The author is director of Center for China in the World Economy at Tsinghua University.
Today many Chinese people are familiar with and pay attention to the middle-income trap and when China will surpass it, thus joining the group of developed economies. However, findings from our long-term study have shown that the middle-income trap is not the biggest threat to our economy. China has already achieved three desirable conditions that countries who have broken out the dreaded trap possess – a stable government that supports the development of a market-based economy, rising human capital, and a high degree of openness.
Rather, China should be wary of the “middle class trap,” when the middle class, who are well-educated and receive mid- to high-level labor remuneration, are deeply concerned about personal or familial prospects and lose faith in the country’s development. This loss of confidence in social and economic development can lead to social instability and even political uncertainty.
At the moment, the nascent development of the middle class trap can be seen in China.
For starters, under the pressure of a high tax burden, the middle class are worried about the growth prospect of their disposable personal income. China’s personal income tax mainly applies to the middle class, whose main source of income is from their salary alone. In addition, China’s personal tax rate can be as high as 45 percent. The threshold for monthly personal income tax is set low at 3,500 yuan ($528). And there is no tax relief for household burden.
Furthermore, the middle class are faced with the anxiety of rocketing house prices in large cities. This weighs particularly heavy on the post-80s and 90s middle-class generations who have only been part of the work force for a few years. These younger groups usually have to rely on financial support from their parents and relatives in order to purchase a home in a big city.
Another cause behind middle class anxiety is the rising costs for education, medicare and retirement. The government provides limited educational funding for kindergarten, primary school, middle school and high school. Increasing medicare costs mean that middle class families face financial disaster if anyone is stricken with a major illness. These situations have consequently triggered worries over future retirement expenses.
The most worrying scenario for the middle class would be that, despite an enlarging economy, they will see little benefit, unlike the wealthy who are guaranteed access to various resources and multiple income channels and the government who can maintain its advantageous status in national income distribution through taxation and fees. Additionally, China’s low-income class can also ensure their income by relying on improvement in the country’s basic welfare system.
In comparison, the middle class is caught in between, left complaining about their lack for further development, and even developing resentment toward society.
Wide-ranging efforts are required to avoid this middle class trap. To begin with, the government must provide clarity on the country’s fiscal and tax reforms. Currently, some people in the policymaking and academic communities believe that reforming the existing fiscal and tax framework is about shifting away from the use of indirect taxes in favor of direct taxes, which is unreasonable.
Direct taxes are mainly levied on the middle class whose income and assets are seen as comparatively transparent and open, and it’s mostly salaries and wages that are chargeable to direct taxes. Accordingly, the middle class often turns out to be the victim and feels that they’re laboring under a heavier tax burdens.
Instead the country should draw on Germany’s model of developing a market economy that favors indirect taxation. Indirect taxes are primarily levied on businesses and a virtuous circle is often produced between the taxpayer and the government while collecting indirect taxes, with companies paying more taxes to be eligible for more government support which consequently helps in solving the businesses’ development woes.
All in all, when it comes to taxation, the actual tax burdens the middle class have to bear should be taken into account. The focus should be on collecting more taxes from companies and those racking up capital gains than on burdening the middle class with excessive taxes.
Further, in regards to the house market, it’s advisable that welfare and security policies specifically designed for the middle class should be put into place. Big cities including Beijing, Shanghai, Guangzhou and Shenzhen should be providing the middle class with affordable, long-term rental options, so residents who can’t afford to buy a home can still live in the big cities. For example, in Hong Kong and Singapore many primary and secondary school teachers dwell in better-than-average public housing offered by the government. As a result they aren’t mired with excessive worrying or feel like they’ve been pushed against a wall amid exorbitant home price woes.
In addition, the country should strive to reduce stress on students, many of whom are under high pressure to excel in various contests and examinations. The push for a transition toward a non-competitive education system in the country will not only drive students to focus on a wider range of merits, not just grades, but also ease pressure on middle class parents who generally have higher educational aspirations for their children.
Most importantly, a transparent and fair social governance system should be gradually built to ensure public safety and freedom, defusing the sense of unease sometimes felt by those falling under the middle class.
There is a strong possibility that China will escape the middle-income trap, but avoiding a middle class trap will require more thinking. This is an issue that the whole of Chinese society should pay attention to in the future. www.globaltimes.cn/content/1001884.shtml
Comments are closed.