes as local fiscal revenue to support public service supply” of China might be distorted. First, local government doesn’t wish great downfall of housing price, for it will affect the fiscal revenue and future property tax income. That forbids property tax to adjust housing price.

Second, real estate developers are likely to transfer the property tax to buyers, making it impossible for property taxes to achieve reallocation effect and narrow the wealth gap.

Finally, such taxes are likely to be used for other purposes by the government if the current budget remains unpublished, such as pay raise for local officials in a disguised form. In this way, the property taxes are not put in public service supplies and therefore hard to achieve the goal of serving public with tax revenue.

As above, in China, real estate issues are related not only to land finance but also public welfare, being confusing and unclear. Without clear tax target, there may be unexpected difficulties during the execution of property tax collection. And it is also hard to realize the true aim of property tax.

Published on Caijing Magazine, Volume 15, 2014   | 2014-6-2