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Impacts of Introducing Real Property Tax on Real Estate Market
2008-10-16
By Lin Jiabin
Research Report No. 059, 2008
I. Prerequisite for Discussions
The Decisions on Issues Concerning the Improvement of Socialist Market Economic System approved by the Third Plenary Session of the 16th Party Central Committee pointed out that a unified and standard real property tax would be introduced for real properties when conditions permit. Since then, what impacts the real property tax will have on the real estate industry once it is introduced has become a hot topic. But the discussions in various circles indicate that as different people discussing the issue have different views on the contents of the real property tax, these discussions often have no common prerequisite. Or in other words, these discussions have failed to "lock on" the objects of the discussions. The result is like the blind man trying to size up an elephant. Therefore, it is necessary to briefly reaffirm, before discussing this topic in this article, the main points of the framework design of the real property tax we made in our book "Design of China's Real Property Tax System" (Edited by Xie Fuzhan and co-edited by Long Guoqiang and Ding Chengri, China Development Press, September 2006) and use them as the basis for further discussions.
1. The real property tax is a tax possessing the nature of a property tax. It is targeted on the real properties owned by enterprises and individuals.
2. The real property tax is not designed to "spread out the lump-sum land transfer royalty to annual collections". Land transfer royalty belongs to the scope of land rent, which is different from tax in essence.
3. On the holding link of real properties, three existing tax types, namely the real estate tax, the urban real estate tax and the urban land use tax, are consolidated into one unified real property tax. This is a simplification of tax types and a unification of internal and external tax systems and can thoroughly change the current state of the real estate tax system, which emphasizes the circulation sector rather than the possession sector.
4. The real property tax takes the market-assessed value of real properties as the basis for tax calculation. At the same time, it sets a non-taxable amount to reflect the policy preference to ensure the basic residential need of the citizens.
5. The real property tax takes the value of all real properties owned by each taxpayer as the object of taxation.
6. The designing of the non-taxable amount and the tax rate should ensure that the result roughly conforms to the "two-eight" principle: 80% of tax revenue comes from 20% of taxpayers. The residents in various places who live under the average residential levels should pay no or little tax.
7. The regional governments should be allowed to have certain discretion in setting the tax rate and the non-taxable amount.
8. The real property tax is a local tax and should be the main source of tax revenue for the regional governments at the lower levels.
9. The real property tax should be first introduced to the real properties owned by industrial and commercial enterprises and to the high-end residential buildings in the urban areas, and then gradually cover other residential buildings.
10. When introducing the real property tax, the existing real estate tax and fee system should be overhauled and the unreasonable charges should be abolished so that the overall level of tax and fee burden remains basically stable.
If we are to analyze the impacts of introducing the real property tax on the real estate market, we must proceed respectively from the supply and demand aspects.
II. Analysis from Market Demand
1. Introduction of real property tax will have no major impact on market demand
To the house buyers, the greatest change arising from the introduction of the real property tax is a lighter initial tax and fee burden when buying real properties. But in the future, they must pay tax on the part above their basic residential need. This change is unlikely to produce too great an impact on the decision making of the house buyers for the following reasons. First, the bulk of the numerous taxes and fees existing in the original real estate trading link is paid by the real estate developers and then is included into the house prices to pass on to the house buyers. But the house prices are eventually determined by the supply-demand relations on the market. When the overall supply-demand relations are relatively tight, a cut in the taxes and fees originally assumed by the developers cannot be converted into a cut in the house prices. Second, a cut in the taxes and fees in the trading link originally assumed by the house buyers can only slightly lower the initial buy-in threshold. The house buyers who need to pay the real property tax must pay a certain amount of real property tax each year in the future. For this reason, they may choose to save part of their incomes to bear the future tax burden instead of increasing their input in house purchase. As a result, the house-buying demand will have no tangible changes when compared with that before the introduction of the real property tax.
2. Introduction of real property tax will help realize personal-use demand to some extent
One important consideration of this research group in designing the real property tax system is how to demonstrate the state policy orientation to ensure that the basic residential need of the residents will be met and to ensure that the residents in various places who live under the average residential levels will pay no or little tax. In the meantime, the introduction of the new real property tax will be accompanied by a mass overhaul and abolition of the taxes and fees now existing in the real estate trading link. Compared with the existing real estate tax and fee system, therefore, the tax and fee burden that must be directly assumed by the house buyers in the past when they buy houses will be drastically reduced. At the same time, when the market supply-demand relations are relatively eased, the tax and fee burden that must be assumed by the developers and then be passed on to the house buyers in the form of the house prices is also expected to become lighter. To the residents with middle or lower income levels, this system design will help them realize their personal-use demand.
3. Investment-oriented demand will be checked to some extent
As a special commodity, real estate itself has a dualist nature both as a consumer product and an investment product. The demand on the real estate market can also be divided into personal-use demand and investment-oriented demand. Numerous facts indicate that the investment-oriented house-purchasing demand on China's real estate market is assuming a growing proportion of the total demand. The increase of the speculative factors has made the bubble on the real estate market something that cannot be ignored.
The introduction of the real property tax can change the comparative advantage of real estate investment and in turn can restrain the investment demand. First, the introduction of the real property tax weakens the investors' sharing of the location revaluation of real properties. If the value of a real property is raised, the corresponding real property tax will become heavier, which in turn will increase the possession cost and extend the time for investment recovery. If the value of a real property is stable or slides down, the tax burden will be stable or lower but the investment is losing money. Next, the introduction of the real property tax can undercut the tax burden advantage enjoyed by real estate investment. Compared with the productive investment, the homeowners do not have to pay income tax before the introduction of the real property tax, which makes the real estate investment and ownership a "more profitable" investment option because the investors can sit by and wait for the revaluation of their real properties and do not have to pay tax for holding them. The introduction of the real property tax can reverse this situation to some extent.
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