Growing (Un)Equal: Fiscal Policy and Income Inequality in China and BRIC
27 Pages Posted: 5 May 2015
Date Written: March 2015
This paper investigates the empirical characteristics of income inequality in China and a panel of BRIC countries over the period 1980–2013, with a focus on the redistributive contribution of fiscal policy. Using instrumental variable techniques to deal with potential endogeneity, we find evidence supporting the hypothesis of the existence of a Kuznets curve - an inverted Ushaped relationship between income inequality and economic development - in China and the panel of BRIC countries. In the case of China, the empirical results indicate that government spending and taxation have opposing effects on income inequality. While government spending appears to have a worsening impact, taxation improves income distribution. Even though the redistributive effect of fiscal policy in China appears to be stronger than what we identify in the BRIC panel, it is not large enough to compensate for the adverse impact of other influential factors.
Keywords: Income inequality, China, Brazil, Russian Federation, India, Fiscal policy, Income distribution, Economic growth, Cross country analysis, Time series, Panel analysis, household income, poverty, poor, rural
JEL Classification: H50, O10
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