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This book offers an analysis of China in its muddling through of financial reforms towards adopting a local real property tax. The research is designed to serve dual purposes. First, it is an effort to provide an independent perspective on an urgent public policy under consideration by the Chinese government and to reflect upon this policy’s process, which started over a dozen years ago yet is still in the fermenting stage with no sight of fruition. Additionally, this project is intended to share China’s experience with other developing and transitional countries, so they can discern the difficulties China has faced and understand what may entangle them in the modernization of their taxation systems.



Chapter 1. Introduction

The Introduction offers some broad and essential background into the “why” of this project. From the late 1970s to the early 2010s, China was successful in achieving double-digit annual GDP growth. Since 2013, the country’s growth rate has slowed to between 6 and 7 percent, which is still very high compared to that of most other countries. The huge successes of the 30-plus years of high economic growth include, among others, two aspects that are closely related to the theme of this monograph: urbanization and large-scale housing construction for urban residents. This monograph offers a detailed analysis, as a case study, of China in its muddling through of financial reforms toward adopting a local real property tax.
Yilin Hou

Chapter 2. Why the Real Property Tax? A Fiscal System’s Approach

This chapter starts with a fiscal system’s approach to taxation and explains why the real property tax should be an inherent part of a tax system. Then it reviews the evolution of taxation in China before and after 1949 as a contrast and describes China’s financial reforms since 1978 as forerunners of subsequent socio-economic reforms. It depicts adopting the real property tax as a reshuffling of China’s current intergovernmental fiscal relations, not merely the introduction of a new tax. To vividly describe the challenges China faces in adopting the real property tax, it uses an analogy of the “window paper effect,” with the connotation that though the window paper is sturdy enough to resist winds, once the paper is broken purposely or a crack occurs, the removal of the whole window paper takes no huge efforts. This analogy of resistance losing steam will be used as a hidden line throughout the book as our expectation for future development.
Yilin Hou

Chapter 3. Housing Provision Reform and the Real Estate Sector

This chapter combs through details of the housing provision reform in China that started in the early 1990s. Doing so enables us to dissect the interlocking relationship between the housing provision reform and the real estate sector of the economy, which has since been one of the strongest pillars to boost the GDP growth not only of the country as a whole but also of municipalities and provinces. The housing reform has generated huge improvements in the living standards of citizens within the last two decades; the real estate sector was a huge impetus to the economy. In this sense, both have been very successful; yet, both have undoubtedly also left behind a trail of unintended consequences from their rapid change.
Yilin Hou

Chapter 4. Why China Needs a Real Property Tax? Empirical Evidence

This chapter elaborates on why a real property tax is necessary, given that the real estate sector has become so strong in the country. If our answer to why China should adopt a local real property tax is “yes,” then what are the rationales? Since at least 2003, the academic and policy communities in China have debated this question without achieving consensus. This chapter offers an empirical analysis of the tremendous inequity and inefficiency of the current scheme of education finance in the absence of a local property tax. The analysis uses capitalization data of basic education and is based on micro-level housing data in central Beijing that illustrates how the differential treatment of tiered schools, coupled with school attendance by rigid proximity plus the household registration system, is the root cause of these problems.
Yilin Hou

Chapter 5. Institutional Obstacles to China in Adopting the Real Property Tax

This chapter offers an analysis of the institutional obstacles to adopting the local property tax in China, including the property right and use right to urban land. It traces the turnover from private to public ownership of land in rural and urban areas around the founding in 1949 of the People’s Republic of China and subsequent changes, which inspires insight into this problem unique to China. The chapter then taps into why local governments can capitalize on the state ownership of urban land to build infrastructure and how they did it within a two-decade period, as well as the problems involved in doing so.
Yilin Hou

Chapter 6. Principles for the Design of the Real Property Tax

This chapter first combs through the ongoing debate among policy experts (including some former high-ranking officials) and academic scholars about the design of the property tax; the chapter then deliberates on a set of six principles to consider when designing the tax. They are equity, efficiency, feasibility, transparency, adequacy, and stability. These principles compose an analytical framework for evaluating any design to see whether it fits the generic political economic theory as well as the practicality of public finance, in particular at the local level. A strong rebuttal of three current and widely circulated designs is based on their failure to meet most of these principles.
Yilin Hou

Chapter 7. Strategies for Implementing the Local Real Property Tax

Even if created optimally, the design of a tax is only the first and relatively easiest phase. The next step is much more difficult: determining how to implement the new tax efficiently, effectively, and in an orderly and smooth manner poses numerous challenges in every aspect of tax administration. Given the conundrums the government has been struggling with—the deep-rooted centralization tradition, for example—this chapter looks into possible strategies that are practical in China’s context for adopting the property tax. These include central authorization for local implementation, local discretion with no uniform scheme, and a window for adjustments by households. This chapter also encapsulates the proposed tax scheme for China into four basic elements, four execution measures, and three related institutions.
Yilin Hou

Chapter 8. Simulation of Tax Incidence and Redistribution Effects of the Tax Proposal

This chapter takes the forthcoming adoption of the real property tax in China as a natural social experiment, estimating the potential ability and willingness to pay the property tax by Chinese urban households and simulating the tax burden distribution and the redistribution effect of the tax under several exemption proposals. The chapter uses a publicly available survey data set to calculate ability-to-pay indexes and willingness-to-pay measures; then, based on the indexes and measures, it conducts simulations. The results show that under the tax scheme proposed by authors of this book, the broad-base, low-rate local property tax is affordable to the great majority of homeowners, that low-income families get more net benefit than high-income families, and that this tax design is horizontally and vertically equitable, thereby politically acceptable; it is also efficient and administratively feasible. We can conclude that this design will generate adequate revenue to provide public services.
Yilin Hou

Chapter 9. Conclusion: Toward Balanced Development and Harmonious Governance

This chapter concludes the monograph. It first offers lessons learned from the case of China in multiple aspects of this complicated socio-political and economic issue; it then points to challenges that lie ahead. Despite the seemingly unsurmountable obstacles inherent in China’s adoption of a local property tax, this monograph ends on an optimistic tone that the property tax can help the country achieve balanced and harmonious development and improve local governance.
Yilin Hou


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