Redistributive Effect of Taxes and Transfers: Evidence from China

Abstract

China’s sustained high-speed several-decade-long economic growth has raised the level of per capita income, but also brought about a serious income gap. Taxes and public transfers are main policy governmental tools in the process of redistribution. This paper leads a comprehensive analysis of the impacts of taxes and transfers on income redistribution using decomposition method and is based on China’s Urban Household Survey Data (2002-2009) derived from the National Bureau of Statistics of China. The empirical results reveal that government’s net transfer reduces urban household’s increasing market income inequality, and the improvement effect increases with time. Taking a closer look, it shows that both tax and transfer play positive adjusting roles. Transfer’s contribution is relatively larger, reflected mainly in the improvement of horizontal equality, while tax’s effect is mainly reflected in vertical equality. On the whole, the combined redistribution effect of personal income tax and social insurance expenses from residents to government is positive, and can play a role in regulating the income redistribution. Endowment insurance, social relief and unemployment insurance reduce inequality in the transfers of government to residents, even though the last two items’ effects are very weak. In contrast, provident fund expands income gap. The conclusions reached in this paper will refer to the refinement of income distribution reform, promotion of tax reform, and improvement of the social security system. Highlights The comparative analysis of tax and transfer impact on income redistribution has been done based on the research of urban households in China in 2002–2009 Rising positive impact of net transfers from the budget on the reduction of income inequality among urban population is demonstrated The impact of transfers on horizontal inequality reduction, and the impact of taxeson vertical inequality reduction is established The need to continue the tax reform and improve the social security system in order to reduce the inequality in the income of the population is demonstrated For citation Liu Baihui. Redistributive Effect of Taxes and Transfers: Evidence from China. Journal of Tax Reform, 2017, vol. 3, no. 1, pp. 43–51. DOI: 10.15826/ jtr.2017.3.1.030 Article info Received February 14, 2017; accepted March 27, 2017