At this year's CPPCC and NPC, income distribution reform was once again a national focus. Policy-makers led observers to believe hope was just around the corner. But later on, officials with the NDRC told the media, "it's difficult to begin reform this year."

However, Zhang Dongsheng's words have renewed our hope.

Based on the reform plan, profits from state-owned enterprises will be used to fund public spending and social security, allowing the public to benefit from the profits of these state-owned giants.

Call to Reform

In an article published in Qiushi (Seeking Truth) magazine on April 1, Premier Wen Jiabao said that now is the time to solve the problem of unequal income distribution.

The EO has learned that the NDRC, the department leading the reform, is co-drafting a reform plan with the Ministry of Finance (MOF), the Ministry of Human Resources and Social Security (MHRSS), the State-owned Assets Supervision and Administration Commission (SASAC) and the State Administration of Taxation (SAT).

The MHRSS and the SASAC are researching and conducting an investigation to figure out how to improve the distribution ratio of worker's compensation; the MOF and SAT will investigate what adjustments can be made to the tax system, with the aim of distributing income to low-income people, expanding the middle-class and restricting the income of high-earners.

Zhang Dongsheng recently said in an article that currently, income distribution among households, governments and enterprises is unbalanced, with the total income of households accounting for a smaller proportion of the total then in should, thus limiting household consumption.

While household income as a proportion of state revenue has decreased from 70.5 percent in 1988 to 59.1 percent in 2007, government revenue has increased by six percentage points, and business revenue has risen by three percentage points.

The income gap between residents has also enlarged. In 2008, while the consumption trend of rural residents was six percentage points higher than that of urban residents; the average income of the former was only 30 percent of the latter. In 2009, the income of urban residents was 3.33 times that of their rural counterparts, but in 1978 it was 2.57 times and in 2000, 2.79 times.

Zhang Dongsheng said, accelerating reform and readjusting income distribution among citizens is a multi-faceted, complicated, deeply influential, difficult job; the period of reform will be long, arduous and complex. But he believes reform must begin this year.

Key Points of Reform

Among the plans to reform income distribution, the redistribution of the income earned by monopoly state-owned enterprises along with the reform of financial policies and social security policies are the most difficult.

Zhang Dongsheng said, profits from state-owned enterprises will be used to fund public spending and social security; meanwhile, the total amount of salaries paid out by monopoly industries as well as their average salaries will be adjusted.

The central government has approved the transfer of 10 percent of shares of state-owned enterprises to a social security fund.

Zhang also suggested transferring part of the profits of state-owned enterprises to public spending. Statistics show, the total profits handed in by state-owned enterprises to the central government exceeded 50 billion yuan in 2009, only one billion of which was transferred to public budget funds; the remaining profit was used to bolster the operation budget of state-owned assets and for state-owned enterprises to perform mergers and acquisitions.

By reforming income distribution, the amount of profit earned by state-owned enterprises being transferred to public coffers will increase. Currently the MOF and SASAC are researching a plan that will raise the amount of profits state-owned enterprises should hand in to central government. The EO has learned the project will be issued this year and it is hopeful that by next year more state-owned enterprises will begin to transfer a portion of their dividends.

The income distribution reform plan hopes to draw up measures to manage the gap between the salaries of those working in monopoly industry and the average salaries of other workers, and plans to sever the link between the monopoly sectors payroll and profits.

"State-owned enterprises who control the resources of this country are lifting the salaries of their employees or paying them high bonuses after earning huge profits every year, which is increasing the gap between the salaries of these state-owned enterprises and the national average," an expert participating in the meeting mentioned above said.

The reform is also targeted at regulating the income of high-level executives of state-owned enterprises and financial institutes. A system to compare the salaries of civil servants and state-owned enterprise employees will be established. The current regular adjustment mechanism of the basic wages of employees of governmental or public agencies will be improved and performance-related wages will be adopted in public agencies.

The performance-related wage reform of public agencies began last year, but progress has been slow. Many local governments argue that it can't be implemented smoothly and that the reform is a great financial burden to local governments.

During the process of income re-distribution,  tax policies will play an important role, Zhang Dongsheng said at the meeting.

According to a scholar who attended the meeting, China's tax system, is dominated by income tax, resource tax, property tax, and heritage tax. These taxes which may be used to readjust the income gap are too small or are not collected. Hence taxes do little to serve the function of income redistribution.

Zhang Dongsheng emphasized, ordinary workers are now the main taxpayers of individual income tax, with what they pay accounting for 60 percent of the total amount. Since capital gains such as stock dividends are tax exempt, the income gap between the rich and the poor is widened.

The next reform of individual income tax, which will allow families to deduct their medical and educational expenses from their taxes, is to be fast-tracked and should help to reduce the tax burden of workers and their families.

The government also plans to impose property tax, and is strengthening research on how to adjust the tax on the transfer of valuable properties and will start collecting heritage and gift taxes.

Recently, Xie Xuren, Minister of Finance, stated in an article that the government is researching how to impose a tax to fund social security in order to replace the current "social security fee" paid by both companies and their employees.

This is the first time the Chinese government has suggested implementing a social security tax.  Once the taxes are diverted into a state-run fund, they can become a source of national revenue and can be used by the MOF through the national budget.

The MOF is aiming to optimize the income distribution among citizens. Currently, individuals and their employers are paying social security fees into individual accounts and the specific amount is decided by their salaries. Meaning, the more you earn, the more you must pay and the more social security benefits you enjoy, which further expands the income gap.

"If we are able to finish a plan [for income reform] this year, even if it's not perfect, we can implement it in the 12th five-year plan," an expert whose opinion on this project has been solicited said.

However, accelerating the reform of income distribution is not one of the ten key tasks to focus on determined at a meeting of the State Council Standing Committee held on April 14.

Despite our hopes, the fate of income reform remains uncertain.

This article was edited by Rose Scobie