Readjusting income distribution in China in a reasonable manner was both a long-term task and an urgent issue to address at present, said Premier Wen Jiabao Saturday in his government work report delivered to the annual session of the National People's Congress (NPC) in Beijing.
Wen said the government would take three major measures in 2011, including increasing the basic income of low-income people in both urban and rural areas, putting more effort into adjusting income distribution, and vigorously overhauling and standardizing income distribution.
"It's the first time income distribution reform has appeared in the central government work report," said Chi Fulin, Executive Director of the China (Hainan) Institute for Reform and Development.
Chi added that he believed Wen's report reflected the central government's commitment to income distribution reform.
"The three measures solve the two outstanding problems existing in income distribution reform, including excessive disparities in wealth and unfair allocation," Chi said. "In fact, the key of income distribution reform lies in the government's resolution to solve it. As Wen said, 'Through unremitting efforts, we will reverse the trend of a widening income gap as soon as possible and ensure that the people share more in the fruits of reform and development,' I believe it is OK. China can solve the problems on income distribution."
Necessity for Income Distribution Reform
"China's income distribution has bordered on the edge of unfairness," said He Keng, Deputy Chairman of the National People's Congress Financial and Economic Committee.
A recent World Bank report noted that China's Gini coefficient, a main gauge of income disparity, exceeded the "security line" of 0.4, indicating unequal income distribution could cause social unrest. Moreover, the latest status report issued by the Ministry of Human Resources and Social Security indicated that the average income of senior administrators at state-owned enterprises was 100 times the average income amount.
The most urgent problems in the reform are to limit excessively high incomes and raise low incomes, He said.
He also attributed the unequal allocation to two factors.
"At first, in the long term we paid more attention to efficiency rather than fairness," he said. "Second, because China's economy is not so developed, leaders at all levels have put too much value on economic development in a one-sided pursuit of gross domestic product."
Challenges of Income Distribution Reform
As one of the hard nuts for the government to crack, China's income distribution reform has been urged for years, but without obvious results. According to "The 21st Century Business Herald," the income distribution reform plan, which was supposed to issue a general proposal before the end of 2010, was suspended, pending the cabinet's decision.
Gu Shengzu, a professor of economics at Wuhan University as well as member of the Standing Committee of NPC, said he believed income distribution to be the most arduous task in China's 12th Five-year Plan because it concerned interest readjustments for enterprises, governments and laborers.
"To increase the proportional income of the citizens means decreasing the proportion of what's allocated to the government and enterprises in the gross domestic product, Gu said. "But it's difficult for the government to cut down its proportion based on the large-scale proportion in GDP. Furthermore, it's easy for state-owned enterprises especially monopoly enterprises to increase wages, but it's hard for small and medium-sized enterprises most of which operate in low profit to do this."
Government's Resolution on Reform
In October 2010, the fifth plenary session of the 17th Central Committee of the Communist Party of China (CPC) passed a proposal for the Twelfth Five-Year Plan, China's economic blueprint for the next five years. The proposal said efforts should be made to rationalize income distribution system, cement the role of tax policies in income distribution adjustment in which excessively high incomes would be adjusted, and reduce the widening gaps between urban and rural areas and among different industries.
In the meantime, 30 provinces in China have raised local minimum wage standards since 2010, most of which increased by 10 percent.
A report in "The Legal Evening News" said that among the 31 provincial governments' 12th five-year plans this year, 23 provincial governments promised to ensure that residential income keep pace with economic development. Six provincial governments, including those in Shandong, Zhejiang and Chongqing, pledged that the growth rate of residents' annual income should be greater than that of GDP.
Moreover, the State Council on Tuesday passed a proposal to raise the personal income tax threshold and planned to present it to the NPC.
Most experts see the move as the beginning of income distribution reform, although the country's cabinet did not disclose details about the reforms or cite a timeframe for them to go into effect.
"If the lowest tax bracket starts at 3,000 yuan (US$456) compared with the current 2,000 yuan, approximately 20 percent of working people will be liable for income taxes, a reduction from the current 50 percent," said Ping Xinqiao, a professor from the School of Economics at Peking University. "At present, the majority of taxpayers are from the low-and middle-income groups."
Shi Zhengwen, a professor at the Center for Research in Fiscal and Tax Law at China University of Political Science and Law, believes taxation is the most effective way to achieve income distribution reform.
"Although raising income has some effect, the income distribution is determined mostly by the market according to production fact," he said. "If the income is regulated by administrative measures, it will have a negative effect on the allocation of resources in the market. In that case, the taxation, an adjustment measure according to citizens' income, is the most effective way."