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Tax reduction, wage bargaining, and income equality: Evidence from China's SMEs

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  • Sun, Wenkai
  • Wang, Wenjing
  • Tang, Siyuan
  • Zhao, Zhong

Abstract

As an important means for firms' burden-lightening and market stimulation, tax reduction is especially crucial for small and medium-sized enterprises (SMEs). This paper examines the wage effects of firm-level tax reduction. Firms' effective tax burden reduction enhanced firm-level surplus as their profitability improved and financial constraints loosened, leading to employees' wages rising, and those having stronger bargaining power benefit more from tax reductions. The difference in substitution costs give high-income employees and employees in management and technical positions stronger bargaining power than others. Therefore, the impact of tax reduction on wages has a Matthew effect and tends to exacerbate inequalities within a firm.

Suggested Citation

  • Sun, Wenkai & Wang, Wenjing & Tang, Siyuan & Zhao, Zhong, 2026. "Tax reduction, wage bargaining, and income equality: Evidence from China's SMEs," China Economic Review, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:chieco:v:95:y:2026:i:c:s1043951x25003037
    DOI: 10.1016/j.chieco.2025.102645
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    Keywords

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    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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