An Empirical Analysis On The Inequality Of Urban Income Distribution And The Adjustment Effect Of Tax In China

There is no doubt that the inequality of income distribution is greater and greater.The inequalities of rural, urban and urban-rural income distribution make nationalincome distribution more complicated. With the acceleration of urbanization, a largepopulation of rural residents will become to urban residents. If the inequality of urbanincome distribution is out of adjustment right now, a new “dual economic structure”will appear during the process of urbanization. Among the three kinds of inequalities,only urban income distribution can be alleviated by tax. Consequently,further optimization of taxation system will be a better institutional guarantee foradjusting inequality of income distribution.This paper starts with the theoretical basis of tax adjustment system, and onlystudy two aspects: tax burden and taxation structure. Then the function of tax to adjustincome distribution is elaborated from above-mentioned two aspects, and thelimitation of the function is also discussed. Total Income of Urban Households istreated as pre-tax income, and Disposable Income of Urban Households is regarded asafter-tax income. Income equality index is introduced to measure the inequality ofincome distribution. The outputs of pre-tax and after-tax income equality indexesfrom1994to2011show that both indexes continually increase, which means theinequality of income distribution has broadened since1994. The after-tax incomeequality indexes are greater than pre-tax indexes from1994to2001and from2009to2011, that’s to say, tax deteriorates the inequality of income distribution. Except for2002, the improvement of the inequality is too slight to mark from2003to2008.Then, the tax reason to worsen the inequality of income distribution is qualitativelyanalyzed.This paper treats the ratio of urban-rural income as the ratio of urban-rural taxamount to reckon urban households’ tax burden in the part of empirical study. Therelationship of urban households’ tax burden and the disposable income equalityindex shows that if lag phase is1, urban households’ disposable income equalityindex is the Granger cause to tax burden. Whatever the lag phase is, urbanhouseholds’ tax burden isn’t the Granger cause to disposable income equality index.The Error Correction Model (ECM) based on ADL states that if income equality index increases1%, the tax burden adds0.9802%. Therefore, the function of urbanhouseholds’ tax burden to adjust income equality index fails to work. Conversely, theenlargement of urban households’ disposable income equality index leads to theaugment of tax burden. That’s to say, absolute tax amount’s increasing or reducingdoesn’t influence on income distribution, while the effective allocation of taxcategories and optimization of taxation structure are the key elements to adjustingincome distribution.This paper establishes3indicators—tax burden of particular tax, Suits index,pre-tax and after-tax income equality indexes—to evaluate if turnover tax andindividual income tax adjust urban households’ income distribution or not. The resultsindicated that:(1) The contrary adjustment of value added tax to urban households’income distribution mainly because of the large regressive nature of low rate VAT.(2)Consumption tax is either progressive or regressive when refers to different taxableitems. The differences between pre-tax and after-tax income equality indexes are bothPositive and negative, but tiny, which indicates that the function of consumption taxto adjust high incomes has not been brought into full play yet.(3) The progressivity ofbusiness tax derives from entertainment which has high elasticity of demand. Andbusiness tax shrinks the inequality of urban households’ income distribution to someextent.(4) The superposition of VAT, consumption tax and business tax leads toregressive nature of turnover tax.(5) The share of individual income tax in taxamount is tiny. Even the progressivity of individual income tax is large, theadjustment to urban households’ income distribution is far from enough.(6) With theadditional effect of other tax categories, the inequality of urban households’ incomedistribution continues to enlarge.Based on the analysis above, this paper presents some suggestions to optimizetaxation system through its four aspects.