Earlier this month the China Institute for Income Distribution at Beijing Normal University released a report arguing that the imposition of a tax on inherited assets of more than 5 million yuan ($803,500) would be a major step toward narrowing the country's widening income gap.
Such claims have naturally stirred up much discussion in recent days in China, where wealth disparity remains a highly contentious topic and much of the country's overall tax burden falls on middle-income earners.
But rushing ahead to implement such a tax without first establishing information disclosure mechanisms would only cause such a levy to miss its target. With protections on individual wealth in China still relatively flimsy, a hastily introduced estate tax could easily motivate the rich to hide their assets offshore.
Right now, there is no comprehensive system in place in China to track and record wealth - especially larger assets like houses, equities and vehicles - so tax officials have limited information on how much people actually own. And this lack of oversight has allowed vast fortunes of grey income and off-the-books earnings to pile up in the shadows, away from the prying eyes of tax collectors.
Actually, a Credit Suisse report released in 2010 estimated that over 9.3 trillion yuan in hidden incomes were made in 2008 - accounting for about 30 percent of the country's GDP during that same year - with nearly two-thirds of that sum going to the top 10 percent of China's wealthy. And even assets like property and real estate, which should not be easy to hide, often go unrecorded in official ledgers because of the cracks in the system which exist for the country's rich.
Needless to say, unless there is a way to bring the holdings of the wealthy into the light of day, there is little point in rolling out an inheritance tax.
Most of China's richest people hide what they have due to anxieties that the government may grab an overly large portion for itself. Such concerns are not entirely unfounded, as laws safeguarding personal property and wealth are largely incomplete.
If the government races ahead to introduce an inheritance tax without first offering the wealthy some assurances that their estates will be protected, many could panic and see the tax as a government play to seize their property. It could reaffirm preexisting fears among the rich and push people to move their assets and capital outside of China.
What house can you buy with 1 million yuan in China?
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