China Doesn’t Have a Tax Problem. It Has a State-Capitalism Problem.

China should tax the rich more.
China should spend more on healthcare.
China should build a stronger social safety net.
China should reduce household savings and increase consumption.

All true — but perhaps not the real story.

The deeper problem is that China has built an extraordinary economic machine in which the state is extremely powerful, but redistribution remains surprisingly weak.

That contradiction matters.

China does not have a small state in the traditional sense. It has a state capable of directing credit, supporting strategic industries, influencing investment, controlling enormous amounts of land and infrastructure, and shaping the behavior of both state-owned and private companies.

Yet when it comes to transferring resources directly to households, the system is far less generous.

That is the paradox.

The IMF has documented how China’s combination of personal income taxation and social-security contributions can produce a regressive effective tax structure, with lower-income workers carrying a disproportionately heavy burden. It has also argued that China’s limited social safety net contributes to exceptionally high household savings. (IMF eLibrary⁠)

But here is the controversial question:

What if China’s high savings are not simply an economic inefficiency — but a consequence of the political economy of the Chinese model?

A household that does not fully trust the state to provide healthcare, retirement security, education and unemployment protection has a rational reason to save.

A worker who cannot assume that social benefits will follow them when they move across provinces has another reason to save.

A family facing enormous housing and education costs has another.

And when the state prioritizes industrial capacity, infrastructure and strategic investment over household income, the result is predictable:

People save.

Companies invest.

The state directs capital.

And consumption remains structurally weaker than China’s productive capacity would suggest.

The IMF itself has connected China’s exceptionally high savings with weaknesses in the social safety net and income redistribution. (IMF⁠)

So perhaps the central economic contradiction of China is not state versus market.

It is state power versus household economic power.

This changes the reform debate completely.

The usual Western prescription says: reduce the role of the state and let markets operate.

The alternative prescription says: keep the state powerful, but make taxation more progressive and dramatically expand social protection.

I think both arguments miss something.

China’s real challenge is deciding what the state is for.

If the state is powerful enough to identify strategic industries, finance infrastructure, support national champions and influence corporate decisions, it is certainly powerful enough to construct a much stronger social contract with households.

The question is whether it wants to.

And this is where the debate becomes uncomfortable.

Because increasing taxation on wealthy households and expanding welfare is not merely an economic reform.

It changes the relationship between the citizen and the state.

A stronger welfare state gives households greater security — but it also gives citizens greater economic independence from family wealth, employers and local governments.

That is potentially much more transformative than simply increasing government spending.

It could create a China in which households consume more, save less and depend less on precautionary wealth.

And that could have consequences far beyond China.

For years, China’s enormous savings have been absorbed through domestic investment or transmitted through the global economy. The IMF has repeatedly identified high savings as a central element of China’s internal and external imbalances. (IMF⁠)

Therefore, the most important Chinese economic reform may not be another industrial policy.

It may not be another export strategy.

It may not even be another stimulus package.

It may be something much more politically sensitive:

putting Chinese households at the center of the economic model.

That means progressive taxation.

A portable national social-security system.

More healthcare spending.

Better unemployment protection.

Greater redistribution.

And, perhaps most importantly, a shift from measuring economic power by how much the state can invest to measuring it by how much ordinary households can safely consume.

The irony is striking.

China became one of the world’s greatest economic powers by building state capacity.

Its next transformation may require using that state capacity to give households more economic security — and potentially more economic autonomy.

That is why I would go beyond the argument that China needs a better tax system.

China needs to decide whether its extraordinary state power is ultimately designed to maximize production…

or to maximize the economic security and purchasing power of its people.

Those are not necessarily the same thing.

And the answer may determine not only China’s next economic cycle, but the next phase of the global economy.

Roberto Balbino — CEO, Fintech SBB.