On the Essential Relationship Between Fiscal and Tax Policy and “Investing in People” and the Paths to Its Realization— —From the Perspective of Human Capital Accumulation

Abstract: At the historical juncture when China’s economic development faces the triple pressures of demand contraction, supply shocks, and weakening expectations, and when the demographic structure is undergoing profound transformation, the paradigm of macroeconomic governance urgently needs to shift from excessive reliance on the accumulation of physical capital to a new stage driven by the coordinated development of both physical capital and human capital. Promoting the close integration of “investment in things” and “investment in people” is not only a requirement for countercyclical adjustment in response to short-term economic fluctuations, but also a strategic cornerstone for shaping new drivers of long-term development and achieving high-quality development. Based on an interdisciplinary perspective that integrates macroeconomic theory, public finance theory, and human capital theory, this paper systematically constructs a theoretical framework for analyzing the essential relationship between fiscal and tax policy and “investing in people.” The paper conducts an in-depth analysis of the connotations and economic attributes of “investment in things” and “investment in people,” as well as their distinct roles in aggregate demand management, and demonstrates the necessity and urgency of integrating the two within the context of the new era. The central argument of this paper is that the essence of fiscal and tax policy support for “investing in people” lies in correcting market failures and positive externalities in the process of human capital formation through the design of both revenue and expenditure mechanisms, thereby internalizing the comprehensive development of individuals as an endogenous variable of economic growth. This process concerns not only the efficiency of resource allocation but also more profoundly involves equity in income distribution and intergenerational social mobility. The study indicates that although the relevant fiscal and tax policy framework in China has been established, it still faces systemic bottlenecks such as rigid inertia in the expenditure structure, insufficient precision of tax incentives, mismatches in intergovernmental fiscal relations, short-term orientation in performance evaluation systems, and the lack of smooth mechanisms for diversified investment. To address these issues, this paper proposes a comprehensive set of policy recommendations that integrate short-term demand management with long-term supply capacity building. These include implementing fiscal expenditure structure reforms oriented toward the full life cycle, constructing an incentive-compatible matrix of tax policies, reshaping central–local fiscal relations with clearly defined powers and responsibilities, innovating budget performance management models based on long-term benefits, and stimulating mechanisms that encourage multiple social actors to invest jointly. This study aims to provide theoretical reference and practical guidance for constructing an “empowering” fiscal and tax policy system that aligns with the goals of Chinese-style modernization and effectively supports high-quality population development and an innovation-driven development strategy.

Keywords: fiscal and tax policy; investing in people; human capital; public expenditure; aggregate demand management; full life cycle; income distribution; high-quality development

Introduction

Since the reform and opening-up, particularly since the mid-to-late 1990s, the model of “investment in things,” characterized by large-scale infrastructure investment, real estate development, and the expansion of manufacturing capacity, has successfully propelled the rapid growth of China’s economy and the rapid accumulation of physical capital. At a specific historical stage, this model effectively resolved the fundamental bottlenecks of economic development, generated strong supply capacity, and, through powerful stimulation of aggregate demand, created a growth miracle that lasted for several decades. However, as China’s economic development enters the “new normal,” the driving force of traditional factors has weakened, constraints on resources and the environment have tightened, and, in particular, fundamental changes in the demographic structure—such as the gradual decline of the working-age population after reaching its peak, accelerated population aging, and a continuously declining total fertility rate—have placed the previously overreliant growth path based on physical capital investment under severe challenge. The law of diminishing marginal returns on investment has become increasingly evident, with overcapacity and accumulating debt risks emerging in some sectors, thereby raising widespread concern about the sustainability and inclusiveness of economic growth.

Meanwhile, the strategic value of “investing in people,” centered on education, health, skills training, and social security, has been elevated to an unprecedented level within the framework of national governance and policy discourse. From the Scientific Outlook on Development centered on “people first,” to the strategic judgment that “talent is the primary resource,” and further to the report of the 20th National Congress of the Communist Party of China explicitly integrating “education, science and technology, and talent,” a profound conceptual transformation is reflected in placing human development at the core of modernization. In 2025, “investing in people” was written into the Government Work Report for the first time; the Recommendations for the Fifteenth Five-Year Plan further emphasized “closely integrating investment in things and investment in people.” “Investing in people” is basically the strategic cultivation and accumulation of human capital, the most fundamental element of modern economic growth. It concerns not only individual well-being and the enhancement of capabilities, but also directly determines the pace of total factor productivity improvement, the strength of technological innovation capacity, and the country’s long-term position in the global competitive landscape.

Against this broad background, examining the relationship between “investment in things” and “investment in people” is by no means a simple binary choice; rather, it involves a profound reconstruction of development concepts, growth drivers, policy instruments, and resource allocation. Fiscal and tax policy, as a foundation and important pillar of national governance, is naturally embedded within this process of reconstruction. It is both a key instrument through which the government conducts macroeconomic regulation and implements countercyclical adjustment, and a fundamental means of redistributing social resources, providing basic public services, and guiding the behavior of micro-level actors. Therefore, scientifically clarifying the essential relationship between fiscal and tax policy and “investing in people,” analyzing the achievements and bottlenecks of current policy practice, and proposing systematic optimization measures carry extremely important theoretical significance and pressing practical urgency.

This paper attempts to move beyond the traditional perspective that simply regards “investing in people” as a type of social expenditure, and instead examines it within a three-dimensional framework consisting of macroeconomic stability, long-term growth potential, and equity in income distribution. The article will first clarify core concepts at the theoretical level and explain the historical context; it will then progressively develop the analysis from perspectives such as the composition of aggregate demand, marginal effects of growth, the balance between short-term and long-term objectives, and the pivotal role of income distribution; finally, it will focus on fiscal and tax policy itself, exploring in depth the theoretical foundations and practical bottlenecks of its key intervention points, and ultimately propose policy recommendations that combine strategic foresight with practical operability.

I. Conceptual Clarification and Historical Inevitability: Moving Toward a New Development Paradigm Driven by the Coordinated Synergy of Material and Human Capital

(I) Redefining “Investment in Things” and “Investment in People” and Distinguishing Their Economic Attributes

1. The Deeper Connotation of “Investment in Things”: In classical macroeconomic analysis, “investment in things” mainly refers to actual expenditures that form stocks of physical capital. Its core characteristics are as follows: First, the object is tangible, and the results of the investment take the form of touchable physical assets such as roads, bridges, factories, and equipment. Second, its value can be capitalized: these assets can be recorded on the balance sheet, and their value can be gradually transferred into products and services through depreciation. Third, property rights are relatively clear, which facilitates market transactions and collateralized financing. Fourth, the multiplier effect is direct and significant; especially under conditions of idle productive capacity, it can quickly stimulate demand in related industries such as steel, cement, and machinery. However, its limitations have also become increasingly prominent: first, diminishing marginal returns— as the capital stock increases, the contribution of each additional unit of investment to output tends to decline; second, a strong lock-in effect— once a specific physical capital structure has been formed, the costs of industrial transformation and spatial restructuring become very high; third, vulnerability to macroeconomic fluctuations— real estate and certain infrastructure investments often become sources of economic overheating or debt risk.

2. The Rich Implications of “Investment in People”: “Investment in people” is a more complex and multidimensional conceptual system. From an economic perspective, it is the productive accumulation of human capital— the knowledge, skills, health, creativity, and adaptive capacity embodied in human beings. Its core characteristics are as follows: First, the object is intangible and attached to the individual; human capital is inseparable from its owner and cannot be directly bought and sold in the way physical capital can be (only its services can be bought and sold). Second, it has positive externalities. When individuals improve their capabilities through investments in education and health, they not only increase their own income, but also benefit society through channels such as knowledge spillovers, improved social coordination efficiency, and reduced crime rates; the social returns are often greater than the private returns. Third, it is life-cycle-based and cumulative. Human capital investment runs throughout the entire course of life; early investment is the foundation for later investment, and it has a pronounced “multiplier effect” or “bottleneck effect” (early deficiencies are difficult to remedy). Fourth, its returns are long-term and uncertain. Its payback period is long, and it is affected by multiple factors such as individual endowments, market opportunities, and the social environment, which makes the risks relatively high. Fifth, it has the dual attributes of both consumption and investment. Receiving education and accessing medical care are both forms of current consumption that bring utility satisfaction and investments in future productive capacity.

(II) The Deep Historical Background and Strategic Considerations Behind Proposing “Close Integration”

Promoting a shift from the relative separation of “investment in things” and “investment in people” toward deep integration is an inevitable requirement arising from systemic changes in China’s stage of development, constraints, and development goals; its background is multiple and complex.

1. A Profound Transformation in the Mechanism Driving Economic Growth: China’s economy has already shifted from a stage mainly driven by factor inputs and investment to a stage of high-quality development driven primarily by innovation. The core of innovation-driven development is talent-driven development. The space for “Smithian growth” (extensive expansion), which relies solely on physical capital input, is narrowing, while “Schumpeterian growth” (intensive upgrading), driven by human capital and technological progress, is becoming the main engine. This means that the focus of resource allocation must shift from building out “hardware” networks more toward cultivating “software” capabilities, making “investment in people” the principal driving force for raising total factor productivity (TFP). The point of convergence between the two lies in the fact that high-quality human capital can improve the efficiency of the use of physical capital and its innovative content, while advanced physical infrastructure (such as digital networks and R&D platforms) can in turn empower the deployment and appreciation of human capital.

2. A Historic Turning Point in the Pattern of Population Development: China is undergoing the world’s largest-scale and fastest demographic structural transformation. In 2022, the total population recorded negative growth for the first time, marking the formal closure of the quantitative window of the “demographic dividend.” The degree of aging continues to deepen, and China is expected to enter a deeply aged society by 2035. This fundamental change brings dual pressure: on the one hand, constraints on the total labor supply are tightening, so the impact of shrinking numbers must be offset by improving labor quality (human capital) and tapping the “talent dividend”; on the other hand, the rising proportion of the elderly population requires society to provide a greater volume of “silver economy” services such as elderly care and healthcare, which in themselves are both consumption and a special form of “investment in people” (maintaining elderly human capital and developing silver human resources). At the same time, overcoming the predicament of low fertility urgently requires improving the childbearing environment through “investment in people” measures that reduce the cost of family childrearing (such as expanding childcare services and education subsidies).

3. Rebalancing Supply and Demand Under the Transformation of the Principal Social Contradiction: The principal social contradiction at present is manifested in the contradiction between the people’s ever-growing needs for a better life and unbalanced and inadequate development. The need for a better life is concentrated in such areas as higher-quality education, more reliable health protection, richer cultural and spiritual products, and a more harmonious ecological environment. The fulfillment of these needs depends to a large extent on improving the quality and expanding the capacity of public services in the field of “investing in people.” From the perspective of the economic cycle, insufficient effective demand, especially weak household consumption demand, is the outstanding contradiction at present. The deeper reasons for weak consumption lie in the slowdown in the growth of household disposable income, relatively large income distribution disparities, and the strong motive for “precautionary savings” brought about by education, healthcare, eldercare, housing, and the like. Increasing public expenditures on “investing in people” can not only directly raise the incomes of workers in related fields, but also reduce households’ worries through improving the social security net, thereby releasing consumption potential and promoting the achievement of a dynamic balance between supply and demand at a higher level.

4. The Reshaping of the Global Competitive Landscape and the Need for National Strategic Security: A new round of scientific and technological revolution and industrial transformation is advancing by leaps and bounds, and competition among major powers is increasingly manifested as competition in science and technology and competition for talent. The “bottleneck” problem in key core technologies is essentially a problem of insufficient reserves of high-end human capital. The modernization and security of industrial and supply chains cannot be achieved without the support of a large number of highly qualified technical and skilled personnel. Against this background, “investing in people,” especially investment in STEM (science, technology, engineering, and mathematics) education, basic research, and the cultivation of talent in frontier fields, directly relates to national strategic security and long-term competitiveness. This requires that fiscal resources must be tilted strategically to ensure that investment in human capital takes the lead.

5. The Practical Requirements of Fiscal Sustainability and the Optimization of Policy Effectiveness: After many years of large-scale investment, traditional infrastructure in many regions has approached saturation, and investment efficiency has declined. At the same time, the accumulation of local government debt risks has constrained the room for continuing to stimulate the economy through large-scale “investment in things.” By contrast, China still has obvious shortcomings in multiple fields of “investing in people” (for example, there remain gaps with developed countries in per capita education funding, the ratio of medical and nursing personnel, R&D investment intensity, and the like); public investment in these fields may have a higher social marginal rate of return and be more broadly inclusive. Optimizing the structure of fiscal expenditure and directing more incremental resources toward the field of human capital is a rational choice for improving the effectiveness of proactive fiscal policy, preventing and resolving fiscal risks, and achieving fiscal sustainability.

Therefore, the call of the times for “close integration” essentially requires us to move beyond the mindset that sets “things” and “people” in opposition or separation and to establish a new framework for development accounting: in the accumulation of national wealth, we must measure not only the abundance of physical capital, but also the depth of human capital; in macroeconomic management, we must not only use “investment in things” to stabilize short-term growth, but also rely on “investment in people” to consolidate the long-term foundation.

II. The Two Pillars in Aggregate Demand Management: The Macroeconomic Roles of Capital Expenditure and Consumption Expenditure

From the perspective of Keynesian macroeconomics, whether government capital expenditure (“investment in things”) or the “investment in people” component within current/transfer expenditure, both are key variables in constituting and regulating aggregate demand (AD) in society. Understanding their similarities and differences within the aggregate demand framework is a prerequisite for designing precise macroeconomic regulation policies.

(I) Commonalities as Components of Aggregate Demand

Both are important components of government expenditure (G), and increases in either can directly expand aggregate demand (AD = C + I + G + NX). During periods of economic recession or insufficient demand, expanding these two categories of expenditure is the principal means by which fiscal policy carries out countercyclical adjustment. Both can, through the multiplier effect, trigger round after round of consumption and investment responses, so that the ultimate increase in aggregate demand is several times the initial increase in government expenditure. In addition, both types of expenditure can create jobs: the former mainly in industries such as construction and manufacturing, and the latter in service sectors such as education, healthcare, and social services.

(II) Differences in the Structure of Aggregate Demand, Transmission Mechanisms, and Timing

1. Different Effects on Demand Structure: “Investment in things” directly increases demand for investment goods (means of production), stimulating related industries such as heavy industry and construction. Expenditure on “investing in people,” by contrast, is more often transformed into demand for consumer goods, especially service consumption. For example, when teachers’ salaries are paid, teachers use that income to purchase food, clothing, cultural services, and the like; subsidizing preschool education can directly increase families’ purchasing power for educational services. Therefore, the former more directly affects investment demand, whereas the latter more directly affects consumption demand.

2. Differences in Transmission Mechanisms and Speed: Projects involving “investment in things” usually require relatively long cycles for project initiation, approval, and construction; from the disbursement of funds to the formation of physical workload and the generation of demand stimulus, there is a certain time lag. But once such projects are launched, the scale of investment is concentrated, and the short-term stimulus effect may be very significant. Many expenditures under “investing in people,” such as raising pension standards, issuing student grants, and increasing subsidies for primary-level medical personnel, can be rapidly delivered to beneficiaries through the existing administrative system or social security network, and may be converted into consumer demand more quickly, with shorter policy lags, especially today with the widespread adoption of digital payment methods.

3. Differences in Income Distribution Effects and Multiplier Magnitudes: Classical research and real-world evidence show that transfer payments and consumption expenditures targeted at low-income groups or livelihood-related sectors often have fiscal multipliers greater than those of general infrastructure investment. The reason is that low-income groups have a higher marginal propensity to consume, and a larger portion of the transfer payments or income increases they receive will be used for immediate consumption, thereby forming final demand more quickly and more fully. By contrast, the distribution of returns from infrastructure investment may be more tilted toward capital owners and enterprises along the relevant industrial chains, and these entities have relatively higher marginal propensities to save. Therefore, in a context of wide income distribution gaps and suppressed consumption propensity, increasing expenditure on “investing in people” may produce superior effects in boosting aggregate demand and improving the structure of demand.

4. Different Pathways of Influence on Potential Growth Capacity: This is the most fundamental difference between the two. “Investment in things” directly raises the economy’s potential output capacity by increasing the capital stock and pushing the production possibility frontier outward, but its effect on productivity is indirect. “Investment in people,” by contrast, acts directly on total factor productivity (TFP) by improving the quality of labor (human capital) and promoting technological progress (human capital being the source of innovation), thereby raising the potential growth rate. In aggregate demand management, taking the latter into account means that current demand-stimulus policies are simultaneously laying the foundation for future supply capacity, thereby achieving, in short-term operations, a unification of demand-side management and supply-side structural reform.

Fiscal and Tax Policy and “Investing in People”: A Systematic Analytical Framework

Fiscal and tax policy support for “investing in people” is a multidimensional and multi-level systematic undertaking, and the essential nature of this relationship can be analyzed from three levels: objectives, instruments, and transmission mechanisms.

(I) The Level of Objectives: The Unification and Balancing of Multiple Objectives

Fiscal and tax policy support for “investing in people” is not oriented toward a single objective, but rather carries multiple strategic intentions:

1. Efficiency Objective: To correct market failures in the field of human capital investment, optimize the allocation of social resources, and promote economic growth. This is the economic rationale based on its positive externalities and public-good attributes.

2. Equity Objective: To guarantee every citizen equal opportunity to acquire basic capacity development, break the intergenerational transmission of poverty, and promote social mobility. This is the ethical requirement grounded in social justice and inclusive development.

3. Stability Objective: To smooth consumption and risk over households’ life cycles by providing social safety nets such as education, healthcare, and old-age security, to strengthen the resilience of economic and social development, and to play the role of a macroeconomic “automatic stabilizer.”

4. Development Objective: To serve the country’s long-term development strategies, such as innovation-driven development, rural revitalization, regional coordination, and green transformation, by providing talent support for these strategies through targeted human capital investment.

Tensions may exist among these objectives, such as short-term conflicts between efficiency and equity; the design of fiscal and tax policy therefore needs to seek balance dynamically, while sound policy design can achieve synergy and enhanced effectiveness—for example, universal education can be both equitable and efficient.

(II) The Level of Instruments: An Integrated Policy Toolbox of “Revenue, Expenditure, and Governance”

1. “Expenditure”: Fiscal expenditure policy, which is the most direct instrument.

First, direct provision: the government funds and operates public schools, hospitals, public training bases, eldercare institutions, and the like, providing services to residents free of charge or at low cost.

Second, fiscal subsidies: financial subsidies are provided to households (such as childcare subsidies and student grants), individuals (such as training vouchers), enterprises (such as employee training subsidies), or nonprofit service institutions, thereby reducing their costs.

Third, government purchase of services: purchasing services such as education, healthcare, eldercare, and vocational training from social actors, thereby guiding the market to increase high-quality supply.

Fourth, social security transfer payments: through social security systems such as pension insurance, medical insurance, and unemployment insurance, carrying out intertemporal and intergroup redistribution to guarantee basic capabilities.

2. “Revenue”: Tax policy, which is an incentivizing and guiding instrument.

First, tax reductions and exemptions: granting pre-tax deductions or tax credits against income tax for individuals’ human capital investment expenditures (such as tuition, medical expenses, training fees, and the like); granting super-deductions for enterprises’ R&D expenses and employee education expenditures; and reducing or exempting income tax, value-added tax, and other taxes for institutions engaged in nonprofit activities such as education and healthcare.

Second, tax expenditures: encouraging households to save for future education through special tax-system arrangements (such as tax deferral for the establishment of education savings accounts).

Third, optimization of the tax structure: increasing the share of direct taxes (such as individual income tax and property tax) to strengthen the redistributive function of taxation and raise more adequate fiscal resources for “investing in people.”

3. “Governance”: Budget management and the fiscal system

First, budget allocation: optimizing the expenditure structure and ensuring investment in key areas of “investing in people” through methods such as medium-term fiscal planning and zero-based budgeting.

Second, performance management: establishing a scientific and effective performance evaluation system to improve the efficiency of fund utilization.

Third, intergovernmental fiscal relations: through the division of administrative powers and expenditure responsibilities and the design of transfer payment systems, ensuring that governments at all levels, especially primary-level governments, have both the incentives and the capacity to fulfill their responsibilities in “investing in people.”

(III) The Level of Transmission Mechanisms: From Policy Instruments to Development Outcomes

Fiscal and tax policy influences human capital accumulation and economic development through the following chain:

Policy instruments → lowering the investment costs of households/enterprises → increasing private human capital investment → enhancing individual capabilities and incomes → aggregating into a stock of high-quality human capital → promoting innovation, raising productivity, and expanding consumption → achieving economic growth, equitable distribution, and social stability.

Any blockage at any stage of this transmission chain—for example, households being unable to respond to tax incentives because of credit constraints—will affect the ultimate effectiveness of the policy. Therefore, policy design must take into account the behavioral responses of micro-level actors and real-world constraints.

A Comparison of Growth Effects: An In-Depth Analysis of Marginal Returns, Cyclical Characteristics, and Differences in Risk

Comparing the economic effects of “investment in things” and “investment in people” from the dynamic perspective of growth theory can reveal more clearly the direction of structural optimization.

(I) Trends in Marginal Returns: Diminishing and Potentially Non-Diminishing

In the standard production function, continuous input of physical capital (K), under conditions where technology (A) and the quantity and quality of labor remain unchanged, inevitably leads to diminishing marginal output. This is the underlying theoretical reason for the decline in investment efficiency in some traditional industries in China. By contrast, the accumulation of human capital (H), especially improvements in knowledge and innovation capacity, may have the potential for non-diminishing or even increasing marginal returns. New growth theory (Romer, Lucas, et al.) points out that knowledge is non-rivalrous and partially non-excludable: one person’s use of knowledge does not prevent others from using it, and the more knowledge is used in production, the more new knowledge may be generated (the “standing on the shoulders of giants” effect). Therefore, sustained investment in core areas of “investing in people,” such as education and R&D, may yield continuously growing returns, which constitute the source of long-term economic growth.

(II) Return Cycles and Intergenerational Effects

Projects involving “investment in things” typically have economic lifespans of several decades, with returns mainly concentrated during the operational period. The return cycle of “investment in people” is as long as the human life cycle, and may even extend across generations. Investment in early childhood education may yield returns to society over the coming decades in the form of higher labor productivity, lower crime rates, and so on, and these investment effects may influence the next generation. This means that the evaluation of “investing in people” must adopt an ultra-long-term perspective, and any utilitarian assessment based solely on short-term GDP growth rates is one-sided.

(III) Risk Attributes: Sunk Costs and Adaptability Risks

Investment in physical capital often creates “sunk costs”; once the investment is completed, it is very difficult to convert its use (such as specialized factory buildings). In an era of rapid technological change, this “lock-in effect” may cause investments to become obsolete quickly, resulting in sunk losses. Although human capital also has specificity risks (such as the obsolescence of acquired skills), human learning capacity and adaptability allow human capital to be updated and reshaped through retraining and lifelong learning, making it more resilient. A person who has received a solid foundational education and possesses strong learning ability is better able to adapt to changes in technology and markets.

(IV) Externalities and Social Returns

As noted earlier, “investment in people” has strong positive externalities. A well-educated and healthy citizen not only benefits personally, but also benefits society through paying taxes, participating in community activities, and contributing to a positive environment. By contrast, the externalities of “investment in things” may be both positive and negative; for example, while infrastructure brings convenience, it may also generate negative externalities such as environmental pollution and ecological damage. Therefore, from the perspective of net social welfare, the net positive externalities of “investing in people” are generally more significant and more certain.

In a comprehensive comparison, at the early stage of economic development, when physical capital is extremely scarce, the marginal returns to “investment in things” are relatively high and should be prioritized. When physical capital has accumulated to a certain level and human capital becomes the more binding constraint, allocating more resources to “investing in people” becomes an inevitable choice for maintaining the vitality of economic growth and improving the quality of development. China is currently at a critical stage of this transition.

V. The Dialectical Unity of Short-Term Stability and Long-Term Development: The Dual Logic of “Close Integration”

Current policy emphasizes “close integration,” and it is necessary to accurately grasp the dual logic it embodies—short-term macroeconomic regulation and long-term strategic development—so as to avoid reducing it to a one-dimensional choice.

(I) Short-Term Logic: Enhancing the Precision and Effectiveness of Countercyclical Adjustment

In the face of demand contraction, the traditional approach has been to initiate large-scale infrastructure projects. Although this approach remains necessary, its limitations have become evident: first, the reserve of high-quality projects has diminished; second, constraints from local government debt have intensified; third, the stimulation of industrial chains is relatively rigid, with limited effects on driving emerging consumption. ：Redirecting part of policy resources toward the field of “investing in people” can produce distinctive short-term effects:

1. Superior job creation effects: education, healthcare, and community services are typical labor-intensive sectors, where each unit of fiscal input typically creates more jobs than capital-intensive infrastructure projects, and these jobs are more closely tied to people’s livelihoods, helping to stabilize the incomes of low- and middle-income groups.

2. More direct consumption stimulus: increasing subsidies for preschool education can immediately reduce the burden on families and release other consumption; raising the reimbursement rate of basic medical insurance can reduce households’ expected medical expenditures and increase current consumption; strengthening vocational skills training can enhance workers’ employability and income expectations, thereby boosting consumer confidence. These measures can act more directly on consumption, which is the foundational component of economic growth.

3. More pronounced improvement in social expectations: in periods of heightened uncertainty, substantive government investment in areas related to people’s livelihoods—such as education, health, and eldercare—can effectively enhance residents’ sense of security and expectations of social stability, which has an irreplaceable psychological effect in repairing balance sheets and reversing pessimistic expectations.

Therefore, in the short term, “close integration” means that within fiscal stimulus programs, the weight and priority of “investment in people” projects should be significantly increased, making them an important means of expanding effective demand and stabilizing social expectations.

(II) Long-Term Logic: Building a People-Centered Foundation for Modernization

This is the fundamental purpose and strategic orientation of “close integration.”

1. The Core Path to Achieving High-Quality Population Development: In responding to low fertility and aging, it is not sufficient to rely solely on adjustments in population quantity; rather, comprehensive improvements in population quality must be pursued. Systematic “investment in people,” covering the entire process “from cradle to grave,” is the only path to optimizing the population structure, improving the overall quality of the population, and developing human resources across all age groups.

2. The Source of Cultivating New Quality Productive Forces: New quality productive forces are characterized by high technology, high efficiency, and high quality, and their development depends on scientific and technological innovation. Scientific and technological innovation ultimately depends on talent. Continuously increasing investment in basic research, STEM education, and the cultivation of high-end talent is to inject the most dynamic factors into new quality productive forces.

3. A Foundational Project for Promoting Common Prosperity: Common prosperity means prosperity in both material and spiritual life for all people. Material prosperity requires raising labor compensation and expanding the middle-income group, which depends on the broad improvement of human capital. Spiritual prosperity requires the nourishment of cultural education and health services. Reducing disparities in capability development across different groups and regions through “investment in people” is the most fundamental and effective path toward common prosperity.

4. Strategic Investment to Enhance Long-Term National Competitiveness: Competition among major powers, in the long run, is a competition of systems, and even more a competition for talent. A country that possesses the largest and highest-quality human capital in the world will stand in an unbeatable position in future competition in science, technology, the economy, and culture. Fiscal investment in human capital is the most forward-looking strategic investment a nation can make.

Short-term policies create conditions for long-term strategies and buy time; long-term strategies provide direction and anchoring for short-term policies. Under the framework of “close integration,” the two achieve dynamic unity: through effective short-term demand management, a stable macroeconomic environment is created for long-term human capital accumulation; and the accumulated strength of human capital over the long term will enhance the endogenous growth momentum and risk resilience of the economy, fundamentally reducing the pressure of short-term growth stabilization and forming a virtuous cycle of “short-term stability and long-term excellence.”

VI. Income Distribution: The Core Nexus Linking the Effectiveness of the Two Types of Investment

Whether it is the physical capital formed through “investment in things” or the human capital formed through “investment in people,” its economic value ultimately must be realized in the distribution process. A distorted income distribution system will greatly undermine the macro-social benefits of any investment. Therefore, a sound income distribution system is the key transmission mechanism and incentive foundation for ensuring that policies of “investing in people” achieve their intended effects.

(I) Primary Distribution: The Key Determinant of the Private Rate of Return on Human Capital

If the social distribution mechanism cannot ensure that “those with higher skills earn more” and “innovators earn more,” then the willingness of individuals and families to invest in human capital will be seriously dampened. At present, certain problems in China’s income distribution sphere are constraining the micro-level incentives for “investing in people”:

1. The share of labor compensation still needs to be raised: although it has improved in recent years, the proportion of labor compensation in primary distribution still has room for further increase. Ensuring that growth in workers’ compensation remains basically in step with economic growth, or even slightly exceeds growth in labor productivity, is the direct economic foundation for strengthening families’ capacity to invest in human capital.

2. The premium on human capital has not been fully reflected: in some industries and fields, the income gap between simple labor and complex labor, and between routine skills and highly sophisticated skills, has not been widened in a reasonable manner; the distorted phenomenon that “those who build missiles earn less than those who sell tea eggs” still exists (although its form has changed), and this suppresses investment in high-level, innovation-oriented human capital.

3. The market-based allocation of factors remains insufficient: institutional barriers such as the household registration system, establishment quotas, and industry monopolies hinder the free movement of labor, especially talent, preventing the value of their human capital from being optimally evaluated and realized in a broader market.

(II) The Role of Fiscal and Tax Policy in Promoting Equitable Distribution

Fiscal and tax policy is itself an important redistributive instrument and must work in concert with expenditure and tax policies that support “investing in people”:

1. Individual income tax reform: implementing a tax system that combines comprehensive and classified taxation, rationally setting basic expense deductions and special additional deduction standards, making the tax system fairer, and directly reducing the burdens of childrearing, education, and healthcare for low- and middle-income groups.

2. Property tax development: steadily advancing legislation and reform on real estate tax, appropriately regulating wealth disparities, and raising funds for public services.

3. Integration and upgrading of the social security system: raising the pooling level and benefit level of social security programs such as pensions and healthcare, and strengthening their redistributive and risk-sharing functions.

4. Precision-targeted fiscal transfer payments: increasing central government transfer payments to local governments, especially to underdeveloped regions, with a focus on safeguarding their expenditures on basic public services so as to provide children and residents there with equal starting points for development.

Only when the income distribution system can ensure that investment in human capital receives reasonable market returns, and can compensate for positive externalities and safeguard equality of starting point through redistributive mechanisms, will private decisions to engage in “investing in people” resonate in sync with the state’s macro-strategic intentions and generate powerful endogenous momentum.

Full Life-Cycle Coverage: The Main Links Through Which Fiscal and Tax Policy Exerts Force and Their Theoretical Depth

Fiscal and tax policy support for “investing in people” should follow the scientific laws of human capital formation and carry out systematic intervention across the full life cycle and through multiple stages. Each stage has its own distinctive economic-theoretical basis.

(I) Pregnancy, Infancy, and Early Childhood Education (Ages 0–6)

1. Key focus areas: prenatal and maternal healthcare and nutrition, universally accessible childcare services (ages 0–3), and the provision of universal, high-quality preschool education (ages 3–6), among others.

2. Theoretical basis: the “Heckman Curve (sample selection model, James Heckman)” shows that the rate of return on investment in early childhood is the highest, reflected not only in the development of cognitive abilities, but also in the cultivation of non-cognitive abilities such as perseverance and cooperativeness, and it also has a cost-saving effect (the cost of remedial education at later stages will be higher). Early intervention can effectively break the intergenerational cycle of poverty. The market exhibits serious “market failure” in the provision of childcare services. Issues such as information asymmetry, difficulty in supervising quality, and strong externalities require strong public fiscal intervention to establish standards and oversight and to provide universally accessible services.

(II) Primary Education and Secondary Education (Ages 6–18)

1. Key focus areas: high-quality and balanced development of compulsory education, universalization of upper secondary education, coordinated development of vocational education and general education, improvement of student nutrition, digitalization of education, and so forth.

2. Theoretical basis: education is regarded as a typical quasi-public good. The social returns to basic education far exceed the private returns and have strong positive externalities, such as improving the overall quality of the population and promoting democracy and social harmony. Provision entirely by the market would lead to under-supply and severe class stratification. Fiscal policy must assume primary responsibility for safeguarding fairness in educational opportunity; this is the cornerstone of social equity. Human capital theory indicates that this is the key stage for forming general human capital.

(III) Higher Education and Vocational Education (Ages 18 and Above)

1. Key focus areas: supporting the development of “Double First-Class” institutions, the development of application-oriented undergraduate and vocational undergraduate programs, improving the student aid system (scholarships, grants, student loans, and the like), and encouraging enterprises to participate in running educational institutions, among others.

2. Theoretical basis: higher education and advanced vocational education have stronger private-good attributes, but they still generate significant positive externalities, such as advancing frontier science and technology and cultivating social elites. There are “capital constraint” problems (such as poor families being unable to afford the costs), which require fiscal intervention through grants, student loans, and the like in order to ensure equality of opportunity. At the same time, for basic disciplines and scarce but less popular specialties, market signals fail, requiring targeted fiscal support in service of national strategy.

(IV) On-the-Job Training and Lifelong Learning (Working-Age Stage)

1. Key focus areas: subsidizing enterprise-based on-the-job training, supporting public practical training bases, promoting the linkage of skill-level certification with compensation, and allowing special individual income tax deductions for continuing education, among others.

2. Theoretical basis: Becker’s theory divides training into general training and specific training. Enterprises underinvest in general training because of the “externality” risk posed by employee mobility. This provides the rationale for government subsidies for general skills training. In today’s era of rapid technological iteration, lifelong learning has become essential, but individuals may face constraints of time and money; policies such as tax incentives and training vouchers can reduce individuals’ costs and stimulate motivation to learn.

(V) Health Maintenance and Medical and Health Services (Across the Full Life Cycle)

1. Key focus areas: improving universal basic medical insurance, increasing investment in public health and prevention, supporting the development of primary-level medical and health systems, and developing commercial health insurance, among others.

2. Theoretical basis: medical and health services are characterized by a high degree of information asymmetry (between doctors and patients), uncertainty (the occurrence of disease), and externalities (such as the prevention and control of infectious diseases). Full marketization would lead to “market failure,” resulting in problems such as supplier-induced demand, high costs, and poor accessibility. Public health is a pure public good. Fiscal policy must take the lead in basic medical and health services to ensure their public-interest character and accessibility; health is the precondition for human capital to function effectively.

(VI) Old-Age Security and the Development of Older Persons (Old-Age Stage)

1. Key focus areas: improving the multi-pillar pension insurance system, developing universally accessible eldercare services and integrated medical-eldercare services, supporting education for older persons, and developing elderly human resources, among others.

2. Theoretical basis: old-age security is an institutional arrangement for addressing “longevity risk” and achieving consumption smoothing across the life cycle. Basic pension insurance has functions of social mutual aid and income redistribution that the market cannot effectively provide. Fiscal policy bears the responsibility of being the “payer of last resort. Investment in the health of older persons is a “productive” investment that preserves human capital in old age and reduces the social burden of care.

The theoretical thread running through all stages is this: market failure (public goods, externalities, information asymmetry, incomplete markets) and fairness and justice (equality of opportunity). The role of fiscal and tax policy is to remedy these market defects and to safeguard social equity through redistribution, thereby optimizing, on the whole, the allocative efficiency and level of accumulation of human capital as this strategic factor.

VIII. Practical Obstacles: The Main Institutional Bottlenecks in Current Fiscal and Tax Policy Support for “Investing in People”

Although the direction is clear, the current fiscal and tax system still faces a series of deep-seated institutional and systemic obstacles in effectively supporting “investing in people.”

(I) The “Rigidity” and “Inertia” of the Expenditure Structure

The long-established model of a “development-oriented government” has given the structure of fiscal expenditure a pronounced “production and construction” character. Although the share of livelihood-related expenditures has risen substantially, the solidification of expenditure remains severe: first, the “base-growth” budgeting model makes adjustment of the existing structure exceptionally difficult, and incremental fiscal resources are more easily allocated along existing paths (for example, in the budgeting of scientific research project expenditures, inappropriate and excessive restrictions are imposed on human-related expenditures such as labor services, experts, and performance-related items). Second, in the “GDP race,” local governments still have strong incentives to direct resources toward “hard” projects that can rapidly boost GDP, rather than toward “soft” human capital projects with long cycles and slow results. Third, the pattern of departmental interests has become entrenched, and the adjustment and optimization of the budgets of departments such as education and health face internal resistance.

(II) The “Fragmentation” and “Blunting” of Tax Incentive Policies

1. Insufficient precision: special additional deductions under the individual income tax adopt fixed-amount standards and fail to fully take into account regional differences, actual family burdens, and inflation, thus providing limited support for high-cost education such as interest development and overseas study. The strength of deductions for childcare expenditures is clearly weaker than that for children’s education.

2. Limited strength: the pre-tax deduction ratio under the corporate income tax for employee education expenses (for general enterprises, 1.5% of total payroll) may be insufficient for knowledge-intensive enterprises that urgently need skills upgrading. The super-deduction policy for R&D expenses mainly incentivizes the front end of technological innovation, while providing insufficient incentives for subsequent stages such as commercialization of results and skills training.

3. Poor coordination: tax incentives are insufficiently aligned with industrial, employment, and education policies. For example, for specific skills training urgently needed by strategic emerging industries, there is a lack of coordinated and more forceful combinations of tax incentives to match it.

(III) The “Mismatch” and “Pressure” in Intergovernmental Fiscal Relations

This is one of the largest institutional bottlenecks. Administrative responsibilities for human capital investment, such as compulsory education and basic healthcare, have largely been assigned to local governments, especially primary-level county and township governments. However, under the current tax-sharing system, fiscal resources are concentrated upward, while primary-level governments have limited own-source revenues and are heavily dependent on transfer payments from higher levels. This pattern of “administrative responsibilities sinking downward while fiscal powers move upward” has led to the following:

1. Severe regional inequality: economically developed regions possess strong fiscal capacity, and their per capita expenditures on education and healthcare far exceed those of underdeveloped regions, creating a “Matthew effect” in human capital accumulation.

2. Distorted incentives for primary-level governments: faced with the expenditure pressure of the “three guarantees”—guaranteeing wages, guaranteeing basic operations, and guaranteeing basic livelihoods—primary-level governments first ensure rigid expenditures such as personnel salaries, but lack both the motivation and the capacity for projects that improve the quality of human capital and require long-term investment with no short-term visible results (such as teacher training, curriculum reform, and the upgrading of medical equipment).

3. The transfer payment system is imperfect: there are too many special transfer payments and they are too dispersed; they require local matching funds, increase the burden on primary-level governments, and make the use of funds rigid. Although general transfer payments are not earmarked for specific uses, their scale is still insufficient to enable underdeveloped regions to fully cover the expenditure gaps associated with their administrative responsibilities, and the scientific basis and transparency of the allocation formula still need improvement.

(IV) The “Short-Termism” and “Formalism” of Budget Performance Management

Current budget performance management places excessive emphasis on short-term, quantifiable economic indicators, such as project completion rates and the progress of fund disbursement, but lacks a scientific and effective evaluation system for long-term projects like “investing in people,” whose benefits are difficult to monetize, such as improvements in students’ overall quality and in health conditions. This leads to human capital projects being easily compressed during budget preparation and review because their “performance is not obvious.” The linkage between performance evaluation results and budget allocation is weak, and the binding force is limited.

(V) The “Absence” and “Poor Functioning” of Diversified Investment Mechanisms

There is excessive reliance on fiscal input, and “glass doors” and “swing doors” still remain for social capital and charitable funds seeking to enter fields such as education, healthcare, and eldercare. The recognition and management system for nonprofit organizations is complex, and tax incentive policies are unstable, which affects the enthusiasm of social actors. The application of the public-private partnership (PPP) model in the field of “investing in people” faces challenges related to law, risk, and return mechanisms. Families and individuals, as the most important investors in human capital, still face credit constraints that have not yet been fully removed (such as the coverage and quality of student loans).

(VI) The “Departmentalization” and “Fragmentation” of Policy Design and Implementation

“Investing in people” involves multiple departments, including finance, development and reform, education, health, human resources and social security, civil affairs, and science and technology. At present, there is a lack of a high-level overall coordination mechanism, and policies are often introduced from departmental perspectives, resulting in fragmented policymaking, inconsistent standards, and even mutual constraints. Data sharing is difficult, making it hard to conduct panoramic monitoring and evaluation of human capital investment.

These bottlenecks are intertwined and constitute systemic obstacles that constrain the effectiveness of fiscal and tax policy; they must be resolved through deepened reform.

System Reconstruction: Paths for Optimizing Fiscal and Tax Policy in Support of “Investing in People”

To respond effectively to the above challenges, it is necessary to carry out a systematic, holistic, and coordinated reconstruction of the fiscal and tax policy system:

(I) Implementing Fiscal Expenditure Structure Reform Oriented Toward the Full Life Cycle

1. Formulate and implement a “National Medium- and Long-Term Strategic Plan for Human Capital Investment”: clearly define China’s investment objectives, key tasks, and safeguard measures over the next 10–15 years in key age groups and key fields (such as early education, skills gaps, and healthy life expectancy), and use this as the basic program for medium-term fiscal expenditure planning.

2. Establish a budgetary priority guarantee mechanism for “human capital investment”: in annual budget preparation and medium- and long-term fiscal planning, clearly stipulate that the growth of expenditures on education, health, social security, employment, and the like should exceed the growth of regular fiscal revenue, and gradually raise their share of GDP to the international average level.

3. Deepen “zero-based budgeting” reform: conduct regular “reset-to-zero” evaluations of project expenditures in the field of “investing in people,” reallocate funds according to their strategic importance, urgency, and performance, break dependence on historical expenditure bases, and concentrate resources on the most effective links.

4. Optimize the internal structure of expenditure: while ensuring hardware investment, substantially raise the proportion of spending devoted to “software,” such as training for teachers and medical personnel, curriculum development, public health communication, and family parenting guidance services.

(II) Building an Incentive-Compatible, Precise, and Forceful Matrix of Tax Policies

1. Deepen individual income tax reform: first, continuously raise deduction standards for infant and toddler care, children’s education, elder support, catastrophic illness medical expenses, and the like, and establish a dynamic adjustment mechanism linked to the price index or per capita disposable income. Second, explore the establishment of “family human capital development accounts,” allowing family members to deposit funds up to a certain limit for designated purposes such as education, training, and healthcare, while enjoying tax deferral benefits.

2. Optimize corporate income tax policy: first, for enterprises with high technical requirements for employees, heavy training tasks, and good economic performance, allow an increase in the pre-tax deduction ratio for employee education expenses (for example, from the current 2.5% of total payroll to 5%), and grant super-deductions for expenditures on specific training such as digital transformation and green skills. Second, for enterprise investment in nonprofit vocational education and universally accessible childcare institutions, provide longer-term and stronger income tax reductions and exemptions, as well as preferential land policies.

3. Improve the tax incentive policy system: clean up and integrate tax incentives for education, healthcare, and eldercare scattered across various laws and regulations, and create a unified, transparent, and stable policy list. Increase the pre-tax deduction ratio for enterprises and individuals making donations to qualified fields of human capital.

(III) Reshaping Central–Local Fiscal Relations with Clearly Defined Powers and Responsibilities and Coordinated Fiscal Capacity

1. Further refine and elevate certain administrative responsibilities: consider gradually defining matters involving nationwide livelihood protection and talent mobility, such as compulsory education teachers’ salaries and basic pensions, as shared responsibilities of the central and local governments, and increase the central government’s share of the burden in order to reduce regional disparities.

2. Reform the transfer payment system: first, substantially increase the scale of general transfer payments and allocate them primarily according to the “factor method,” with factors fully reflecting the size of the resident population, age structure, geographic conditions, differences in the cost of public services, and the like, so as to strengthen the coordinating capacity of local governments. Second, consolidate and merge special transfer payments, establish a model of “major special programs + task lists,” and grant local governments greater autonomy. Establish a regular evaluation and exit mechanism for special transfer payments. Third, explore the implementation of transfer payments combining vertical and horizontal approaches, and encourage developed regions to support human capital development in underdeveloped regions through paired assistance, co-construction and sharing, and similar arrangements.

3. Improve the local tax system: accelerate legislation and reform on real estate tax, cultivate stable local tax sources, alleviate fiscal pressure at the primary level, and enable it to devote more fiscal resources to local public services.

(IV) Innovating Budget Performance Management Models Based on Long-Term Social Benefits

1. Develop a performance indicator library applicable to “investing in people”: introduce methods such as “cost–benefit analysis” and “cost–utility analysis,” and design multidimensional indicators covering outputs, outcomes, impacts, and the like. For example, education programs may assess students’ long-term academic achievement, quality of employment, and civic literacy; health programs may assess extensions in healthy life expectancy, reductions in disease burden, and the like.

2. Implement medium- and long-term performance evaluation: for major human capital investment projects, carry out follow-up evaluations over 3–5 years or even longer, and use the evaluation results as the core basis for subsequent budget arrangements and policy adjustments.

3. Strengthen the disclosure and utilization of performance information: publicly disclose to society the performance objectives, evaluation results, and audit reports of key projects, and accept public oversight. Strengthen the hard linkage between performance evaluation results and departmental budgets as well as cadre assessment.

(V) Stimulating Dynamic Mechanisms for Joint Investment by Diverse Social Actors

1. Lower entry thresholds and optimize the business environment: simplify the approval procedures for social actors to establish institutions in education, healthcare, eldercare, and similar fields, and provide fair treatment in land, planning, water, electricity, gas, and other such areas.

2. Innovate the public-private partnership (PPP) model: for fields such as vocational training, smart eldercare, and health management, design PPP models featuring shared risks and shared returns, and clarify government regulatory responsibilities and payment mechanisms.

3. Vigorously develop philanthropy: improve charitable tax incentive policies, facilitate charitable donations, and encourage the establishment of charitable trusts and foundations focused on fields such as education and health.

4. Improve the family financial support system: develop inclusive finance, innovate financial products such as education loans and training loans, improve the national student loan system, and reduce the liquidity constraints on family human capital investment.

(VI) Strengthening Cross-Departmental Coordination and Data Governance

1. Establish a high-level overall coordination mechanism: it is recommended that at the central level a “National Human Capital Development Commission” be established under the leadership of a comprehensive department, responsible for overall planning, policy coordination, and monitoring and evaluation.

2. Advance data sharing and integration: break down interdepartmental data barriers, build a unified “National Human Capital Database,” integrate information on education, employment, social security, health, household registration, and the like, and provide data support for policy formulation, effectiveness evaluation, and precise service delivery.

3. Strengthen policy communication and capacity building: popularize among the public the importance of human capital investment and explain the relevant fiscal and tax preferential policies. Strengthen training for personnel in primary-level fiscal and operational departments so as to enhance their capacity for policy implementation and project management.

Conclusion

The essence of the relationship between fiscal and tax policy and “investing in people” is a process in which public authority, through the mobilization, allocation, and management of resources, strategically shapes and systematically empowers a country’s most valuable factor of development—human capability. This relationship transcends the simple binary distinction between consumption and investment in traditional public finance; it requires that, in the top-level design of state governance, we genuinely place the comprehensive development of human beings at the center and, through sophisticated institutional arrangements, transform macro-level strategic intentions into rational choices by micro-level actors.

This study shows that promoting the close integration of “investment in things” and “investment in people” is a historical necessity for China to overcome the middle-income trap, respond to demographic structural challenges, and achieve high-quality development. It requires fiscal and tax policy to complete a profound transformation from “construction finance” and “subsistence finance” to “livelihood finance,” “development finance,” and “empowerment finance.” Although the current policy system has already laid a foundation, systemic obstacles still remain in areas such as expenditure inertia, tax incentives, intergovernmental relations, performance management, and social mobilization.

Solving these problems cannot rely on piecemeal patchwork; rather, it requires a profound revolution in the fiscal and tax system and policy paradigm. The core of this revolution is to establish the public investment concept of “human capital first” and to build a policy system that covers the full life cycle, is incentive-compatible, has clearly defined powers and responsibilities, and delivers significant performance. Its success depends not only on the efforts of fiscal authorities, but also on the coordination of the entire government governance system and on the forging of broad social consensus.

Looking to the future, a China that continuously, precisely, and efficiently devotes more resources to “investing in people” will surely be better able to unleash the creative potential of hundreds of millions of people, transform demographic pressure into talent advantages, and convert development challenges into opportunities for upgrading, thereby laying the strongest and most enduring human capital foundation for fully building a great modern socialist country and realizing the great rejuvenation of the Chinese nation. This is both the mission of fiscal and tax policy and the fundamental path to national prosperity and flourishing.