How China's Tax Structure Crushes The Poor
REUTERS/Aly Song
In a new note to clients, Morgan Stanley's Richard Xu writes how China's tax structure puts the poor at a gross disadvantage.
China’s tax structure partly contributes to the widening income gap as China relies more on indirect or transaction-based taxes, such as business tax, VAT, and consumption tax (around 50% of the tax base in China, versus less than 20% in many developed countries), this effectively imposes a higher tax rate on the lower-income population because of the larger share of their incomes that is spent on consumption. The situation is more pronounced if we consider taxes on land sales as transaction-based taxes.
"On the spending side," Xu writes, "government spending may not be the best system to provide support for low-income groups. Because of 1) its greater focus on investments, 2) potential leakages, and 3) friction costs during transfers between central and local governments, vested interest groups could benefit more."
Morgan Stanley
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