Focus of Income Distribution Reform Shifts to Reducing Flow of Wealth to Government

By Zhang Xiangdong
Published: 2010-07-29

News, Cover, Issue 473, June 14
Translated by Tang Xiangyang:

To reduce social conflicts, ensure social fairness and pursue sustainable economic development, the Chinese government has expressed its intention to reform income distribution among all members of society and has assigned three study groups to conduct investigations nationwide.

According to the reform projects, the focus of the reform has shifted to reducing the wealth flowing to governments and state-owned enterprises, especially the central government and those centrally-owned enterprises (COE).

Sources from the Financial and Economic Committee (FEC) of the National People's Congress and the China Democratic League (CDL) told an EO reporter, it is hoped that the reform plan will be drafted in July and completed at the end of this year.

Nationwide Investigation

In May, the FEC of the National People's Congress sent three vice directors to conduct investigations in Gansu, Anhui, Jiangxi, Fujian, Sichuan and Guangdong provinces.

The FEC is most concerned with the income distribution among governments, enterprises and employees. They want to find out what governments can do to readjust income distribution, where the wealth of enterprises has gone, and what kind of relationship exists between the profit growth of an enterprise and its employee salaries.

Earlier in May, the chairman of the CDL, who is also vice chairman of the Standing Committee of the NPC, conducted a survey in Guangdong to see the income situation of different interest groups including governments, state-owned enterprises, private enterprises and towns and villages.

The provincial government said that the total national income must grow big enough to be equally distributed. The investigation group disagreed, however, arguing that, without a good distribution mechanism, a larger national income would actually be more difficult to distribute.

The CDL has performed similar surveys in Guizhou, Shanghai, and Henan and expects the final report to be finished in late-July.

Meanwhile, the NDRC is also drafting a project to reform the income distribution mechanism.

The Core of the New Project

Statistics from the NDRC show China's GDP has grown by an average annual rate of 9.9 percent over the past thirty years while the proportion of workers income as that of total national income has dropped by 13 percentage points since 1995.

The greater proportion of this increased wealth has flowed to governments and state-owned enterprises.

The CDL found the profitability of some private enterprises in Guangdong to be only between 3 and 5 percent which may explain their reluctance to raise the salaries of employees. In response, the CDL recommended that the business revenue tax and other taxes be reduced to leave more profit for enterprises.

Both study groups believe this is a key to solving the issue, in addition to addressing the huge profits of SOEs.

A researcher with the Chinese Academy of Social Sciences Economics Research Institute, suggested to the FEC study group that the ratio of profits of state-owned enterprises given to the central government to their total profit should be raised and the income of the state-owned enterprise employees should be mainly made up of their salaries. This would not only help narrow the income gap between employees of state-owned enterprises and that of private enterprises, but would also shrink the salary gap between high-level executives and ordinary employees of state-owned enterprises.

Another focus of the reform is to adjust the distribution ratios of the revenue of the central government and that of local governments.

The CDL study group found that 60 to 70 percent of the revenue of local governments is taken by the central government which explains the reluctance of local governments to address the issue.

Therefore, members of both the FEC and CDL have advised the central government to allow local governments to keep revenue gained from the real estate tax, value added tax and consumption tax.

According to a member of the CDL, the central government should also raise the threshold of personal income tax as China bears one of the heaviest tax burdens in the world. The study shows that the Chinese middle-class has to pay 30 percent of their income to governments.

Obstacles to Reform

The NDRC proposed reform for income distribution in 2006, but no improvements were made because the income distribution reform affected the interests of too many people and was thus too difficult to undertake.

The core of the project drafted by the NDRC in 2006 was to control the earnings of high-income people, expand the income of mid-income people and raise the earnings of low-income people. However, these are no longer the keys aspects of income distribution reform.

The FEC and China Democratic League are experiencing fewer obstacles now as the central government pushes forward reform that ensures social fairness, stimulates domestic demand and shifts the growth model of the economy.

This article was edited by Andrew Ward