How Redistributive Is Fiscal Policy in China ? New Evidence on the Distributional Impacts of Taxes and Spending

How redistributive are fiscal policies in China? This paper applies the standard fiscal incidence analysis to data from the China Family Panel Study 2018 to study the effect of government taxes and spending on inequality in China. The analysis includes fiscal elements, such as personal income tax, contributions to social insurance, value-added tax, consumption tax, cash transfers, contributory pensions, and spending on education and health, and accounts for 63 percent of total revenues and 43 percent of total government spending. Consistent with previous studies, the paper finds that fiscal policy in China continues to redistribute quite effectively, achieving inequality reduction of about 10.3 Gini points, placing China around the median of upper-middle-income country peers on the level of redistribution achieved by fiscal policy. Not unlike several other countries where similar analysis has been done, most of the inequality reduction achieved by China is through education and health spending. Findings from the paper further suggest that while the fiscal system delivers more to those who need the most support, the heavy burden of user fees—relative to disposable income—may prevent some families from accessing needed health care services and imply high costs of raising children. In addition, there is room for the progressivity of the overall package to be enhanced. In particular, the fiscal system could make a greater dent in inequality by collecting more from those who could afford to pay more and leaving more money in the pockets of those who need it the most. This could be done by increasing the share of fiscal revenues collected through progressive taxes such as personal income tax and increasing the level of cash-based social benefits (such as residents’ pensions and transfers).