Inequality in China:

The incident at the station, however, reveals the disconnect between the government’s fixation with income inequality and what’s really been rubbing the masses the wrong way. What people resent isn’t wealth, it’s privilege. By and large, your average Chinese worker admires people who have gotten rich through cleverness or hard work, because that’s what they aspire to do themselves. What bothers them, though, is the growing sense that there’s a special class of people who get to live by a different set of rules than everyone else...

The incident was just the latest in a series of fatal hit-and-run incidents where young hot-rodders appeared to get off scot free due to family political connections. Despite the government’s best efforts to suppress the story, it quickly became a cause célèbre via the Chinese Internet, with the slogan ‘My father is Li Gang!’ emerging as an all-purpose catchphrase for official arrogance and corruption. Under immense public pressure, Li Gang’s son was eventually tried and sentenced to six years in prison.

The assumption, in Beijing, is that the government needs to intervene more actively to combat inequality. But the real problem is that government officials have far too dominant a role in picking winners and losers in almost every walk of life...

China’s tax system is a case in point. The country’s tax authorities estimate that mid- to low-income workers account for two-thirds of personal income taxes paid, in sharp contrast to the United States, where the top 5 percent of income earners pay nearly 60 percent. The difference isn’t the tax rate—with its top tax bracket at 45 percent, China actually has a higher marginal rate than the United States, scoring second only to France in Forbes’ ‘tax misery index’ based on nominal rates. The disparity is due to rampant tax evasion. China’s millionaires may owe more in theory, but they pay very little in practice.

According to a recent study commissioned by Credit Suisse, and conducted by Prof. Wang Xiaolu of the China Reform Foundation, hidden, undeclared income in China may total as much as RMB 9.3 trillion ($ 1.4 trillion), equivalent to 30 percent of GDP. Nearly two-thirds of hidden income belongs to the top 10 percent of households; 80 percent belongs to the top 20 percent. As a result, the per capita income gap between the top 10 percent and bottom 10 percent of urban households is much wider (26 times) than official statistics suggest (9 times).

The nature of this income is what rankles. According to the Credit Suisse report, ‘The facts show that grey income has its origins in the misuse of power and is closely connected with corruption.’ In other words, it’s the power wielded by government officials, not the absence of it, that’s fuelling inequality and fanning popular discontent.