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Allowing High Incomes
Profound social changes since China's reform and opening-up have brought about not only a substantially improved living standard, but also a widening income gap.

The problem has aroused general concern because its solution is of vital importance to the country's social and economic progress.

To help low-income earners, the State is establishing and perfecting a social security system to ensure their minimum living standards.

But how should we judge the emergence of high-income earners?

Lack of an appropriate policy for the rich will impair the country's modernization drive and undermine the fundamental and long-term interest of the masses.

China's reform and opening-up policy is aimed at both the establishment of a market-oriented economy and integration of the Chinese economy into the world. Therefore, a group of high-income earners from legal income is an inevitable result.

First, the decentralization and marketization of control on production factors will unavoidably lead to the emergence of rich people.

To make the transition from a central planning to a market economy smoother, the State has developed economies of various ownership, fostered markets for production factors and adjusted distribution policies to facilitate economic reform in urban areas.

Due to many reasons, such as departmental and industrial monopoly and policy favors, the income gap has been widened.

Second, demand-led economic development also needs China's rich. Their consumption can help boost the country's economic restructuring.

Third, high income resulting from capital gain is normal in a market economy. Capital gain has become an essential source of income as a market economy takes root in the country.

With an absence of legal protection for capital gains, foreign capital will not flow in and domestic capital will likely flow out.

In addition, the coming of a "new economy" era featuring a technological explosion will also enable people to become rich quickly.

The phenomenon is a measure of social progress, to which the State should give policy support.

Economic globalization also requires paying employees in line with international standards.

Another group of people has become rich through illegal means during the course of China's reform and opening-up.

Some corrupt government officials have abused their power to grab State assets and take bribes. Though the number of them is small, the amount of their illegal income is shocking and their corruption is extremely detrimental to the country's economic reform.

Some other people in administrative departments or industry have collaborated with lawbreakers to embezzle fiscal funds, bank loans, tax revenues and profits.

Some people have also accumulated wealth by illegal means like smuggling, cheating and tax evasion.

All of them - though only a minor portion of the high-income group - have tarnished attitudes towards other rich people and even the reform and opening-up policy.

Therefore, we must take effective measures to check this undercurrent.

A debate on income is needed.

In view of people's fundamental and long-term interests, the State should strengthen and standardize income adjustment instead of imposing a limit.

There should be no ceiling for fair and legal after-tax income because such high income is the result of a great contribution to society. It is either based on the application of new science and technology or results from risk investment. In terms of international standards, the income level of China's upper echelon remains relatively low. To catch up with developed economies in the coming decades, the State should allow the rich to further their legal income level to help raise efficiency of the national economy.

In dealing with the high-income group, the government can strengthen income adjustment with tax leverage like individual income tax, while preparing to collect inheritance tax, gift tax and real property tax.

A law should also be promoted to plug existing legal loopholes and crack down those who get rich through illegal means.

By deepening reform, the government can create more opportunities for people to become wealthy.

The authors are researchers with the Institute of Fiscal Science at the Ministry of Finance.

(China Daily December 2, 2002)

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