With the rise of the middle class in major cities throughout China, a potentially very disruptive identity is also bound to emerge: The concept of the individual taxpayer.

This might sound ridiculous to most Americans.  The American Revolution began over taxation, and it has been a central part of political discourse ever since.  The two party system is in reality the struggle between taxation (Democrats) and no taxation (Republicans).  Of course this is oversimplification to the extreme, but this is the ideological basis for each party.

The Chinese people have faced taxation without representation for thousands of years.  During dynastic times, you’d be expected to pay the imperial officials in cash or in rice/wheat/vegetables.  Otherwise you could be imprisoned or killed, as simple as that.  During the height of Communism in the 1950s and 60s, having any wealth at all was dangerous, and private business and imports were extremely heavily taxed.

Today, most Chinese are shielded from taxation in interesting ways.  This perhaps explains why there isn’t a larger backlash against taxes.  For example:

1) Although there are income taxes like in the US, they are almost impossible to enforce.  Businesses simply lie on contracts about salary to avoid employees (or themselves) from paying income tax.  A common method is an employment contract with a company for a smaller salary, perhaps around 4000 RMB per month deposited to a bank account.  Then the company has an “off the books” contract with the employee for the remainder of the salary (let’s say 30,000 RMB for an example).  This is deposited to the employee’s second account, from the company manager’s second account.  The 30,000 RMB contract is never showed to anyone, but the 4000 RMB contract is files with the appropriate labor bureau.  This method is endemic.  It would probably be not too difficult to crack down on if there was the will to do so, but it would likely be quite disruptive.  If your total monthly salary is 34,000 RMB per month, you would be giving well over 30% of that to the government in taxes.  This income adjustment multiplied half a billion times would be very disruptive.

2) VAT is very difficult to determine unless you are a retailer.  In China, the most common VAT bracket is 17%.  This means for most things I buy at the supermarket, an extra 17% has already been tacked onto the price to account for the 17% on all goods the supermarket must pay the government.  However, there is also a 3% VAT rate, a 13% VAT rate, and others.  Since it’s not required to print on a supermarket receipt the level of VAT I’m paying, it’s impossible to know.  It might be 17% across the board, and the supermarket is picking up extra profit under the guise of tax.  This could easily happen in the public sector as well.

In the US, tax is very clearly marked on the receipt of every retail purchase.  There’s also the notion that the 99 cent bottle of Coke is really $1.06.  The 5 yuan bottle of beer I buy in China is really 5 yuan.

3) Although there is a transaction tax for buying property, there isn’t a real property tax.  In the US, your house is valued each year and you’re responsible for paying tax on that.  Property tax is expensive; even after buying a home, the amount you spend in property tax could make owning a home more expensive than renting an apartment in the long run.  Property tax also reduces the incentive to owning investment properties.  Investing in a 401k, IRA, or mutual fund is more rewarding from a tax standpoint.

The lack of a property tax coupled with a volatile stock market has perpetuated a huge housing bubble in China, where currently 65 million homes are unoccupied.  There is also little incentive to rent these units out.  In Beijing, the price-rent ratio is 500:1, meaning it will take 500 months of rent to purchase a home, compared to the global average of 300:1.  Many (if not all) property developers have strong government connections, so there is low political pressure to tax property.  Additionally, there is the fear that property tax would harm first-time buyers the most, because their homes are significantly overvalued (thus, potentially overtaxed).  For people who can barely afford a home as it is, a property tax would be like pouring salt in the wound.

Thus, tax and tax responsibility is a very interesting concept in modern China.  As the middle class grows and takes further interest in how their tax dollars are spent, massive shifts in tax priories could begin to take shape.  City beautification projects (like $150 million spent to restore the old city walls of Datong) and unprecedented spending on international events like the Olympics or the World Expo must, at some point, generate enough questions from the people as to the true added value to all this.  Even more obvious are the legions of black Audi A6s driven by government officials around town.  Didn’t my tax dollars pay for that?  When based on the average Chinese income, a person would have to save for 100 years to afford that kind of car?

And these are only the most obvious expressions of largess.  If the estimated $200 million spent on developing the  internet censorship system was brought to light, there would certainly be more than a few Chinese wondering how blocking Facebook and YouTube was going to better their lives.  The Tea Party might gain a lot of traction in China.  Perhaps they should consider outsourcing.

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