China Doesn’t Have a Tax Problem. It Has a State-Capitalism Problem.
The conventional argument about China’s tax system is almost too comfortable.
China should tax the rich more.China should spend more on healthcare.China should build a stronger social safety net.China should reduce household savings and increase consumption.
All true — but perhaps not the real story.
The deeper problem is that China has built an extraordinary economic machine in which the state is extremely powerful, but redistribution remains surprisingly weak.
That contradiction matters.
China does not have a small state in the traditional sense. It has a state capable of directing credit, supporting strategic industries, influencing investment, controlling enormous amounts of land and infrastructure, and shaping the behavior of both state-owned and private companies.
Yet when it comes to transferring resources directly to households, the system is far less generous.
That is the paradox.
The IMF has documented how China’s combination of personal income taxation and social-security contributions can produce a regressive effective tax structure, with lower-income workers carrying a disproportionately heavy burden. It has also argued that China’s limited social safety net contributes to exceptionally high household savings. (IMF eLibrary)
But here is the controversial question:
What if China’s high savings are not simply an economic inefficiency — but a consequence of the political economy of the Chinese model?
A household that does not fully trust the state to provide healthcare, retirement security, education and unemployment protection has a rational reason to save.
A worker who cannot assume that social benefits will follow them when they move across provinces has another reason to save.
A family facing enormous housing and education costs has another.