Supply-Side Economics, Chinese-Style
Op-Ed: The latest Chinese government plan to tax the rich to bridge the income divide will have the opposite effect. In China -- perhaps even more than the West -- markets must be free, taxes low and Leviathan reigned in to increase and share wealth acros
BEIJING – In his report this week to the Chinese National Congress, China's Prime Minister Wen Jiabao laid out the government's new plan to raise taxes on high-income earners as a way to solve the problem of wealth disparity.
"Narrowing the gap between the rich and poor" and "common prosperity" have always been obsessive economic slogans of the Chinese regime. China's personal income tax system is indeed progressive, with rates applied so that the more one earns the more tax one pays. China's current top marginal tax rate is at 45%, comparable with some Western European countries.
Yet has levying high taxes on the rich narrowed the gap between China's rich and poor?
The Gini coefficient, which measures the degree of income disparity, has exceeded international warning levels in China since 2000. In egalitarian Sweden, it is less than 0.25, while in South Africa it is more than 0.6. In China, it stands at around 0.5.
Cai Jiming, a member of the Chinese People's Political Consultative Conference (CPPCC), made waves in 2009 when he pointed out that a government survey found that 0.4% of the population in China possesses 70% of the wealth. "The concentration is even higher than that in America," he declared. Since then, the voices warning that China's disparity of wealth has reached a dangerous level have grown louder.
Still, the approach of levying higher taxes on the rich does not seem to tackle the issue at all. Even in the United States, using tax regulation to adjust the difference between the privileged and the destitute has proved to have a very limited effect. Between 1952 and 1981, the highest marginal personal income tax rate imposed by the U.S. federal government on rich people were between 50% and 92 %, while the poor were taxed between 11% and 22.2%.
Although the applicable tax rate difference is so great, the impact of the tax on high-income groups is very small. In 1981, the top 15% of rich Americans' pre-tax income represented 38% of total revenue, while this ratio fell only to 35% after tax.
Taxes can't adjust the difference between the poor and the rich. Besides, to strike at the rich can create a moral hazard. As long as one gets rich through honest labor, no matter how high one's earnings, you are blameless. To get rich is not a crime. If taxation were used as a punishment on those who work hard to earn more, or if depriving them of their possessions is used to narrow the gap between them and others, it may actually have the inverse effect of the goal of "common prosperity" – collective poverty. Indeed, the Cultural Revolution was an extreme example of such an effect.
Luck and sweat
The gap that exists between the rich and the poor is not a problem. People have different capabilities, intelligence, luck, knowledge and levels of effort. It's only natural that people's earnings vary widely, and people don't feel dissatisfied with this kind of gap.
The kind of wealth disparity between the top and bottom layers of Chinese society today is, however, not formed by the difference of income through labor, but its origin lies in corruption and collusion between officials and businesses. Their unjust enrichment causes a seriously unfair social distribution of wealth.
Under such circumstances, it is absolutely impossible to tax corrupt revenue. The latest proposal can only harm the middle class who work honestly. Allowing the powerful to carry on unchecked with their proliferating "grey" income, while supposedly attempting to reduce the disparity of the rich and the poor is total nonsense.
The answer to helping the poor is not by limiting or fighting against the rich people who bring the wealth, but in giving the poor the ability and the opportunity of creating their own wealth. Robin Hood-like measures such as targeting landlords or redistributing land, which were implemented in the Cultural Revolution, are not going to provide sustainable help to the destitute. On the contrary, it just deprives the rewards of people who are producing and pushes the poor deeper into an absolute abyss of poverty.
What the poor in China need today is opportunity. Yet, many of our businesses are forced to go through layers and layers of control and red tape. Only rich people with close relationships with public officials can enter the system easily. Meanwhile, state-owned enterprises have the monopoly of all important resources thanks to the government's support. The small and medium-size enterprises that provide most jobs to the country's workers have to struggle to survive under heavy taxation and harsh control. How does one expect to shrink the gap between the rich and the poor like this?
Only the loosening of governmental control, elimination of privileges, breaking-up of administrative monopolies and the establishment of a truly free market will permit the poor to pursue a better life.
Read the original article in Chinese
Photo - Cory Doctorow