The long expected and occasionally debated hope for income distribution reform will make a breakthrough this year. As is reported, the general scheme of the reform, which has taken eight years to conceive, will be revealed to the public this month. While this news remains to be officially confirmed, the content and policy indication of the scheme is noticeable. In today’s China, the topic of income distribution is prone to cause estrangement among different social classes. It is not only an economic issue, but also a social and political one.

As a response to the public concern, reforming the current climate of unequal income distribution is of paramount importance to the central government in terms of improving people’s livelihood and establishing a harmonious society. In order to solve the problem, we need to pay more attention on distribution than on redistribution; the fundamental solution is to change the pattern of economic growth and the organic composition of capital. Besides, to deepen market reforms and make breakthroughs in political reforms are also priorities in the reform package.

Generally, there are three types of income: wage income, property income (or capital income), and transferred income. It has always been the emphasis of the Chinese government to adjust wage income and transferred income.

Since the 17^th Party Congress, the three keynote policies have been “to raise incomes of low-income groups, to enlarge the number of middle-income people, and to curb the income growth of high-income people.” In order to do so, the government has adopted such measures as abolishing agricultural taxes and setting up basic living standards to guarantee the well-being of the rural population. This demonstrates that the policy makers are indeed taking the distribution issue into primary consideration.

Yet it should be acknowledged that the effect of the policies has not substantially improved the situation. An empirical study, which won the Sun Zhinfang Prize of Economics, shows that the reform in personal income tax and agricultural tax only put emphasis on redistribution, which is virtually ineffective in adjusting the income gap. Efforts made by the government are being counterbalanced by differences among the industries and the state monopolies, which cause about one third of the income differences among China’s key industries.

It is a commonly accepted fact that there should be an income gap inside a society because people are born with varied ability and develop themselves to different degrees. The principle of “income distribution on the basis of labor with coexisting modes of distributions” in the market economy also prescribes such a fact. Yet the widely reviled income gap now is exacerbated by loopholes in policies and the political system. Equal opportunities inside the market is a luxury, monopolized industries reap fruits that they have not personally sown, government monopoly becomes an incubator of “gray incomes,” and the deprivation of personal property based on political discrimination (peasants are not able to share the profits of land development through urbanization). These are the extremely dissatisfying aspects of the current income gap. People are demanding more equality in opportunity rather than equality of income.

Undoubtedly, it is the obligation of the government to perform a justified income distribution. Considering the root cause of the widening income gap, it is only possible for the reform to be on the right track if the government only acts in accordance with social requirements.

The root cause of the widening income gap lies in the government’s excessive interference in the distribution of resources and unequal opportunities in the market. Although a bigger government has a bigger share of the market, the urgent problem now is to adjust the proportion of government income in the entire income of a society, and the redistribution of government transferred payments will follow as second. The emphasis of the reform should be put on deepening reforms in the market, administration systems, as well as finances and taxes. The current political system also needs to be reformed to include more mechanisms of checks-and-balances. The current over-reliance on reforming income distribution based on labor will not shake the vested interest groups, nor will it protect the middle-income group.

Collective prosperity cannot be realized through “equal prosperity.” According to both Marxist and contemporary macroeconomic theory, the organic composition of capital determines the fundamental patterns of distribution, and redistribution could only be adjusted on this basis. Obviously, it is important to change the pattern of economic growth: to rely more on technological improvement and scientific management than on factors of production.

As to the prospect of “curbing the income growth of high income people”, reform policies are hard to be carried out because, it is hard to distinguish legal income from “gray income” based on blurring criteria, not to mention the invested interest groups ignoring policies. The core of eliminating “gray incomes” is to solve existing problems in the implementation of power while promoting reforms in an all-inclusive manner. In this sense, the “Sunshine Act,”  intended to provide open information on government officials sources of income, needs to be put forward thoroughly with its aim of boosting budget transparency and freeing production elements.

As to “enlarge the number of middle-income people,” the government needs to do more in terms of cutting taxes, optimizing the environment for free entrepreneurship, guaranteeing equal job opportunities, and decentralizing monopolies. This is of great importance to China’s stable social transition.

Finally, in terms of “raising the income of low-income groups,” the government should not be restricted in its role of amending disadvantages in public service. Inadequate job opportunity is ailing some impoverished families. Therefore, the major breakthrough for the government is to facilitate job flow, bring forward reforms in the household registration system, improve the rural-urban dynamic, and lower the administrative standard for migrant workers to work and settle down. Accordingly, the government should be mindful not to violate the peasants’ basic rights on their land during the urbanization process. Besides, the government should provide equal education opportunities for the rural population to eliminate the possibility of inherited poverty.

To solve the problem of unequal income distribution, the government needs to realize the limit of its power and inform the public accordingly, in case they would engender disappointment by raising expectations too high and subsequently failing to meet them.

Translator: Xiaoyuan Li

Xiaoyuan Li is a current intern for the China Program at the Carter Center

Editor: Andrew Dirks

Original Author: Hu Shuli

Original Publication Date: October 15, 2012

Original Article: http://magazine.caixin.com/2012-10-12/100446507.html