Taxes, Inequality And Unemployment Will Weigh On China After Party Congress

China Communist Party Secretary Xi Jinping is widely expected to get a third five-year term as the country’s leader after the upcoming party congress scheduled to start on October 16. What will be some of the key issues to be tackled after?

Debt, tax revenue, income distribution and youth unemployment problems will loom large, believes Jessica Teets, a political science professor and China expert at Middlebury College.

“The slowing economic growth rate — because of zero-Covid – has created a lot of problem areas for Xi Jinping,” Teets said in a Zoom interview on Monday. “These are foreshadowing even bigger problems that are still hidden from the scene.”

Just last week, China’s Finance Ministry said the country’s tax revenue dropped 12.6% in the first eight months of 2022 from a year earlier following tax cuts to boost markets, according to a report by the Xinhua News Agency. For the second quarter, GDP eked out a 0.4% year-on-year increase.

Xi has of late used the term “common prosperity” as an approach to narrowing the country’s wealth gap, stirring concern and uncertainty among business leaders about what it actually means. More clarity is likely ahead, Teets said. “I think we’re going to see much more discussion, resources and policies devoted to common prosperity, just because it’s becoming such an important topic,” she noted.

Teets is the author of Civil Society Under Authoritarianism: The China Model and co-editor of Local Governance Innovation in China: Experimentation, Diffusion, and Defiance. Teets is a fellow in the Public Intellectuals Program created by the National Committee on United States-China Relations, and is currently researching policy experimentation by local governments in China.

Interview excerpts follow.

Flannery: What are your expectations for the party congress?

Teets: My expectations are pretty much everyone’s. Xi Jinping will take a third term — if terms is still even a meaningful way of talking about leadership.

As far as who he picks for the premier or for the Politburo Standing Committee, it will be really interesting to see the distribution he gets as far as elite preferences. Will members be more for open markets versus more socialism or common prosperity? I’ll try to learn from those choices what trends we should expect.

The slowing economic growth rate — because of zero-Covid – has created a lot of problem areas for Xi Jinping, such as the high rate of unemployment for college graduates. Those problems have suddenly become a lot more difficult to resolve, including real estate debt. I think that these are foreshadowing even bigger problems that are still hidden from the scene.

For example, if you take real estate off the table for local government as main source of revenue and instead you implement a tax rate that makes their local finances sustainable, that would solve that problem. But is that something that you can do, given the economic slowdown and the fact that a lot of people are either unemployed or have less revenue? That’s really problematic.

I’m not really sure how you develop outside of that real estate model for local governments. If you can’t expand the tax base, another solution is to have more central transfers. But again, slowing income means less money at the central level to transfer back to these provinces.

So either way, less growth is going to create problems. How will they resolve the root of the problem — creating new sources of revenue for local government? Will they use repression? That’s something I think is problematic.

Flannery: How much room is there for local policy experimentation? Four decades ago, China used cities like Shenzhen to try out new ideas.

Teets: There are a few policy areas such as the environment and the economy where experimentation is still encouraged, but it’s top down. Cities or provinces that want to participate in pilot studies apply to the central government, get a status as a pilot city or a pilot province, and then they’re allowed to test policies, but a lot of those policies are being developed at the central level and then tested locally. If the central government has two or three ways that they think they could go, they’ll test ideas in provinces or cities that have been selected and then try to learn from that. A lot of the vibrancy in ideas used to come from local policymakers trying to solve a local problem.

Flannery: Another problem in China today is the distribution of income, which is behind the common prosperity conversation. What’s your take on that conversation? And how do you think that’s going play out after the party congress?

Teets: I think we’re going to see much more discussion, resources and policies devoted to common prosperity, just because it’s becoming such an important topic.

We used to see an income gap between urban areas and rural areas, with increased migration into urban areas helping to increase incomes. Now, we’re seeing a lot more urban poverty. That’s really concerning for Chinese leaders with their Marxist background. They’re worried about urban poverty.

These gaps are problematic. If you want to grow out of the middle-income trap, you need to invest in education, healthcare and these sorts of inputs to build a strong economy. For a while, having the urban versus rural distinction meant that you could invest in urban areas, and save the rural areas for later. And that’s no longer possible. We’re at a different stage of development now. So I think we’re going to see that Xi Jinping and whatever leadership cohort that emerges invest a lot more in common prosperity.

And then the question is: What does that really look like? It could look very neoliberal, but it also might have a lot of redistribution in it.

That’s the part that we’re really not sure of. So far, his speeches about common prosperity have talked about redistribution. But does he mean new taxation that we haven’t seen before? Does he mean the kind of voluntary redistribution that Jack Ma is doing — don’t punish my companies and I’ll redistribute part of my income voluntarily?

If the amount of money that the central government has access to is decreasing because of slower economic growth, are they then going to try to capture other sources of revenue? And what are those?

Common prosperity is really important. We’ve done a survey in China every two years since 2018, and ask people if they think it’s appropriate to protest. We ask them by issue area. We also know their age, income level, and whether they’re a party member or not.

And what we see is that people mostly say you shouldn’t protest. You should work with the government, donate, or do other things. Protest is everybody’s absolute last choice. That completely flips when you get to problems of inequality.

When we ask about left-behind children, even party members say it’s appropriate to protest over that issue, because they don’t feel that the local government or the central government is doing a very good job. This also involves solving high unemployment for recent graduates. It’s really shining a light on this inequality and all of these lockdowns that we see in Chengdu and all these other cities where migrant workers all of a sudden lose all income.

I think that people are very sensitive to these areas of inequality in a way that they haven’t been in the past. And they don’t think that the government’s doing a good job with it yet.

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