Inequality and the Urbanrural Divide in China: Effects of Regressive Taxation

20 Pages Posted: 3 Jan 2011

See all articles by Xiaobing Wang

Xiaobing Wang

The University of Manchester - Economics - School of Social Sciences and Centre for Chinese Studies

Jenifer Piesse

University of Stellbosch; King's College London - Department of Management

Date Written: November 15, 2010

Abstract

Using three comparable national representative household surveys for China in 1988, 1995 and 2002, the present paper reveals the regressivity and urban bias of China's direct tax and welfare system in this period. It shows that a regressive taxation system and skewed allocation of subsidies increases the urbanrural income gap and enhances overall inequality. Modeling these relationships indicates that the relatively poorer rural population has a net tax liability, whereas those in the richer urban areas receive net subsidies. This pattern is common in China, although the extent of the bias varies. This skewed system of tax and welfare payments is a major cause of the persisting urbanrural income gap and contributes to the overall income inequality in China. The abolishment of the agriculture tax in 2006 has had a positive impact on rural people's livelihoods.

Keywords: China, inequality, subsidies, taxation, urbanrural divide

JEL Classification: I38, K34, R11, R20

Suggested Citation

Wang, Xiaobing and Piesse, Jenifer, Inequality and the Urbanrural Divide in China: Effects of Regressive Taxation (November 15, 2010). China & World Economy, Vol. 18, Issue 6, pp. 36-55, 2010, Available at SSRN: https://ssrn.com/abstract=1734197 or http://dx.doi.org/10.1111/j.1749-124X.2010.01219.x

Xiaobing Wang

The University of Manchester - Economics - School of Social Sciences and Centre for Chinese Studies ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Jenifer Piesse

University of Stellbosch

Stellenbosch, Western Cape
South Africa

King's College London - Department of Management ( email )

Virginia Woolf Building
22 Kingsway
London, England WC2B 6NR
United Kingdom

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