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Rising Chinese regional income inequality: The role of fiscal decentralization

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  • Song, Yang

Abstract

This article examines the quantitative effects of the Chinese fiscal system on the increasing regional income inequality in China, from 1978 to 2007. Fiscal decentralization is a multifaceted concept not likely to be captured by a single measure. This paper investigates the evolution of three aspects of fiscal decentralization including spending decentralization, revenue decentralization, and autonomy power, and tests the effects of each aspect on the regional income inequality in China in the past thirty years. Several critical findings were obtained through econometric analysis. The fiscal decentralization on spending side in China has contributed to rising income inequality over the last three decades. On the revenue side, the fiscal system became more decentralized from mid-1980s to 1994, and re-centralized after the 1994 tax sharing reform. The econometric analysis shows that the increase in revenue share of local governments from mid-1980s to 1994 indeed increased regional inequality, while the revenue re-centralization in 1994 only had a modest effect on reducing regional inequality. In terms of autonomy power measured by how public spending at local level of government is maintained by its own revenue, the degree of fiscal decentralization decreased since mid-1980s, and experienced a sharp reduction in 1994 due to the tax sharing reform. The autonomy power has mixed effects on regional inequality in the two periods, before and after the 1994 reform, depending on the targeting of fiscal transfers and the incentives of local governments. As it turns out, fiscal decentralization may not be automatically equalizing or anti-equalizing, whereas how fiscal decentralization is promoted is important for how it impacts regional inequality.

Suggested Citation

  • Song, Yang, 2013. "Rising Chinese regional income inequality: The role of fiscal decentralization," China Economic Review, Elsevier, vol. 27(C), pages 294-309.
  • Handle: RePEc:eee:chieco:v:27:y:2013:i:c:p:294-309
    DOI: 10.1016/j.chieco.2013.02.001
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Zhu, Rong, 2016. "Wage differentials between urban residents and rural migrants in urban China during 2002–2007: A distributional analysis," China Economic Review, Elsevier, vol. 37(C), pages 2-14.
    2. Song, Yang & Yang, Jidong & Yang, Qijing, 2016. "Do firms' political connections depress the union wage effect? Evidence from China," China Economic Review, Elsevier, vol. 38(C), pages 183-198.
    3. Yang Song & Guangsu Zhou, 2017. "Inequality of opportunity and household education expenditures: Evidence from panel data in China," Working Papers 439, ECINEQ, Society for the Study of Economic Inequality.
    4. repec:kap:itaxpf:v:24:y:2017:i:2:d:10.1007_s10797-016-9416-1 is not listed on IDEAS
    5. Antonio N. Bojanic, 2016. "The Impact of Fiscal Decentralization on Growth, Inflation, and Inequality in the Americas," Working Papers 1610, Tulane University, Department of Economics.
    6. Anping Chen & Nicolaas Groenewold, 2015. "The Regional Effects of Macroeconomic Shocks in China," ERSA conference papers ersa15p17, European Regional Science Association.
    7. repec:eee:chieco:v:47:y:2018:i:c:p:96-115 is not listed on IDEAS
    8. repec:eee:chieco:v:44:y:2017:i:c:p:67-78 is not listed on IDEAS
    9. Yongzheng Liu & Jorge Martinez-Vazquez & Alfred M. Wu, 2017. "Fiscal decentralization, equalization, and intra-provincial inequality in China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(2), pages 248-281, April.
    10. Jingyi Huang & Yumei Guo & Yang Song, 2016. "Intergenerational transmission of education in China: Pattern, mechanism, and policies," Working Papers 415, ECINEQ, Society for the Study of Economic Inequality.
    11. Antonio N. Bojanic, 2016. "Fiscal Decentralization, Economic Freedom, and Political and Civil Liberties in the Americas," Working Papers 1609, Tulane University, Department of Economics.
    12. repec:gam:jecomi:v:6:y:2018:i:1:p:8-:d:129749 is not listed on IDEAS

    More about this item

    Keywords

    Fiscal decentralization; Regional income inequality; Tax sharing reform; China;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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