Making sense of property tax proposal

Property tax has become a hot topic of discussion in the Chinese media after figuring in the Decisions on Major Issues Concerning Comprehensively Deepening Reforms, issued by the Third Plenary Session of the 18th Communist Party of China Central Committee as a blueprint for reforms.

China has implemented many tax reforms in the past three decades but none has attracted as much public attention as property tax. The response it has generated is surprising especially because property tax in sample cities account for only a small percentage of the total tax; it is estimated to reach 152.5 billion yuan ($25.11 billion) this year, just about 5 percent of the value-added tax. Why this big interest in a "small tax"?

History tells us that property tax has always sparked disputes. When the United Kingdom tried to collect community charge poll tax in the 1980s, it met with fierce resistance from residents, and was ultimately forced to replace it by council tax in 1993.

China used to collect tax on realty in the 1950s. But after the 1986 tax reforms, property tax was applicable only to real estate used for business purpose in urban areas. The point of public debate now is whether such a tax should be extended to residential buildings as well, something that Shanghai and Chongqing municipalities did in 2011.

The reason why people are concerned about property tax lies primarily with the high and rising costs of owning a house. For a long time, many urban residents had only land-use rights on the house they lived in because of the collective land ownership system. The change came with "marketization" reform in 2000, under which a majority of residential houses became the property of residents through commercial trade or other reformatory means.

By 2012, the total area of residential houses in China had reached 19.83 billion square meters, or 14.5 sq m per person; the figure could be 30 sq m per person if the previously built houses are included. The 2012 Research Report of China Household Finance Security, jointly released by the People's Bank of China and Southwestern University of Finance and Economics, says 89.68 percent of Chinese families have their own houses, a much higher percentage than in Western countries.

For ordinary wage-earning people or families, a house is often the most prized possession, although many of them may be mortgaged in lieu of loans. Better-off or rich families also use real estate as an essential tool of investment. Therefore, property tax will have a direct impact, mainly negative, on ordinary people's investment, rents and loans. In other words, property tax might add up to a small amount for the State, but it affects the core interests of a very high percentage of people and is thus bound to raise their concern.

Besides, ordinary residents also hope that the property tax is used to bridge the widening social gap. Since China relies heavily on indirect taxes for its tax revenue, almost all the tax burden is borne by ordinary people (as consumers). But the document issued by the plenum, in principle, says that the percentage of direct tax will be increased, and the public hopes the tax on private property will help prevent the social gap from widening further.

Of course, people's opinions on property tax differ, because different people own different number of houses which they got through different channels. For example, many families have one or two houses in which they or their relatives live and it might not be fair to collect property tax from them. Hence, before introducing the realty tax, the authorities need to consider the interests of people across the social divide and allow them to express their views and reservations freely.

The heated public debate on property tax has shown that people have come to know where their interests lie. So property tax should be delicately planned and implemented to better protect people's interests and narrow the widening social gap.

The author is deputy director of the Research Institute for Fiscal Science, affiliated to the Ministry of Finance.