In China, most residential property owners do not need to pay real estate taxes. In 2011, China initiated property tax trial programs in Shanghai and Chongqing, but even here, the taxes applied only to a few types of properties (newly purchased second homes and high-value properties, respectively) and the tax rates under these trial programs were quite low, and based on a property’s transaction price rather than its current appraised value. But this is about to change. President Xi Jinping’s administration sees a property tax as a key tool to achieve its goal of “common prosperity,” and last October, the government announced a major property tax reform, which is to begin with a five-year pilot program implemented at the local level in selected subnational jurisdictions. Under this reform, most residential property owners will need to pay property taxes, though local governments will have broad discretion to decide on the scope, rates, and collection procedures (see here and here).
Most of the debate about this dramatic change to China’s tax policy have focused on whether the proposed property tax can stop rampant speculation in the housing market and help redistribute wealth. Some commentators, though, have suggested that the new property tax might also help advance President Xi’s anticorruption campaign, because (it is argued) the tax will force greater disclosure of businessmen and government officials’ property ownership. But that hope is misplaced. In fact, the evidence so far suggests that the property tax reform might actually create more opportunities for corruption.
One of the key features of the proposed property tax—and an important distinction between this reform and the previous trials in Shanghai and Chongqing—is that under the new reform, the tax rate is to be based on the properties’ appraised market value. In principle, this makes more sense than basing the tax rate on things like transaction price and rental income, which are often much lower than the properties’ true market value. But in China, there are currently no laws, regulations, or broadly accepted industry standards for assessing property values, and Chinese officials lack experience in property appraisal. In the absence of clear regulations and standards, the determination of “fair market value” can be highly subjective—and the appraiser’s determination can be hugely consequential for the amount of tax that the property holder pays.
That situation is a recipe for corruption. Indeed, even in countries with more experience with property appraisal, there are numerous examples of property owners seeking to cut their taxes by bribing tax assessors to appraise the property at well below its true value. The United States, for instance, has seen numerous incidents of this sort of corruption (see, for example here, here, here, and here)—including allegations implicating former President Trump’s companies. Similarly, in India, tax authorities’ corrupt abuse of their discretion has substantially compromised the government’s property tax revenues. China might be even worse, especially given that there is already a huge “market” for bribery in land sales (here, here, here, here, here, here), which might be diverted to bribery in property assessment, with ostensible
“tax consultants” and other middlemen colluding with government tax assessors to manipulate property prices and reduce clients’ property taxes.
The property tax reform introduces another worrisome form of official discretion as well: determining which property owners are eligible for an exemption from the new property taxes. Although the property tax program has a sweeping scope—covering all existing residences—the program grants local governments the authority to make exemptions. But rather than establishing a set of exempt categories, to be determined according to clear criteria, the new system leaves local authorities with unfettered power to make such determinations. The corruption risks here are obvious, and confirmed by the experience with the 2011 trial programs in Shanghai and Chongqing (which, it’s worth restating, imposed a much lower property tax rate than the current reform). Those trial programs led to an increase in bribery by real estate agencies and middlemen to obtain exemptions from the local tax authorities.
What about the optimistic prediction that because the new property tax system will make it easier to identify government officials’ property holdings (presumably because the collection of the property taxes will require the local tax authorities to determine ownership), this would help detect and deter corruption? This seems unlikely. For one thing, those who want to keep their ownership of property a secret would purchase property through shells or intermediaries, and those nominal owners would pay the tax. Nothing in the new tax law requires greater disclosure of the true owners of the property. Indeed, the property tax reform does not require any sort of centralized recordkeeping or disclosures of taxpayers’ identities, properties, or tax amounts. Moreover, any disclosures that do occur would be to the local tax authorities, which are not required to share such data with other agencies. And none of this should be surprising. Given how strenuously the Chinese government has resisted imposing any sort of financial disclosure requirements on Chinese officials (see, for example, here, here, and here), it’s hard to imagine the government would allow such requirements to be imposed by the property tax system.
Tax evasion and corruption often go hand in hand. And the more discretion that tax authorities have to make key decisions regarding the tax burden—without clear and objective criteria, and with minimal review—the greater the corruption risks. It remains to be seen whether the imposition of a residential property tax will help China achieve “common prosperity.” But the way the program has been designed makes it all too likely that it will increase the prosperity of both bribe-paying property owners and bribe-taking government officials, as well as the intermediaries who facilitate these transactions—all at the expense of the public.