A microsimulation of property tax policy in China

Abstract China is exploring possible property tax reform to stabilize the booming housing market as well as providing sustainable revenue for the local government. In this paper we develop a theoretical model of property tax reform to decompose potential impacts of property tax reform in China. Then we used the China Family Panel Survey (CFPS) data to conduct a microsimulation model to examine potential impacts and incidences of alternative property tax designs in China. Our analyses suggest that a uniform property tax policy would bring substantially heterogeneous impacts across different income groups as well as different regions, mainly due to the differences in income distribution, housing prices and the degree of the Housing Demolition program. In terms of property tax incidence, our simulation suggests that utilizing tax revenue on the poor's public housing subsidy may mitigate the regressivity; in some case may even increase the overall social welfare. Finally, we use the cross-sectional information in the Chinese Family Panel Survey (CFPS) data to simulate for optimal tax scenarios for each region. Our microsimulation results provide some initial quantitative analysis in the literature and may shed some light on understanding the impacts of future property tax reform in China.