Reducing Inequality in the People's Republic of China through Fiscal Reform

Abstract

This policy note highlights the crucial role that fiscal policy could play in efforts to reduce income inequality, both directly and indirectly, through raising revenues for progressive programs.

Inequality in the People’s Republic of China (PRC) has increased over time. The government recently reported that the official measure of the Gini coefficient reached 0.47 in 2012 from 0.32 in 1990. High and increasing income inequality would be detrimental to both the creation of a harmonious society and long-term economic growth.

In February 2013, the State Council released guidelines to reform the income distribution system and narrow the income gap. Central to the guidelines is a comprehensive set of policy actions to tackle income inequality through a combination of fiscal and legislative reforms to balance income distribution.

Without comprehensive policy adjustments, inequality is unlikely to moderate. This policy note highlights the crucial role that fiscal policy could play in efforts to reduce income inequality, both directly and indirectly, through raising revenues for progressive programs. Reforms in taxation and fiscal expenditure will be vital to reducing inequality effectively.