Income inequality in China and the role of fiscal policies: An empirical study of Chinese provincial data

This chapter conducts panel regressions using provincial data from 2005 to 2010 to investigate whether China’s fiscal system is effective in mitigating the rise in income inequality in those years. On the revenue side, we find that only operation tax has a significant negative effect on income inequality. Value-added tax (VAT), individual and enterprise income tax all have an insignificant impact on income inequality. We suspect the insignificant effect of progressive individual income tax on income inequality reflects tax evasion by the rich. On the spending side, the results indicate that all government expenditures have no significant impacts on reducing income inequality. This suggests that, among other possibilities, government spending lacks efficiency or pays insufficient attention to the needy.