Su Jingchun: Third Way's the Charm
31 Aug, 2021  |  Source:China Daily  |  Hits:1205

Enterprises and individuals can be encouraged to help narrow the widening wealth gaps

At the 10th meeting of the Central Committee for Financial and Economic Affairs on Aug 17, the participants underlined the need to uphold a people-centered development philosophy and promote common prosperity while pursuing high-quality growth. They also highlighted the need to properly deal with the relationship between efficiency and equity in income distribution, and establish a basic system that coordinates primary distribution, redistribution and third distribution.

Third distribution refers to individuals, enterprises and organizations voluntarily donating parts of their incomes for charity purposes, which results in the transfer of wealth from the richer group to the poorer group in the society. It complements primary distribution and redistribution flexibly.

Since the launch of the reform and opening-up policy, China has seen the wealth gaps widen among urban and rural residents, among people from different regions, and among different sectors and positions after the primary distribution of wealth which is in accordance with the law of worldwide economic development. The redistribution, mainly in the form of fiscal means, narrows the gaps to a certain extent. But as for residents' disposable incomes, transfer incomes still account for a relatively small proportion, and there remains a large gap between urban and rural residents.

Overall, China's redistribution process is far from enough to reverse the trend of widening wealth gaps which is difficult to reduce automatically in theory and practical observation. Therefore, it is urgent to establish a channel through which individuals, enterprises and organizations can help narrow the wealth gaps through voluntary third distribution.

The conditions are favorable for promoting third distribution in China.

First, the rapid economic growth for decades has greatly raised the living standards of Chinese people. The increasing wages, diversified capital incomes, rising property prices and earnings of self-employed families have all contributed to the country's expanding wealthy population and the middle-income group. The savings of urban and rural residents over recent years lay a solid foundation for third distribution.

Second, China has promulgated a series of laws and regulations related to third distribution, such as the Charity Law, the Law on the Red Cross Society and the Law on Public Welfare Donations. In addition, regulations on voluntary services have also been rolled out, establishing an institutional foundation for implementing third distribution.

There are still some related problems worthy of our attention, though.

First, the capability of charity organizations to raise funds still has room to be improved.

According to a blue paper on China's charity development in 2020, the country's total charity resources-social donations, volunteer services and public welfare lotteries-amount to 337.4 billion yuan ($52 billion).

According to Forbes magazine, in 2019 almost $450 billion was donated to charity organizations in the United States, of which $49.5 billion, or 11 percent, came from the top 100 donors. Moreover, with the growing capital pool of Chinese charity organizations, they are paying more attention to wealth management, which is instrumental in preserving and increasing the value of their wealth. But at the same time, we should be cautious of the possible risks during balancing profit and charity.

Second, individuals' voluntary enthusiasm for charity could be further motivated.

According to a report on China's charity donations in 2019, released by China Charity Alliance, enterprises accounted for 61.71 percent of the total donations, giving away 93 billion yuan in cash and goods. Personal donations reached 38.9 billion yuan, a record high. But in comparison, in some foreign countries, individual contributions make up the bulk of social donations-usually larger than 60 percent. Charity funds are also responsible for significant shares, while corporate donations comprise a relatively small proportion.

Third, a comprehensive approach to philanthropy is yet to take shape, as third distribution in the country mainly focuses on limited areas.

Statistics from 2015 to 2019 indicate that education is the most favored area of charity, with institutions of higher learning and primary schools in far-flung rural areas attracting the most donations. Healthcare and poverty alleviation are also the main areas of benevolent donations. Other areas, such as public affairs, international issues, and environmental protection, require more public attention.

Fourth, if the foundation for third distribution to be more sustainable, the inheritance tax and gift tax would be levied scientifically, gradually and orderly.

Large donations in developed countries mainly rely on reasonable property tax systems. However, China has not yet levied the related taxes, and as a result, most rich groups would rather leave wealth to their offspring than donate to charities. Statistics in recent years show that in years where disasters are frequent, the amounts of donations will surge, while in normal times, charity donations will decline, which to a certain extent reflects the lack of a solid foundation for sustained third distribution.


(Su Jingchun, an associate professor and supervisor at the Chinese Academy of Fiscal Science.The views do not necessarily reflect those of this platform.)