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The Impact of Taxes and Transfers on Income Inequality, Poverty, and the Urban-Rural and Regional Income Gaps in China

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  • Nora Lustig

    (Tulane University)

  • Yang Wang

    (Nanjing Audit University)

Abstract

China is characterized by high prefiscal overall, urban-rural and regional inequality. Applying standard fiscal incidence analysis, we estimate the redistributive effect of taxes and social spending on income distribution and poverty. In particular, we estimate the effect of direct and indirect taxes, direct cash transfers, contributory pensions, indirect subsidies, and in-kind transfers (education and health) on overall inequality and poverty, the urban-rural income gap, and income inequality between regions. The results show that the fiscal system is inequality-reducing overall and between regions. However, the urban-rural gap rises and the postfiscal headcount ratio is higher than prefiscal poverty in rural areas. Both are undesirable outcomes given that rural residents are poorer. They are largely explained by the considerably lower contributory pensions received by rural residents.

Suggested Citation

  • Nora Lustig & Yang Wang, 2020. "The Impact of Taxes and Transfers on Income Inequality, Poverty, and the Urban-Rural and Regional Income Gaps in China," Working Papers 556, ECINEQ, Society for the Study of Economic Inequality.
    • Handle: RePEc:inq:inqwps:ecineq2020-556
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    References listed on IDEAS

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    Cited by:

    1. Lugo,Maria Ana & Niu,Chiyu & Yemtsov,Ruslan G., 2021. "Rural Poverty Reduction and Economic Transformation in China : A Decomposition Approach," Policy Research Working Paper Series 9849, The World Bank.
    2. Lugo, Maria Ana & Raiser, Martin & Yemtsov, Ruslan, 2022. "China's economic transformation and poverty reduction over the years: An overview," KCG Policy Papers 8, Kiel Centre for Globalization (KCG).
    3. Parro, Francisco, 2024. "Unveiling the impact of income taxes on inequality in a HACT model," Journal of Macroeconomics, Elsevier, vol. 79(C).
    4. Kolawole Ogundari, 2023. "Club Convergence in Income Inequality in Africa," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 167(1), pages 319-337, June.
    5. Peihua Deng & Ronnie Schöb, 2022. "Group-Specific Redistribution, Inequality, and Subjective Well-Being in China," CESifo Working Paper Series 9847, CESifo.
    6. Can Verberi & Muhittin Kaplan, 2024. "An Evaluation of the Impact of the Pension System on Income Inequality: USA, UK, Netherlands, Italy and Türkiye," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 174(3), pages 905-931, September.

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    More about this item

    Keywords

    Poverty and Inequality in China; Urban-Rural Gap; Regional Disparity; Taxes; Transfers; Incidence Analysis;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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