The Misunderstanding on Chinese Property Tax

Market sources said that property tax, that is levied on property price or rental income, will be introduced comprehensively in mainland China this year. Shanghai and Chongqing have been the testing cities to levy property tax. Since 2011, Shanghai has been levied on the purchase of the second house and the subsequent purchases, as well as new house buyers who are non-residents of Shanghai, with the tax rate set at 0.6% and 0.4% depending on the property prices. Chongqing also started the levy in 2011, on villa in the major 9 districts, new purchases of high-end commercial housing and foreign investors who purchase the second house in Chongqing, with the tax rate of 0.5% to 1.2%.

Some people think that property tax, which will increase the cost of holding the second house, will make people who originally intended to buy the second house abandon their plans, and result in investors selling their second house. As the demand in the market decreases and the supply increases at the same time, property prices will fall. However, in the beginning of implementing property tax, the tax rate will be set at a low level, so it will not be effective in curbing investment. Furthermore, when the tax rate is set at different levels depending on property price, as that in Shanghai, the investment demand for houses with lower price will increase, and will push up property prices indirectly.

When property tax rates are high, investors will pass the tax on to the tenants. The basic concept "tax incidence" in economics means that the burden of taxation is irrelevant to whom the tax is imposed on. The impact of taxation depends on the elasticity of supply and demand, and generally does not affect only one of the parties of the transaction. There is a saying "Like tree, like fruit." Even if the property tax only levies on investors who own the second house, it will push up rents indirectly, which in turn will increase the tenants’ costs on housing. The Shenzhen government announced that rental income tax may be implemented this year. For the same reason, rental income tax will pass part of the tax on to the tenants, resulting in higher rents. It will also make the original tenants who do not intend to buy a house before, rush to buy one because of the implementation of rental tax, distorting market demand and pushing up prices.

The introduction of property tax may not be able to directly benefit the public, but pushing up rents and property prices indirectly, and is likely to increase people’s burden on housing expenses. The party who will benefit most may be the treasury of the government. The introduction of property taxes will increase government revenue significantly, and how to make the most out of the increased revenue to benefit people is the thing that has to consider. While mainland China does not have enough domestic demand, introducing a new tax will reduce the consumption of the public and may not be good for the economy. Policy has to be multi-pronged, including the control of land costs, and leading a reasonable market demand, which are the key to stabilise housing prices.

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