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Welfare Effects of Regressive Taxation and Subsidies in China


  • Xiaobing Wang
  • Jenifer Piesse


Using three comparable national representative household surveys for China in 1988, 1995 and 2002, this paper provides micro level evidence of a policy of absolute regressive taxation and an inverted welfare system. It reviews the economic effects of taxes and subsides and shows that a dual and regressive taxation system increases the urban rural income gap and enhances overall inequality. The empirical evidence indicates that the relatively poorer rural population pay net tax while those in the richer urban areas receive net subsidies. This biased system of taxes and welfare payments is one of the major causes of the persisting urban-rural income gap and is largely responsible for overall income inequality in China.

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  • Xiaobing Wang & Jenifer Piesse, 2009. "Welfare Effects of Regressive Taxation and Subsidies in China," Brooks World Poverty Institute Working Paper Series 10809, BWPI, The University of Manchester.
  • Handle: RePEc:bwp:bwppap:10809

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    References listed on IDEAS

    1. Knight, John & Song, Lina, 1999. "The Rural-Urban Divide: Economic Disparities and Interactions in China," OUP Catalogue, Oxford University Press, number 9780198293309, June.
    2. Vickrey, William, 1992. "An Updated Agenda for Progressive Taxation," American Economic Review, American Economic Association, vol. 82(2), pages 257-262, May.
    3. Meng, Xin & Zhang, Junsen, 2001. "The Two-Tier Labor Market in Urban China: Occupational Segregation and Wage Differentials between Urban Residents and Rural Migrants in Shanghai," Journal of Comparative Economics, Elsevier, vol. 29(3), pages 485-504, September.
    4. Gustafsson, Bjorn & Shi, Li, 1997. "Types of Income and Inequality in China at the End of the 1980s," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 43(2), pages 211-226, June.
    5. Shorrocks, Anthony F, 1984. "Inequality Decomposition by Population Subgroups," Econometrica, Econometric Society, vol. 52(6), pages 1369-1385, November.
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    Cited by:

    1. Markussen, Thomas, 2011. "Democracy, redistributive taxation and the private provision of public goods," European Journal of Political Economy, Elsevier, vol. 27(1), pages 201-213, March.

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