Reducing income inequality:  China vs US

A few weeks ago, in his opening speech to China’s 20th National Congress, Xi Jinping doubled down on an initiative he introduced almost exactly one year ago: increasing common prosperity.   The goal, Xi said, “is to meet the people’s aspirations for a better life. We will endeavor to maintain and promote social fairness and justice, bring prosperity to all, and prevent polarization.”  During the week-long Congress, the concept of “common prosperity” was even added to the Party’s Constitution.

Increasing common prosperity is about more than just getting people more money, but like many social programs it certainly starts there.  In a post entitled “How the ‘China Model’ lifted 850 million people out of poverty,” I described how China’s rapid economic rise was rooted in Deng Xiaoping’s decisions to liberalize the economy in the 1980s and “allow some people to get rich first.”   Which they did, sometimes much too well.

According to the latest estimates, there are now about 5,738,000 millionaires in mainland China, and 539 billionaires.  As described in other posts, these are the people who have been willing and able to spend $1,000 for a single bowl of soup at a business banquet, or $1.5 million for a Covid N95 mask covered in jewels

But while the rich were savoring their $1,000 soup, the average person in China was scraping by on $13,000 per year.  A graph of income distribution in China would look like a squeezed pyramid with a very broad bottom, a small middle, and a tiny spot for millionaires at the top. Xi’s goal is to change this picture to an “‘olive-shaped’ income structure, in which the middle-income class is large and the poor and rich classes are small.” 

According to the CCP’s flagship tabloid, the program will “not only enhance people’s buying capabilities by enlarging markets, but also help eliminate wars and chaos by reducing cases of poverty.” Sounds good to me, but then I am not a Chinese millionaire.  To reassure those who are, other Chinese experts quickly jumped in to explain that “Common prosperity means doing a proper job of expanding the pie and dividing the pie… We will not kill the rich to help the poor.” 

Well then, what EXACTLY will China do?  I don’t know, and Xi probably doesn’t either. The common prosperity initiative is not a well defined list of policies; it is instead a broad general framework for China’s future.  It’s a campaign and a general direction, not a project plan.

Nevertheless, the work has begun.  In June 2021, Zhejiang province (just south of Shanghai on China’s east coast) published aplan to develop itself into the first common prosperity pilot zone. The document proposed raising per capita disposable income starting by 2025, and listed many specific changes including “rural land reforms, a plan to let resident income double in 10 years, and train 100,000 rural entrepreneurs, as well as push a number of scientific plans with a special focus on Internet plus, life science, and new materials.”  One example that is already underway:  an “intelligent farm” that includes 50,000 sheep, each with their own ear tag or ID card and…  control rooms where the sheep’s living and growing condition can be adjusted to provide it a suitable growth environment.”

The main reason Xi is stressing common prosperity now is a “tacit acceptance that China is entering a period of slower economic growth, something the leadership seems willing to accept as long as individual households are still seeing their prosperity rise.”  The initiative has both national and international implications.  In a 2021 speech, Xi noted that in some countries “the wealth gap and middle-class collapse have aggravated social divisions, political polarization and populism, giving a profound lesson to the world.”

You know, now that Xi mentions it, I have been feeling a little jealous about Elon Musk’s $80 million Gulfstream private jet.   Not to mention Jeff Bezos’ $485 million mega yacht.  Guess I’d better get used to it, because here in the US we seem to be heading in the opposite direction of China.  Although the US has no written policy on income inequality, almost everything the government has done in the last few decades seems to have been designed to make the rich richer.  

The biggest beneficiary of US laws and loopholes designed to make the rich richer may have been Elon Musk, currently the richest man in the world. For details see “Here’s how Elon Musk’s fortune has benefited from taxpayer help.”  Musk is shown here on a yacht in Greece last July.

In fact, according to the nonpartisan Congressional Budget Office, income inequality in the United States has been rising for decades, with the incomes of the highest earners rapidly outpacing the rest of the population.  According to a recent analysis by the Washington Post, “Many economists say decades of cuts to income tax rates on the highest earners are one of the drivers of the runaway inequality that’s come to characterize the modern U.S. economy.”

From the end of World War II until the 1980s, the top marginal US tax rate was 70% or higher.  But then came Reagonomics and the idea that tax cuts for the rich would “trickle down” to boost the entire economy.  The first Reagan tax cut in 1981 reduced the top tax rate to 50%.  By 1986, the “IRS announced that… more than 900,000 Americans were millionaires, perhaps partially due to the high-level tax cuts under Reaganomics.”  Like the poverty stricken urchins in Charles Dickens, the US rich then said “Please, sir, may I have some more?”  And Reagan said: Sure.  A second round of tax cuts took place in 1986, reducing the top tax rate for corporations from 50% to 35%, and for individuals from 50% to 28%.

The next big tax cut was the Tax Cuts and Jobs Act in 2017, which slashed individual, corporate and estate taxes some more.  The law“was highly criticized for favoring billionaires and corporations instead of everyday Americans,” but rich people liked it a lot.   

Many economists have studied the effects of tax cuts like this, and consistently found that very little money actually trickles down.  The rich just keep it. For example, David Hope and Julian Limberg reviewed all major tax cuts in 18 countries between 1965 and 2015.  Their conclusion?  “Our analysis [found] strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment.”

When it comes to taxes, the top marginal rate is easy to observe, but what really matters is the  effective tax rate that wealthy people actually pay after all the “write-offs, exceptions and loopholes top earners are able to take advantage of.”

According to a White House study released last year “the 400 wealthiest U.S. families paid an average income tax rate of just 8.2 percent from 2010 to 2018.”  I don’t know about you, but it looks like I am paying two to three times as much as the 400 wealthiest families.

The original version of Biden’s Build Back Better agenda included provisions to “address these inequities by reforming capital gains taxes and providing tax cuts to families.”  But a funny thing happened to the bill before it was passed; various congress people kept chipping away at the middle class tax cuts.  Then, to add insult to injury, “Freshman Sen. Kyrsten Sinema (D-Ariz), held up passage in the evenly divided Senate at the last minute over a provision that would have closed… [a] loophole that allows private equity managers and hedge fund executives to pay significantly lower tax rates than most taxpayers.”  Sinema triumphed and the hedge fund executives kept their loophole.

This Congressional meddling in favor of special interests was hardly an isolated event.  In 2017, Sen. Ron Johnson (R-Wis) had refused to pass President Trump’s tax cut unless the bill “sweetened the tax break for a class of companies that are known as pass-throughs.”  Johnson too got what he wanted. 

It turns out that Johnson’s change was very popular with a few rich voters.  An analysis of just two wealthy Wisconsin families who “had contributed around $20 million to groups backing Johnson’s 2016 reelection campaign” found that these two families will see a total return of about $500 million in tax savings over the next eight years.  That’s a 2,500% return on the cost of helping elect Johnson.  Now, in some parts of the world, that might be called corruption.  Here in the US, we call it a perfectly legal result of effective lobbying.

Another example:  Sometime during the process [of negotiating the 2017 tax cut], “eight words… that had been in neither the House nor the Senate bill were inserted… Who wrote the phrase — and which lawmaker inserted it — has been a much-discussed mystery in the tax policy world.”  But we do know who benefited: wealthy families,  For example, this single loophole has “netted [Bechtel family members] deductions of $111 million on $679 million in income.”

These examples offer just a small window into the “explosion in loopholes and fine print [that] makes the tax code [so] time-consuming to understand,” and so profitable for tax lawyers, accountants, and wealthy Americans.  ProPublica’s ongoing study of “Secret IRS Files” provides a long list of additional “midnight deals and last-minute insertions of language [that have] resulted in a vast redistribution of wealth into the pockets of a select set of families, siphoning away billions in tax revenue from the nation’s coffers.”

At the end of the day, China’s common prosperity campaign could have significant advantages both inside and outside the country’s borders.  According to an analysis by the Asia Society, “This is a populist strategy to revitalize the roots of communist ideology in China [by providing Xi with] a new opportunity to align with the people against the powerful… by soaking the rich.”   Of course, the question here is can China pull it off?  Because if it IS successful, this will surely help “to disseminate the ‘China Model’ worldwide as a tool to further China’s superiority in global politics.”

Meanwhile, the US is moving in the opposite direction:  the gap between rich and poor has been growing since the Reagan tax cuts began.  Will this ultimately affect America’s influence around the world?

3 thoughts on “Reducing income inequality:  China vs US

  1. A few hours after I published this post, I got an email from an old friend that led to this brief exchange

    Friend 1: I read your blog regarding the disparity between rich and the rest of us… I hope this country wakes up to the damage being done by this huge gap.

    Me: Didn’t you mean the disparity between the poor and the rest of us? While neither one of us is anywhere near Elon Musk, you have two houses! I’ll bet the people who take care of your summer house while you are away consider you very rich.

    Friend 1: Point well made: but the maintenance people also take care of the mansions on the lake. I bet they think we aren’t quite as grand!

    Then independently, another friend emailed me about this same post and wrote, in part:

    Friend 2: The thing that is really interesting to me is that the losers in the American economic derby blame not the really rich, but the folks like us who are borderline rich…because we have enough to do the stuff almost everyone took for granted when we were growing up. (Vacations, health care, pensions, new cars, etc.). I also am interested in the fact that China has so conspicuously argued for greater equality because it seems to understand that these kinds of income disparities are bad for a society whereas the US seems to believe that disparities somehow motivate people in the hopes they will become fabulously wealthy. Of course that only works for people with very atypical intelligence/energy and, occasionally, great luck. Which leaves the rest of America chasing lottery tickets.

    This got me thinking about “what is rich,” exactly? My motto is: When in doubt, Google. Which quickly led me an article in Kiplinger ( which said “according to Schwab’s 2021 Modern Wealth Survey, Americans believe it takes a net worth of $1.9 million to qualify a person as being wealthy.”

    More generally, this email exchange got me thinking about globalization, which quickly took me to another webpage ( which says that the GDP per capita in the US is 7th in the world at $63,416, while China is 77th on this chart at $17,192. (When it comes to GDP per capita, only residents of Luxembourg – whose average is $118,001 — are correct if they chant “We’re number 1.”)

    There are many other ways to measure a country’s wealth, but all lists have the US near the top, and most of the world far behind. As manufacturing, call centers, and other jobs can increasingly be performed anywhere in the world, businesses lowering costs will inevitably push more and more jobs to other countries, and the situation of the US poor will get worse and worse. (Of course this will be complicated by supply chain concerns that arose during the pandemic, but that’s another story.)

    Some day, will the poor at home and abroad end up like the anchorman in the 1976 film Network and shout “I’m as mad as hell, and I’m not going to take this any more!”


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