The Basic Income Distribution System of China by Changhong Pei & Zhen Wang & Jingfang Sun

Author:Changhong Pei & Zhen Wang & Jingfang Sun
Language: eng
Format: epub
ISBN: 9789811534614
Publisher: Springer Singapore

2 Taxation and Redistribution of Income

Government is the subject of redistribution of income in modern market economy. Main policy means of government for redistribution of income is public finance, including taxation and public spending. Income redistribution effect of taxation, and the influence of current Chinese taxation structure on income distribution are discussed in this section.

2.1 Taxation and Redistribution of Income

Taxation is one of the major functions of modern government, main source of finance for government running. With respect to economic running, main functions of taxation: firstly, balancing macroeconomic operation as main means of fiscal policy; secondly, allocation of resources via supply of infrastructure and public goods, public services; thirdly, role of redistribution, government realizes income transfer via different taxation structures and tax rates.14

Different taxation structures have different redistribution effect, generally speaking, income redistribution effect of direct tax in which income tax, property tax are dominant is the strongest, progressive rate is mostly implemented to achieve more obvious redistribution effect; income redistribution effect of indirect tax in which business tax, commodity tax, value-added tax are dominant is relative weak. Although taxation could realize equality objective of income redistribution, yet since taxation distorts market structure, it inevitably brings about efficiency loss. Research on the theory of optimal tax systems in western economics thinks that, a “neutral tax” may be designed to realize income transfer payments without distorting market structure and production structure. But theoretical assumptions are too rigorous to realize the so-called “neutral tax”, for example, completely free market economy is required, while this is impossible in reality.15 A large number of empirical researches also show that, it’s impossible for government to raise the required income without any cost in the real world, and such cost is mainly loss of economic efficiency when taxation interferes resource allocation.16 Balance of “equality-efficiency” has to be faced between different taxation structures. Empirical researches also show that, the substitution of indirect tax for direct tax will often deteriorate income distribution status, but will increase economic efficiency, the substitution of direct tax for indirect tax will narrow income distribution gap, but will decrease economic efficiency.17

For use of taxation as policy means of income redistribution, in addition to considering the above-mentioned distortion of resource allocation and balance between “equity and efficiency”, the collection cost and management cost of different tax types should also be considered. Although direct tax including income tax, property tax has stronger effect of income redistribution, yet collection of direct tax imposes higher requirements for government management capacity and collection capacity. For example, the collection of individual income tax and property tax not only requires government to fully grasp the income and property information of residents, have complete personal income records of residents, but also requires government to collect a large number of incomes in kind, design different deduction proportion for households of different dependency burden. With respect to different taxation structures in all countries, proportion of direct tax is high in developed countries, proportion of indirect tax is high in developing countries. Proportion of

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