Joining the Hands of Government and Society to Leverage the Role of Public Finance and Charity

This chapter examines how China can collectively leverage the role of public finance and charity to promote common prosperity. China’s fiscal redistributive effect is not salient because of poor progressivity in taxation and the low level of spending on public services and transfers. In terms of the tax system, taxation is dominated by indirect taxes such as value-added tax (VAT), which is mainly levied on consumers. The corporate tax burden is also partly perceived as a burden on employees, so the effective tax rate for corporate owners is lower. Structural tax cuts both raise economic efficiency and help improve the redistribution of the tax system. To this end, China can reduce VAT, reform individual income tax rates on capital and labor income, and introduce a real estate tax while cutting taxes on property transactions. In terms of public expenditure, fiscal spending is biased towards economic development, with room for improvement in the input of public services and transfers targeting specific groups of people to promote both efficiency and fairness. China has a broad fiscal sector that includes state-owned enterprises (SOEs), land finance, and social insurance funds. SOEs should increase their dividends and allocations to the social security fund to provide for redistribution. As the aging population increases and GDP per capita grows, China’s social security levels should and can rise. The basic pension insurance system has two major challenges: Large urban–rural disparities and poor financial sustainability. More fiscal support should therefore be enacted, while parameters should be adjusted. To address the urban–rural disparity, financial resources can be used to revamp the basic pension scheme for rural and non-working residents and to establish a non-contributory minimum pension to provide basic protection for the poor elderly population. To address the issue of financial sustainability, the policy has improved the financial position of the basic pension scheme for urban employees through financial subsidies and transfer of state-owned assets, and fiscal policy can do more in the future. An important variable for parameter adjustment is the setting of the retirement age. At present, the retirement age in China is low, so delaying retirement would significantly improve the financial position of the pension system and reduce the intergenerational gap. This would also increase the total labor supply. The intensity of social giving to charity in China is low. The public’s perception of charity is limited, and charitable organizations operate inefficiently. The root causes of the problem include the unique origins of charity development in China, the current low level of economic development, the imperfect legal and regulatory systems for charity, and the lack of incentives such as taxation. Therefore, China may focus on long-term institutional development, guide social awareness, and encourage corporate social responsibility.