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.
GAB | The Global Anticorruption Blog 
I really liked this approach of evaluating how proposed legislation could lead to corrupt practices in the future. So often it seems that anticorruption work is done in hindsight, and we’re left trying to correct for and reform policies that have already had a malign effect. It’s great to see anticorruption work that is proactive rather than reactive.
In your article, you identified the discretion left to officials as one major source of potential corruption, and I was wondering what sorts of safeguards other countries have used to combat that issue. You showed that countries like the US and India are also victims of abuses of discretion with respect to property appraisal, but do we have any examples of countries that have found effective solutions in this area? Perhaps the best solution is a more liquid real estate market, where the value of a property is slightly more “objective.” But I’m not sure that would be a clearly desirable outcome overall, and even if it were, it would require other structural reforms that just don’t seem likely in this case. Are there other solutions?
Thanks Logan, it’s a great question.
I think that there are still precautions that China can take. At an institutional level, I agree with Teri that there should be less unchecked discretion to the lower-level officials in terms of deciding tax base or exemptions, but more specific and clearer laws and guidelines throughout the life cycle of property tax assessments and collection, increased trainings, and ways to hold them accountable (including whistleblower channels). I also like Justin’s proposal of using technologies to reduce discretions.
This might not be an imminent issue regardless of whether a well-designed system is in place, because trials will only start with major cities like Shanghai/Beijing. Considering the attention that China and the world have on this property tax reform, these governments will most likely be extremely cautious in carrying out the initial stage of the reform plan and ensure it’s corruption-free. But I have more doubts as the trials expand to other local governments, and as time goes on and the media start to pay less attention to it overall. How to keep the momentum and make the system corrupt-free in less developed areas and in the long term is concerning.
Your recommendation on liquidity sounds useful, but I’m not sure if will work for China. Indeed some property tax policies that might reduce corruption are at the risk of reducing liquidity in the real estate sector.
As background, the housing prices in the “secondary market” in China is infamous for rapidly changing and unpredictable. For instance, in 2020, the real estate prices in a district in Shanghai witnessed a 50% surge almost overnight over a sudden change in Shanghai’s school district housing policy. By contrast, the government guides (normally caps) first-hand housing prices in the primary market. (But much fewer first-hand houses are up for sell). One trend is that local governments (e.g., Shenzhen) is now adopting “reference market prices” for second-hand housing. They are often below actual market rates, and has a chilling effect on market liquidity, but if strictly followed, they will make assessment easy and transparent.
This is such an insightful and well-written blog post, Emma! Thank you for sharing your perceptive thoughts on the major property tax reform in China. It is something that the world should know about. More often than not, mechanisms that are purportedly designed to curb corruption turn out to be catalysts of it. It is astounding how government officials are able to devise these channels with such careful thought for the ultimate end of siphoning money off people.
Echoing Logan’s comments, I was wondering if you think it would be possible to further amend the major property tax reform in China in order to actually achieve its alleged objective. Taking into thoughtful consideration what you had written about in your blog post, here are some possible solutions to the problems you mentioned: First, relevant property tax laws and regulations should be passed in order to ensure accurate property appraisals. These laws should include legitimate assessment standards. Moreover, assessors should undergo thorough training on the same. Second, the tax regime on property should be delineated—such that the tax base as well as the property deductions and exemptions would be indicated with precision. With reference to the property deductions and exemptions, sufficient standards must be put in place. There should be justifiable reasons why particular items can be considered as deductions from the property value and why certain properties are exempted from property tax. Third, assessors should be penalized in the event that the assessed value they put forth turns out to be erroneous. In this light, there should be a central body or group of assessors that would be in charge of vetting property appraisals in order to make certain that the assessed value is indeed correct. I would love to hear your opinions on the aforesaid reforms.
Thank you for such proposed solutions, Teri! I agree and would hope to see such changes in the future.
Thanks, Emma, your post raises a host of important issues. It’s always interesting to see the different ways countries tax property.
I agree that discretion and imperfect information is a recipe–potentially–for corruption. I also agree that taxation is unlikely to foster transparency because, so long as the entity or individual who owns the property pays the taxes, the tax officials are unlikely to conduct a detailed analysis of the source of funds. Counter-intuitively, paying property taxes legitimizes the property’s ownership–even if the property was purchased using the proceeds of corruption–because it creates a government document that indicates the property’s owner has complied with the law (at least tax law).
That said, although I agree there’s a corruption risk arising from discretion in tax assessment, I think China should be able to use technology to reduce officials’ discretion in assessing real estate. In the States, Zillow uses sales data to offer a reasonable, though imperfect, estimate of a property’s market value, which is usually more accurate than the assessed value. The real estate tax, if well designed, could discourage speculation and laundering money through property. Admittedly, you’d want an appeal mechanism to allow people to contest the computer-generated assessment–and that mechanism could still be susceptible to corruption–but it would probably cut back on many of the problems your post so insightfully highlights.
Thank you Justin! This is a very constructive advice, and I hope there can be more discussions on how to use technologies to address corruption in not only property tax but all types of tax evasions.