The Property Tax in China: History, Pilots, and Prospects (Development and Governance Book 1)

This monograph offers a detailed analysis of the creation, pilot implementation, and possible wide adoption of the real property tax at the local level in China. Starting in 2003, as Chinaℓ́ℓs economy gradually recovered from the Asian financial crisis that started in 1998, the real property market entered a period of rapid expansion, followed immediately by rampant speculation, rising housing costs, and official corruption. Over the last ten years, the price of real property in most cities has more than tripled, especially in metropolitan areas. In an effort to curb this, the government has instituted a number of property-market controls, including property tax pilot programs in Shanghai and Chongqing. While this is the latest of a number of fiscal reforms, it is a very important one that carries with it the ability to change the landscape of public finance, intergovernmental relations, and local governance in China. It represents a fundamental change in the provision of public services, the relationship between local governments and tax payers, and the status of localities in the government structure. Taking a public choice perspective, the authors argue that the local property tax should be used not solely as a means of controlling housing prices but should be fully employed as a fiscal and budgetary institution that will contribute to mitigating multifarious socio-economic problems resulting from economic growth, rapid urbanization, and widening income disparity. As this program is the first of its kind, so this book is the first detailed study of property tax in China; as such, it will appeal to researchers of public finance and public policy. It will also be of great interest to policymakers in China and in other countries that are considering adopting or reforming their versions of the local property tax. It fills the gap in a growing body of literature about the inner workings of Chinese economics and policy Preface 6 Acknowledgements 7 Book Note 8 Preamble: A Note on China’s Housing Sector 8 Land Ownership Issues 10 Soaring Housing Prices 11 References 12 Introduction 13 Contents 15 Chapter-1 16 Three Stages of China’s Financial Reforms 16 1.1 Stage One: Readjustment for Growth and Development 17 1.2 Stage Two: Innovations for a New Financial System 18 1.3 Stage Three: Toward Efficiency and Accountability 19 Chapter-2 21 Transition of Local Revenue Systems 21 2.1 The Old System: Land Transfer Fees 21 2.2 The New System: Local Property Tax 23 2.3 Local Discretion and Decentralized Service Choice 26 Chapter-3 28 Real Property Tax for Chinese Local Governments 28 3.1 Defining the Real Property Tax 28 3.2 LPT As a Fiscal and Budgetary Institution 30 3.3 LPT and Intergovernmental Relations 31 3.4 LPT and Efficiency in Public Service Provision 31 3.5 Why China Needs a Local Property Tax? 32 3.6 Appendix: Property Taxes and the Tax Rate Determining Processes in Typical Countries 32 3.6.1 A Brief Overview of Property Taxes in Other Countries 32 3.6.2 The Tax Rate Determining Process 34 Chapter-4 35 Creating Local Property Taxes as an Institution: Policy Process in China 35 4.1 A Long and Cautious Policy Formulating Process 35 4.2 Academic and Policy Research on Adopting the Property Tax 36 4.2.1 Academic Research 37 4.2.2 Opinions of Think Tank Researchers 37 4.3 Feasibility of Levying Local Property Tax in Current China 38 4.3.1 Political Acceptability 39 4.3.2 Technical Operability 40 4.3.3 Administrative Ease 40 4.3.4 Revenue Adequacy 41 4.4 Expansion of Local Property Tax from Pilots to Nationwide 41 Chapter-5 42 Roots of the Real Property Tax in Chinese History 42 5.1 Property Taxation in Chinese History 42 5.1.1 Property Taxation as Mainstay Tax Revenue 43 5.1.1.1 Property Taxation Before the Late Tang Dynasty 43 5.1.1.2 Property Taxation Since the Late Tang Dynasty 44 5.1.2 Summary of Findings 46 5.2 Property Taxation in Ancient China and the Modern Real Property Tax 47 5.2.1 Tax Base and Rate Structure 47 5.2.2 Elasticity and Stability 48 5.2.3 Control of the Tax and Use of the Revenues 49 5.3 Traces of the Real Property Tax in Chinese History 51 5.3.1 Rise of the Residential Property Tax in China 51 5.3.2 China’s Early Residential Property Tax vs. Modern Real Property Tax 53 5.4 Why China’s Ancient Property Tax Did Not Evolve into A Modern Property Tax? 54 5.4.1 Stable Property Ownership 54 5.4.2 Smooth Transition of the Society and Economy 55 5.4.3 Free migration in the Market Orientation 55 5.4.4 Strong Governance Capacity 56 Conclusion 57 Chapter-6 59 Design Features of the Local Property Tax Pilots 59 6.1 Relevant National Laws and Local Administrative Rules 59 6.1.1 China’s Interim Rules on Real Property Tax (中国房产税暂行条例) 59 6.1.2 Shanghai’s Rules on Levying the Real Property Tax (上海开征房产税细则及暂行办法) 60 6.1.3 Chongqing’s Rules (重庆开征房产税细则及暂行办法) 60 6.2 Policy Details of the Shanghai Pilot Local Property Tax 60 6.2.1 Eligibility 60 6.2.2 Tax Rate and Exemption 61 6.3 Policy Details of the Chongqing Pilot Local Property Tax 61 6.3.1 Eligibility 61 6.3.2 Tax Rate and Exemption 61 6.4 Comparisons Between Pilot Local Property Tax in the Two Metropolitans 62 6.5 Tracing the Links Between the Pilot Local Property Tax and the Ancient Property Tax 63 6.5.1 Two Pilots vs. Ancient Land Taxes 63 6.5.2 Two Pilots vs. Ancient Housing Taxes 64 6.5.3 Antecedents of Pilot Local Property Tax Features in Their Predecessors 64 Chapter-7 65 Progress of LPT in Two Pilot Cities 65 7.1 Overall Implementation of the Pilots 65 7.1.1 Identification of Real Property Taxpayers 65 7.1.2 Tax Preservation Measures 65 7.2 Amount of Tax Collected 67 7.2.1 Tax Collected in Shanghai 67 7.2.2 Tax Collected in Chongqing 67 7.3 Real Property Market after Adoption of Pilot Tax 68 7.3.1 Price Trend of Real Property 68 7.3.2 Analysis 71 7.4 Reflections 72 Chapter-8 74 Public Feedback—Survey and Public Media Findings 74 8.1 Household Survey 75 8.1.1 Sample Distribution 75 8.1.2 Citizens’ Understanding of the Pilot LPT 77 8.1.3 Respondent Attitudes Toward Pilot LPT in Shanghai and Chongqing 79 8.1.3.1 Attitudes Toward Pilot LPT in Shanghai 80 8.1.3.2 Attitudes Toward Pilot LPT in Chongqing 81 8.1.4 Respondent Advice on Future Improvement of the LPT 82 8.2 Results of Government Officials’ Survey 85 8.2.1 Sample Distribution of Surveyed Officials 85 8.2.2 Attitudes Toward LPT and Local Governance 86 8.3 Regression Analyses of Survey Responses 87 8.3.1 Opinion of Citizens Toward LPT 88 8.3.1.1 Who Supports the LPT? 89 8.3.1.2 Who Is Proposing a Broader Tax Base or a Higher Tax Rate? 89 8.3.1.3 Compare SH and CQ: Who is Satisfied with the Design in SH or CQ? 92 8.3.2 Opinion of Government Officials on the Effects of LPT 94 8.4 Summing Up: Main Findings 98 Chapter-9 102 Simulation 102 9.1 Sample Selection 103 9.1.1 Metropolitan, Central City, City, and County 103 9.1.2 Parameters Established for Simulation 105 9.2 Trend of Outlay on Education, Health, Safety, Recreation and Roads 110 9.2.1 Total Revenue at Local Level 110 9.2.2 Trends of Expenditure 1994–2007 112 9.3 Potential Effects of the LPT Revenue 118 9.3.1 Simulation Results 118 9.3.2 Extending the Simulation Results 125 Conclusion 128 Chapter-10 129 Towards Local Property Tax as an Institution 129 10.1 Embracing the Full Functions of LPT 129 10.2 Bottlenecks in Adopting LPT 130 10.3 The Link Between “New” Property Tax and Existing Tax System 131 10.4 Prospects of Institutionalizing Local Property Tax in China 133 Appendixes 134 Appendix 4.1 Excerpts of Official Documents of Chinese Government(s) as Illustration of the Policy Process on Adopting the Local Property Tax 134 Appendix 8.1 Definition of Variables Used in Regression Analyses 135 Appendix 8.2 Survey Instrument for Residents 135 Appendix 8.3 Survey Instrument for Government Officials 140 Appendix 9.1 Sampling Method (with Hebei Province as Example) 143 Appendix 9.2 List of Main Official Data Sources for Variables 143 Appendix 9.3 Full Versions of Tables 9.2, 9.6, 9.7 (A&B), and 9.8–9.13 (and more) 144 References 192 This monograph offers a detailed analysis of the creation, pilot implementation, and possible wide adoption of the real property tax at the local level in China. Starting in 2003, as Chinaĺls economy gradually recovered from the Asian financial crisis that started in 1998, the real property market entered a period of rapid expansion, followed immediately by rampant speculation, rising housing costs, and official corruption. Over the last ten years, the price of real property in most cities has more than tripled, especially in metropolitan areas. In an effort to curb this, the government has instituted a number of property-market controls, including property tax pilot programs in Shanghai and Chongqing. While this is the latest of a number of fiscal reforms, it is a very important one that carries with it the ability to change the landscape of public finance, intergovernmental relations, and local governance in China. It represents a fundamental change in the provision of public services, the relationship between local governments and tax payers, and the status of localities in the government structure. Taking a public choice perspective, the authors argue that the local property tax should be used not solely as a means of controlling housing prices but should be fully employed as a fiscal and budgetary institution that will contribute to mitigating multifarious socio-economic problems resulting from economic growth, rapid urbanization, and widening income disparity. As this program is the first of its kind, so this book is the first detailed study of property tax in China; as such, it will appeal to researchers of public finance and public policy. It will also be of great interest to policymakers in China and in other countries that are considering adopting or reforming their versions of the local property tax. It fills the gap in a growing body of literature about the inner workings of Chinese economics and policy Front Matter....Pages i-xvii Three Stages of China’s Financial Reforms....Pages 1-5 Transition of Local Revenue Systems....Pages 7-13 Real Property Tax for Chinese Local Governments....Pages 15-21 Creating Local Property Taxes as an Institution: Policy Process in China....Pages 23-29 Roots of the Real Property Tax in Chinese History....Pages 31-47 Design Features of the Local Property Tax Pilots....Pages 49-54 Progress of LPT in Two Pilot Cities....Pages 55-63 Public Feedback—Survey and Public Media Findings....Pages 65-92 Simulation....Pages 93-119 Towards Local Property Tax as an Institution....Pages 121-125 Back Matter....Pages 127-186