How Redistributive Is Fiscal Policy in China? New Evidence on the Distributional Impacts of Taxes and Spending

Investment Rating - The report does not explicitly provide an investment rating for the fiscal policy in China, but it indicates that there is significant room for improvement in the redistributive capacity of the fiscal system [17][18]. Core Insights - Fiscal policy in China effectively reduces inequality by approximately 10.3 Gini points, positioning China around the median of upper-middle-income countries in terms of redistribution achieved [17][18]. - The primary drivers of inequality reduction are in-kind benefits from education and health spending, while cash transfers play a smaller role [18]. - The report suggests enhancing the progressivity of the fiscal system by increasing revenues from progressive taxes and cash-based social benefits [18]. Summary by Sections Overview of Fiscal System - The fiscal system's redistributive power is influenced by its size and progressivity, with total fiscal revenue in China amounting to 26,197 billion RMB in 2018, representing 29.1% of GDP [20][22]. - Tax revenues account for nearly 60% of total revenue, with the largest components being value-added tax (VAT), corporate income tax, and personal income tax [20][22]. Revenue and Expenditure - Total public expenditure in 2018 was 22,090 billion RMB, or 24.5% of GDP, with social expenditure comprising about 37% of this total [32][35]. - Education and health expenditures are significant components of social spending, accounting for 14.6% and 7.1% of total expenditure, respectively [34][35]. Inequality and Redistribution - The analysis indicates that while the fiscal system reduces inequality, it also highlights the burden of user fees in health care, which may limit access for lower-income families [18]. - The report emphasizes the need for a more progressive tax structure to better address income inequality, particularly through personal income taxes and increased cash transfers [18]. Data and Methodology - The study utilizes data from the 2018 China Family Panel Study, combining household survey data with administrative sources to assess the impact of fiscal policy on inequality [40][41]. - The methodology follows the Commitment to Equity framework, allowing for a detailed analysis of how taxes and transfers affect household income distribution [41][42].