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Two sides of the same coin

27 Sep 2021 By Gina Chon, Pete Sweeney

Both leaders hope to tax the wealthy to help the middle class. The leaders of China and the United States share a common interest: raiding the pockets of the rich. Xi Jinping and his counterpart Joe Biden are keen to bash the wealthy in a bid to reduce inequality. Each faces his own limitations.

The hyper-concentration of wealth sits poorly with both communist and democratic ideals, and has gotten worse during the pandemic. In the United States in 2020, the top 20% of earners grew their share of aggregate income, while that of the bottom 20% shrank. The Gini coefficient – a measure of inequality – rose over that time, according to the U.S. Census Bureau. Meanwhile, Credit Suisse estimates that in China the wealthiest 1% hold 31% of the country’s assets. Hence, Xi’s harsh campaign to restrain the “unreasonable incomes” of tycoons like Alibaba’s Jack Ma.

Turning this inequality into tax revenue is theoretically easier in China. Xi could deploy a long-threatened property holding tax. Real estate contributes 70% to China’s wealth gap, according to estimates by Li Shi of Beijing Normal University. In the United States, however, tax changes require political consensus and public squabbling. Biden planned $3.6 trillion in tax hikes over a decade but Democrats in Congress have watered down those proposals.

The American advantage, on the other hand, is that spending tax revenue effectively ought to be simpler. A $1 trillion bipartisan plan to fix roads and bridges, awaiting a vote in the U.S. House of Representatives, would create more than 880,000 jobs by 2030, according to S&P Global. Proposals to expand universal schooling for younger children would be a big help to lower- and middle-income families in America.

China, after decades of heavy infrastructure investment, can no longer rely on outsize returns. As for social services, Chinese officials, incentivized to grow GDP, have preferred investment in school buildings over teacher salaries. Beijing is also stingy: Officials declined to hand out unemployment cash even at the height of the pandemic. Uncle Sam signed checks worth roughly $1,800 per eligible individual last year. Factor those in and the poverty rate fell by 2.6 percentage points from 2019 to 2020, according to the Census Bureau.

That leaves each leader likely to get only part of what he wants. Humbling rich folk may be easier in authoritarian China. But the United States is better placed to shrink the gap between rich and poor.

 

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