IDEAS home Printed from
   My bibliography  Save this paper

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


  • Nora Lustig

    (Stone Center for Latin American Studies, Department of Economics, Tulane University, Commitment to Equity Institute (CEQ).)

  • Yang Wang

    (Institute of Economics and Finance, Nanjing Audit University, China)


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," Commitment to Equity (CEQ) Working Paper Series 93, Tulane University, Department of Economics.
  • Handle: RePEc:tul:ceqwps:93

    Download full text from publisher

    File URL:
    File Function: First version, 2020
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Marisa Bucheli & Nora Lustig & Máximo Rossi & Florencia Amábile, 2014. "Social Spending, Taxes, and Income Redistribution in Uruguay," Public Finance Review, , vol. 42(3), pages 413-433, May.
    2. Gustafsson,Björn A. & Shi,Li & Sicular,Terry (ed.), 2008. "Inequality and Public Policy in China," Cambridge Books, Cambridge University Press, number 9780521870450, November.
    3. Lustig Nora, 2016. "Inequality and Fiscal Redistribution in Middle Income Countries: Brazil, Chile, Colombia, Indonesia, Mexico, Peru and South Africa," Journal of Globalization and Development, De Gruyter, vol. 7(1), pages 17-60, June.
    4. Adam Wagstaff, 2012. "Benefit‐incidence analysis: are government health expenditures more pro‐rich than we think?," Health Economics, John Wiley & Sons, Ltd., vol. 21(4), pages 351-366, April.
    5. Mookherjee, Dilip & Shorrocks, Anthony F, 1982. "A Decomposition Analysis of the Trend in UK Income Inequality," Economic Journal, Royal Economic Society, vol. 92(368), pages 886-902, December.
    6. James Alm & Yongzheng Liu, 2013. "Did China's Tax-for-Fee Reform Improve Farmers' Welfare in Rural Areas?," Journal of Development Studies, Taylor & Francis Journals, vol. 49(4), pages 516-532, April.
    7. Song, Yang, 2014. "What should economists know about the current Chinese hukou system?," China Economic Review, Elsevier, vol. 29(C), pages 200-212.
    8. Jean-Yves Duclos & Abdelkrim Araar, 2006. "Poverty and Equity," Economic Studies in Inequality, Social Exclusion, and Well-Being, Springer, number 978-0-387-33318-2, December.
    9. Wagstaff, Adam & Lindelow, Magnus & Jun, Gao & Ling, Xu & Juncheng, Qian, 2009. "Extending health insurance to the rural population: An impact evaluation of China's new cooperative medical scheme," Journal of Health Economics, Elsevier, vol. 28(1), pages 1-19, January.
    10. Meng Cai & Ximing Yue, 2017. "The Redistributive Role of Government Social Security Transfers on Inequality in China," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 201721, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    11. Dennis Tao Yang, 1999. "Urban-Biased Policies and Rising Income Inequality in China," American Economic Review, American Economic Association, vol. 89(2), pages 306-310, May.
    12. Qin Gao & Irwin Garfinkel & Fuhua Zhai, 2009. "Anti‐Poverty Effectiveness Of The Minimum Living Standard Assistance Policy In Urban China," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 55(s1), pages 630-655, July.
    13. Xiaoyan Lei & Wanchuan Lin, 2009. "The New Cooperative Medical Scheme in rural China: does more coverage mean more service and better health?," Health Economics, John Wiley & Sons, Ltd., vol. 18(S2), pages 25-46, July.
    14. Shi Li & Chuliang Luo & Terry Sicular, 2011. "Overview: Income Inequality and Poverty in China, 2002-2007," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 201110, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    15. Instituto Centroamericano de Estudios Fiscales–ICEFI, 2017. "Incidencia de la Política Fiscal en la Desigualdad y la Pobreza en Honduras," Commitment to Equity (CEQ) Working Paper Series 51, Tulane University, Department of Economics.
    16. Golan, Jennifer & Sicular, Terry & Umapathi, Nithin, 2017. "Unconditional Cash Transfers in China: Who Benefits from the Rural Minimum Living Standard Guarantee (Dibao) Program?," World Development, Elsevier, vol. 93(C), pages 316-336.
    17. Li,Shi & Sato,Hiroshi & Sicular,Terry (ed.), 2013. "Rising Inequality in China," Cambridge Books, Cambridge University Press, number 9781107002913, November.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Lugo, Maria Ana & Niu, Chiyu & Yemtsov, Ruslan, 2021. "Rural Poverty Reduction and Economic Transformation in China: A Decomposition Approach," SocArXiv 8rbgw, Center for Open Science.
    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. 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.
    4. Peihua Deng & Ronnie Schöb, 2022. "Group-Specific Redistribution, Inequality, and Subjective Well-Being in China," CESifo Working Paper Series 9847, CESifo.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kakwani, Nanak & Li, Shi & Wang, Xiaobing & Zhu, Mengbing, 2019. "Evaluating the effectiveness of the rural minimum living standard guarantee (Dibao) program in China," China Economic Review, Elsevier, vol. 53(C), pages 1-14.
    2. Li, Jinjing & Wang, Xinmei & Xu, Jing & Yuan, Chang, 2020. "The role of public pensions in income inequality among elderly households in China 1988–2013," China Economic Review, Elsevier, vol. 61(C).
    3. Nora Lustig, 2018. "Measuring the Distribution of Household Income, Consumption and Wealth: State of Play and Measurement Challenges," Working Papers 1801, Tulane University, Department of Economics.
    4. Lee, Jongchul, 2013. "A provincial perspective on income inequality in urban China and the role of property and business income," China Economic Review, Elsevier, vol. 26(C), pages 140-150.
    5. Pan, Liqun & Mukhopadhaya, Pundarik & Li, Jing, 2019. "The changing texture of the city-size wage differential in Chinese cities – Effects of skill and identity," China Economic Review, Elsevier, vol. 53(C), pages 191-210.
    6. Hong Wang & Yu Liu & Yan Zhu & Lei Xue & Martha Dale & Heather Sipsma & Elizabeth Bradley, 2012. "Health Insurance Benefit Design and Healthcare Utilization in Northern Rural China," PLOS ONE, Public Library of Science, vol. 7(11), pages 1-7, November.
    7. Mao Zheng & Xiaoguang Li & Zhilong Qin & Muhammad Tayyab Sohail, 2023. "Examining the Impact of Fiscal Resources on Anti-Poverty Expenditure: Evidence from China," Sustainability, MDPI, vol. 15(5), pages 1-17, March.
    8. Terry Sicular & Shi Li & Ximing Yue & Hiroshi Sato, 2017. "Changing Trends in China’s Inequality: Key Issues and Main Findings," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 201712, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    9. Nora Lustig & Florencia Amábile & Marisa Bucheli & George Gray Molina & Sean Higgins & Miguel Jaramillo & Wilson Jiménez Pozo & Veronica Paz Arauco & Claudiney Pereira & Carola Pessino & Máximo Rossi , 2014. "El impacto del sistema tributario y del gasto social sobre la desigualdad y la pobreza en Argentina, Bolivia, Brasil, México, Perú y Uruguay: Un panorama general," Commitment to Equity (CEQ) Working Paper Series 1313S, Tulane University, Department of Economics.
    10. Kuangnan Fang & BenChang Shia & Shuangge Ma, 2012. "Health Insurance Coverage and Impact: A Survey in Three Cities in China," PLOS ONE, Public Library of Science, vol. 7(6), pages 1-8, June.
    11. Nora Lustig, 2017. "Fiscal Policy, Income Redistribution and Poverty Reduction in Low and Middle Income Countries," Commitment to Equity (CEQ) Working Paper Series 54, Tulane University, Department of Economics.
    12. Hu, Shu & Das, Dhiman, 2019. "Quality of life among older adults in China and India: Does productive engagement help?," Social Science & Medicine, Elsevier, vol. 229(C), pages 144-153.
    13. Wu, Ximing & Perloff, Jeffrey M., 2004. "China's Income Distribution Over Time: Reasons for Rising Inequality," Institute for Research on Labor and Employment, Working Paper Series qt9jw2v939, Institute of Industrial Relations, UC Berkeley.
    14. Zhiyuan Hou & Ellen Van de Poel & Eddy Van Doorslaer & Baorong Yu & Qingyue Meng, 2014. "Effects Of Ncms On Access To Care And Financial Protection In China," Health Economics, John Wiley & Sons, Ltd., vol. 23(8), pages 917-934, August.
    15. Liu, Hong & Fang, Hai & Zhao, Zhong, 2013. "Urban–rural disparities of child health and nutritional status in China from 1989 to 2006," Economics & Human Biology, Elsevier, vol. 11(3), pages 294-309.
    16. Xiaojun Lu & Qun Wang & Daishuang Wei, 2020. "Do Health Insurance Schemes Heterogeneously Affect Income and Income Distribution? Evidence from Chinese Agricultural Migrants Survey," IJERPH, MDPI, vol. 17(9), pages 1-12, April.
    17. Zhou, Wenhui & Wan, Qiang & Zhang, Ren-Qian, 2017. "Choosing among hospitals in the subsidized health insurance system of China: A sequential game approach," European Journal of Operational Research, Elsevier, vol. 257(2), pages 568-585.
    18. Yang, Xiuna & Gustafsson, Björn & Sicular, Terry, 2021. "Inequality of opportunity in household income, China 2002–2018," China Economic Review, Elsevier, vol. 69(C).
    19. Emran,M. Shahe & Sun,Yan - GSP05, 2015. "Are the children of uneducated farmers doubly disadvantaged ? farm, nonfarm and intergenerational educational mobility in rural China," Policy Research Working Paper Series 7459, The World Bank.
    20. Nora Lustig, 2016. "Fiscal policy, inequality and the poor in the developing world," Working Papers 418, ECINEQ, Society for the Study of Economic Inequality.

    More about this item


    Poverty and Inequality in China; Urban-Rural Gap; Regional Disparity; Taxes; Transfers; Incidence Analysis; Test;
    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

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tul:ceqwps:93. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Nora Lustig (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.