Customers select flowers at a flower planting base in Heyang town of Nanhe district in Xingtai, North China's Hebei province, Nov 1, 2021. (PHOTO / XINHUA)
Experts agree that common prosperity is an essential requirement of socialism and an important feature of Chinese-style modernization. They also said the country should promote common prosperity alongside high-quality development. This has significant meaning for China in blazing the right trail and making specific measures for economic and social development in the next chapter of growth.
I'd like to talk about common prosperity from three perspectives: How large is the current income gap in China? What misunderstandings does the public have during the nation's efforts to push for common prosperity and how to overcome these misunderstandings? How should the country strengthen the role of the tertiary distribution in promoting common prosperity?
According to estimates of the National Bureau of Statistics, the Gini coefficient in China increased from 0.389 in 1995 to around 0.46 currently.
As an indicator measuring income inequality among individuals, the Gini coefficient is based on the comparison of cumulative proportions of the population against cumulative proportions of income they receive. It ranges between 0 in the case of perfect equality and 1 in the case of extreme inequality, said the Organisation for Economic Co-operation and Development.
According to World Bank estimates, which are based on an internationally comparable method, China's Gini index was 38.5 in 2016, higher than many countries', including Germany (31.9) and the Republic of Korea (31.4).
World Bank data showed that based on the above comparison, China's income gap is relatively large.
Many people are concerned that reducing the income gap may dampen entrepreneurial enthusiasm for investment and innovation. However, we can see from World Bank data that many countries, such as Germany, Japan, Switzerland and the Netherlands, have highly developed industries and commerce as well as frontier innovation, but the income gap among their citizens is not so onerous. It can be seen that a small income gap does not necessarily lead to a lack of motivation for investment and innovation among business owners.
If we look at China's inequality in terms of assets, we'll find that the proportion of assets of the country's high-asset group－10 percent of the total population－in total assets of Chinese residents increased from 40 percent in 1978 to more than 60 percent in 2015. Meanwhile, the proportion of assets of the low-asset group－50 percent of the total population－dropped from about 17 percent to 8 percent over the same period. The other two features of the income gap are regional and urban-rural differences. The real situation shows us the necessity and urgency of promoting common prosperity.
At the 10th meeting of the Central Committee for Financial and Economic Affairs on Aug 17, Chinese leaders called for efforts to promote common prosperity in the pursuit of high-quality development and to make basic institutional arrangements on income distribution, featuring coordinated primary distribution, redistribution and tertiary distribution.
The concept known as the three distributions was first introduced by Li Yining, a prominent Chinese economist, in the 1990s.
The primary distribution refers to the distribution of wages, profits, etc, carried out by the market in accordance with the principle of efficiency. The redistribution is carried out by the government through taxation and social security expenditures, taking into account the principles of fairness and efficiency while focusing on the principle of fairness. The tertiary distribution taps enterprises and individuals to redistribute their wealth through voluntary donations.
Speaking of the primary distribution, the proportion of labor incomes in total personal incomes has kept falling since 2009, while that of property incomes has increased in China.
Although the primary distribution is mainly aimed at pursuing efficiency, the nation could still make more efforts to raise the minimum wage and establish rational institutions to bring about salary increases.
We learned from international experience that income distribution usually starts to improve when labor shortages occur. As China has entered into a phase of labor shortages, we have seen a fairly rapid salary increase, and it is necessary to guide the income distribution into a virtuous cycle.
As for redistribution, although the share of tax revenue in GDP is not small in China compared to other countries, direct taxes such as income taxes, real property taxes and taxes on assets account for a smaller fraction of tax revenue than indirect taxes. This is very different from other countries.
Compared with direct taxes, indirect taxes－which are usually imposed on manufacturers or suppliers who later pass the taxes on to end-users－play a less significant role in reducing income inequality because proportionally, the poor usually pay more indirect taxes. Therefore, China should reform its tax structure, strengthen its transfer payment mechanism and improve its social security system in particular. Additionally, the plan to roll out property taxes such as real estate and inheritance taxes will also help improve income distribution.
The tertiary distribution is the redistribution of income and wealth through voluntary donations. The volume of donations in China has been growing of late, but the scale is still fairly low. The amount reached 150.9 billion yuan ($23.6 billion) in 2019, and around 72 percent of the money flowed into three areas－education, poverty alleviation and healthcare.
Another feature of donations in China is that the majority of donors are enterprises and entrepreneurs, whereas personal donations take a larger share of total donations in other countries.
While the topic of common prosperity has been widely discussed recently, we should clarify a few misunderstandings.
First of all, common prosperity is not egalitarianism. China will not rob the rich to help the poor. The country should also avoid falling into the welfare trap and prevent people from holding the attitude of "waiting for, relying on and requesting" aid.
During the process of sharing a cake, we should also remember that to make it bigger, we must promote common prosperity amid high-quality development.
It is impossible for the incomes of different groups of people to grow at the same pace. For a fairly long period of time, the efforts to promote common prosperity should focus on the expansion of China's middle-income group, which the National Bureau of Statistics said has a population of over 400 million. The country is striving to enlarge its middle-income group to more than 800 million by 2035.
International experience show that it is sound to form an olive-shaped income distribution structure, as the society will become relatively stable and people will have a strong sense of happiness. Therefore, China should put more emphasis on further expanding the middle-income group when making policies.
We must be keenly aware that promoting common prosperity is an arduous and complicated long-term task, which cannot be accomplished overnight or pressed ahead at the same pace in different companies, communities or areas of the country.
Another misunderstanding is putting the hope of achieving common prosperity in the tertiary distribution.
As I said earlier, the volume of donations in China was only 150.9 billion yuan in 2019, or 0.15 percent of GDP that year. In the United States, the volume of donations accounted for 2.2 percent of GDP.
The tertiary distribution can only play a supplementary role, rather than a leading role, in improving the distribution of income in any country. It will play an even smaller part in China as the public has not yet formed a habit of making donations.
However, the tertiary distribution still has huge growth potential in China, where 62 percent of donations came from businesses while personal donations only contributed 16 percent of the total. That's why the country should also encourage individuals to participate more in charitable activities.
I want to stress that the tertiary distribution must abide by the principle of voluntary participation and that the government can take various measures, such as tax exemptions and granting naming rights, to encourage entrepreneurs and ordinary people to make donations.
Moreover, China should further expand the scope of participants in charitable activities. In order to enlarge the number of volunteers, the country needs to allow more nonprofit organizations to take part in public welfare undertakings and play a bigger role in the tertiary distribution.
The writer is a counselor of the State Council, China's Cabinet, and executive vice-chairman of the YouChange China Social Entrepreneur Foundation. The views are compiled from his online lecture to the Tsinghua University PBC School of Finance.
The views don't necessarily reflect those of China Daily.