Reducing Inequality in the People’s Republic of China through Tax and Fiscal Reforms

Abstract

Taking into account recent changes to the tax system and fiscal relations, the paper offers policy recommendations to reduce inequality by strengthening redistribution mechanisms.

The Long-Term Growth Prospects of the People’s Republic of China

“…Services could only improve their share in GDP marginally from 52.4% in 2016 to 53.3% in 2021 as household consumption stagnated as a share in GDP (Figure B6). In the first half of the 2010s, household consumption (as a share in GDP) picked up, which coincided with income inequality improving and wages in low-skill sectors outgrowing that in high-skill ones (Peschel 2021). However, the share of household consumption in GDP has not increased further in recent years, but de facto stagnated (38.7% of GDP in 2016(38.7% of GDP in versus 38.4% in 2021 reflecting a stagnating disposable income share (61.6% of GDP in 2016 versus 61.7% in 2020).…”

“…Third, basic public services and social security need to be improved to reduce the need for precautionary saving. This requires higher transfers to less-developed regions and additional government spending to cope with needs of a rapidly aging society (Peschel 2021).…”

“…Increased efforts to boost education in rural areas are needed, as are steps to expand early childhood education. Such reforms would require higher fiscal transfers to poorer regions and need to be embedded in broader reforms of intergovernmental fiscal relations (Peschel 2021).…”

“…The share recovered to 52% by 2015. However, wage growth in the second half of the 2010s was lower than that of nominal GDP (Peschel 2021). The assumed 0.5 takes this into account.…”