[DongleDongle] 'Can't even pay civil servants' salaries'... Why China can't collect property tax

No Land Ownership Allowed Under Socialist System
Possession Tax Cannot Be Imposed as Lease Concept
Housing Ownership Possible Through Real Estate Privatization
High-Ranking Officials Oppose Possession Tax Imposition

Recently, foreign media have reported some absurd news about China. A local government, unable to cope with its increased debt, has been imposing fines on citizens for all sorts of bizarre reasons to cover its finances. An employee at a restaurant in Shanghai was fined for serving julienned cucumbers to customers without a license. In Guangxi Province, a state-owned enterprise faced backlash for charging office workers tens of thousands of won in parking fees.

In this way, local governments in China have been experiencing severe financial difficulties as the domestic economy stagnates and the real estate market faces crises following the zero-COVID policy. Some local governments are even delaying the salaries of public officials due to insufficient funds.

Yet, there is a curious point. Despite such difficult circumstances, the Chinese government does not impose property taxes on the wealthy who own dozens or hundreds of real estate properties. This is because the concept of property tax does not exist in China. While China levies taxes in other areas such as value-added tax and personal income tax, why does it uniquely refrain from collecting property tax?

[Image source = Getty Images Bank]

◆Based on Socialist System...Only Land Leasing, No Ownership Allowed

The reason lies in China’s political and economic system. China adopts a market economy system based on socialist ideology. Accordingly, all land is owned by the state. Private ownership of land is considered to undermine the foundation of socialism.

Instead, Chinese citizens can pay usage fees to the government and lease land for up to 70 years. The Chinese government has been able to comfortably secure tax revenue without imposing heavy taxes on other items, thanks to these land usage fees. As of last year, land lease revenue accounted for about 7% of China’s Gross Domestic Product (GDP).

[Image source=Bloomberg]

Because individuals cannot own land, China only imposes transaction taxes when real estate is traded, but does not collect property taxes. Since the land is leased rather than owned, imposing property tax on real estate holdings is considered illogical.

However, problems began when the housing market was privatized. Since 1998, China has sold the ownership of housing that state-owned enterprises rented to workers to private individuals. During this process, the wealthy purchased homes worth billions of won, exacerbating asset polarization. Yet, they paid no taxes other than transaction taxes when buying homes, as the land remains state-owned.

◆Government Initiates Property Tax Collection...Faces Opposition from Wealthy and Real Estate Slump

As real estate prices soared and multi-homeowners paid no taxes, the government finally took action. Tensions began to rise between the wealthy who want to avoid property tax and the government seeking to collect it.

After ten years of effort, the Chinese government succeeded on April 10 in establishing a system that can verify the registration of 790 million apartments nationwide. The government believed it must identify homeowners across China to impose taxes, so it worked to unify scattered registration information into a single system.

Citizens are looking at an apartment model in a remodeled house in Qingzhou City, Shandong Province. [Image source=SCMP]

However, protests against property tax are not insignificant. High-ranking Chinese officials and the middle class in major cities are blocking the government’s decision.

The New York Times reported in May that local senior officials responsible for the property tax policy are themselves opposing it. They had purchased homes at low prices in the 1990s. Currently, the annual salary of senior Chinese officials is only about $30,000 to $40,000. If property tax is imposed, they might have to pay their entire annual income in taxes.

Moreover, the difficult state of the real estate market is also hindering the implementation of property tax. China has been in a slump since 2021 due to a liquidity crisis triggered by the default of Evergrande Group, the largest real estate developer. As the number of land lease rights purchased by real estate companies decreases, local tax revenues have sharply declined. Local governments have long relied heavily on selling land lease rights to real estate companies to cover their tax revenues.

Evergrande Group [Image source=EPA Yonhap News]

Chinese real estate experts say local governments are caught in a dilemma. Imposing property tax to increase revenue inevitably depresses the real estate market. This could lead struggling real estate companies to reduce land lease purchases, worsening local government finances.

These are the reasons why the Chinese government cannot impose taxes on real estate despite the difficult situation. We look forward to the day when the Chinese government overcomes these challenges and successfully collects property tax.

This content was produced with the assistance of AI translation services.