Premier Wen Jiabao told the economic conference for the fourth quarter of the State Council that there will be wide-ranging reform of the income distribution system.

This is a necessary step to close the widening income gap in China. Over the past decade, the personal income of the average Chinese citizen grew at a slower pace than GDP. The income disparity in some industries grew increasingly large.

The phenomenon causes two problems. Firstly, some people attribute the income gap to market economy reform and strongly campaign for social justice and fairness. In fact, it is not the fault of a complete reform, but an unfinished reform. Secondly, because middle and lower income groups comprise a large share of the Chinese population, it is very difficult for China to boost domestic demand and consumption. Chinese economic growth largely relies on government investment and export, as opposed to a developed domestic market. So building a fair income distribution system requires the transformation of the economic growth model.

Income distribution reform relates to interest distribution, so the reform naturally meets resistance from various sources. This is because many local governments rely on land transfers to make ends meet, and the prosperity of the real estate sector stimulates the development of the iron, steel, energy and financial industries, which are mostly monopoly industries. Past experience proves local governments and relevant State-owned enterprises of the industries do not return as much of their profit as they should to the money-hungry areas of society, such as social insurance, the pension system, education and medical care. This means the tax burden for average wage earners and private enterprises increases, offsetting the nominal increase of their income.

Relevant statistics show the share of workers' wages in China's GDP dropped 5 percent from 1992 to 2008. During the same period of time, the production tax paid by families increased 0.2 percent. The family property income (which mainly refers to deposit interest income) declined 1.9 percent. Disposable income decreased by 9 percent and family consumption plummeted 12 percent. These changes indicate family income to consumption is quite limited. China should let more people enjoy the fruits of its development. This is a long-term requirement for the stable and sustainable development of a national economy.

The central authority must make local governments and State-owned enterprises return more financial resources into society. They are also the largest sources of resistance to the income distribution reform. China should also lower the administrative costs and tax burdens of private enterprises and replace the monopolies in some fields with market competition.

Laborers' legal rights should also be protected, this is an important component of labor costs that has been under-valued for too long in China. Tax should play a more active role in the redistribution of national wealth. It is necessary, under current circumstances, to levy the value-added tax on the estates of the rich in China, whose property income is exorbitantly high while their tax burden is considerably low.

In short, China's inclusive growth and sustainable development should guarantee all people enjoy the country's prosperity, since they have been making their contributions to the country's progress. The income distribution reform is just a good starting point of that meaningful, though bumpy journey.

Translated by Li Yang from 21st Century Business Herald