Inequality and the Urban–rural Divide in China: Effects of Regressive Taxation

Using three comparable national representative household surveys for China in 1988, 1995 and 2002, the present paper reveals the regressivity and urban bias of China's direct tax and welfare system in this period. It shows that a regressive taxation system and skewed allocation of subsidies increases the urban–rural income gap and enhances overall inequality. Modeling these relationships indicates that the relatively poorer rural population has a net tax liability, whereas those in the richer urban areas receive net subsidies. This pattern is common in China, although the extent of the bias varies. This skewed system of tax and welfare payments is a major cause of the persisting urban–rural income gap and contributes to the overall income inequality in China. The abolishment of the agriculture tax in 2006 has had a positive impact on rural people's livelihoods.