Income Inequality, Fiscal Redistribution, and Governmental Corruption: Evidence from Chinese Provincial Data

Abstract

We build a theoretical model that describes the relationship between income inequality, fiscal redistribution and corruption in China. With between-group econometric model, using the provincial panel data of China from 1997 to 2006, this paper finds strong evidence in support of the propositions revealed by the theoretical model. The conclusion of empirical analysis is that fiscal redistribution as a remedy of the failure of market allocation fails to restrain income inequality. In contrast, it worsens income inequality because of the corruption when the officials implement fiscal redistribution policies. The article suggests that we should eliminate the corruption in the process of fiscal redistribution to effectively restrain income inequality and promote social harmony. JEL classifications: D63; D73; H23

Tax and income inequality: evidence from Sub-Saharan Africa

“…De Freitas’ (2012) study showed that countries with an informal sector which has high income will rely heavily on consumption tax to redistribute. Mi and Liu (2014) took the analysis further by incorporating governmental corruption in the fight to close the income inequality gap through fiscal redistribution. Mi and Liu (2014) concluded that fiscal redistribution worsens income inequality due to corruption in the implementation of fiscal redistribution policies.…”

“…Mi and Liu (2014) took the analysis further by incorporating governmental corruption in the fight to close the income inequality gap through fiscal redistribution. Mi and Liu (2014) concluded that fiscal redistribution worsens income inequality due to corruption in the implementation of fiscal redistribution policies. Hu and Liu (2009) study showed that in rural areas, the redistributive effect of tax is not obvious but in urban areas, individual income tax has a strong adverse effect on income inequality.…”