Inequality and tax in China – new report
July 17, 2011 by Charlie Stedman · Leave a Comment
For those interested in China’s tax system, and in the impact of personal income taxes on inequality in countries more generally, this new paper by Richard Krever and Hui Zhang (hat tip TaxProf), looks interesting. It’s called Progressive Income Taxation and Urban Individual Income Inequality, and its introduction notes:
“To date, China has not been able to use the personal income tax effectively as a redistribution tool. . . . the tax system has an almost insignificant impact on income redistribution, with post-tax incomes not varying significantly from pre-tax incomes. These findings stand in contrast with those commonly found in more advanced market economies.”
Income tax is a relatively recent phenomenon in China (TJN wonders whether this has weakened the potential of the tax system to act as a brake on authoritarian tendencies through the ‘no taxation without representation’ channel. The article notes, and provides a handy graph illustrating, that
“With the notable exception of the United States, there is a very strong inverse correlation between a country’s reliance on income tax as a percentage of total taxation and the level of inequality in the nation. As income tax drops in relative weighting to other types of tax revenue, inequality rises. China stands apart from more advanced economies in terms of its limited reliance on income tax relative to other types of taxes and this no doubt inhibits its ability to use income tax as a tool of redistribution.”
The paper discusses why China’s income tax system might not be working and suggests – surprise, surprise – that one factor might be
“evasion by higher-income persons. There is evidence that a range of income types including income from stock market manipulation, property deals, vast bonuses from state- owned firms enjoying monopoly positions, large “gifts” received by powerful officials and their relatives, and income from corruption, abuse of power, exploitation of public resources, and dealings in land development projects and other monopoly interests go undetected by revenue authorities.”
The secrecy jurisdiction of Hong Kong will have had an awful lot to do with that. But as the paper notes, a lot more research is needed in this crucial area.
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