The Labor Income Tax Equivalent of Price Scissors in Prereform China

Abstract

In a centrally planned economy, the government can raise investable resources through price and wage manipulation. By treating price and wage controls as an implicit labor income taxation, we assess the scale of resource transfers from households to the government in prereform China. The implicit tax revenue during the 1964 to 1978 period is estimated at 10.4% of GDP. This implicit tax led to implied reductions of 31.1 and 37.8%, respectively, in the price of agricultural goods and in the nonagricultural-sector nominal wage during the 15 years. The equivalent average labor income tax rates were 16.7 and 24.1% for agricultural and nonagricultural workers.J. Comp. Econom., September 2000, 28(3), pp. 524–544. Lingnan University, Tuen Mun, Hong Kong.