Property tax trial: a sharp sword or a delicate needle? On Jan 28th 2011, China finally began to implement its property tax policy in two trial cities, Shanghai and Chongqing. The new tax policy was expected to be carried out through the whole year and to successfully cool the overheated real-estate market. However, the result seems complex and confusing.
An Overview of the Property Tax Policy Property tax policy is different in Shanghai and Chongqing, varying in tax rate and charging targets. Property tax in Shanghai aims at newly-bought houses, while that of Chongqing aims at high-class apartments. However, they both impose restrictions on non-local residents and their tax rates are both pretty low (See Exhibit 1).
Compared with property tax policy of other countries, China’s tax trial is far from mature. Its tax rate stays around 1%, while Hong Kong is 17% and Japan is 10%. Besides, the current trial policy only covers a small proportion of the whole house market.
Goals of the Property Tax Trial
The short-term goal of the property tax trial is to depress the rapid growth of housing prices through two paths. First, by increasing the holding cost of investment houses and prolonging the returning period, property tax would put financial pressure on real-estate speculators and therefore depress the demand, which would decrease housing prices. Second, sales of investment houses would also increase the supply of the real-estate market, which would also decrease housing prices.
The ultimate goal of the property tax trial is to change the fiscal mode of local governments. Currently, local governments are mainly relying on the sales of land to make ends meet, which is often called the Land Fiscal Mode. This provides motivations for the local governments to push up the housing prices. With the introduction of the property tax, local governments will be able to get