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Sustain to gain: June 2010 Archives

As the most dynamic world region, China is poised to become fully established as a global powerhouse. Challenges, however, are abundant, and macroeconomic policies need careful balancing to sustain "growth" while avoiding overheating, and keeping social and environmental frustrations from boiling over. The Chinese national government now considers introducing a real estate tax (Financial Times, June 11, 2010). Such a tax is motivated by a number of reasons:

  • The Chinese real estate market is overheated, and property speculation may feed an unpleasant bubble.
  • Being object to speculation, many flats remain empty (speculators simply wait for the right moment to sell again). A tax would provide incentive to utilize flats.
  • Local government are heavily indebted by recent infrastructure investments. Currently they rely on new land development (appropriation and re-sale). A tax would provide a stable source of income.

The effects of a real estate tax are difficult to predict and also depend on other market forces and developments. For example, there is fear that if not well-handled, the property market could crash. Nonetheless, it is educational to also understand possible profound consequences of a real estate tax on other domains.

BEIJING - OCTOBER 30:  Sales people introduce ...

Image by Getty Images via @daylife

Equality: 

A reduction of the rate of land appropriation directly benefits farmers who are not going to be expelled anymore. Furthermore, profit margins of speculators would be reduced. Money would be available locally to provide service also for migrant workers, up-to-now treated as "second-class citizens".

Environment and GHG emissions:

 The recent surge in GHG emissions was to significants parts driven by capital investments, such as land development and infrastructure building (Peters et al., 2010, and citations therein). A reduced rate in new constructions induced by a real estate tax would dampen GHG emission growth.

Recent development was, as indicated above, mostly motivated by the need of local governments to raise income, resulting in uncontrolled semi-dense sprawl - in many cases without public transit access. This lack of proper land-use is one of the main factors driving unsustainable urban transport (Creutzig et al., 2010). A real estate tax could, if well implemented, decelerate urban sprawl and provide funding for public transport and non-motorized transport infrastructure.

Finally, a quick reference to economic theory reveals the full scope of this instrument. The Henry-George Theorem claims that in a spatial economy public goods are optimally financed by land rents that decline with distance. One of the most impressive examples of its application is the Hong Kong MRT which finances public transport by highrise development on top of its station (and high quality pedestrian accessibility boosting ridership). As a rapidly developing and urbanizing world region, the application of the Henry-George Theorem seems to be ideally suited for China: Develop public transit and land simultaneously to reap the positive externalities of public transit provision.

 

Financial Times, June 11, 2010. Property tax offers to pave way to China's social reform, by Geoff Dyer

F. Creutzig, A. Thomas, D. M. Kammen, E. Deakin (2010) Transport Demand Management in Beijing, China: Progress and Challenges. In Low Carbon Transport in Asia: Capturing Climate and Development Co-benefits, edited by E. Zusman, A. Srinivasan, and S. Dhakal (Earthscan, London, 2010) ISBN 9781844079148

G. Peters, D. Guan, K. Hubacek, J. C. Minx, C. L. Weber (2010) Effect's of China's Economic Growth. Science 328:824-25

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