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| The Pro-poor Index and the Generational Burden of Indirect Taxes: Can Tax Cuts Spontaneously Benefit the Poor？ |
| ZHANG Nan,LIU Rong,LU Shengfeng
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School of Public Finance and Taxation, Southwestern University of Finance and Economics;
School of Economics and Management, Wuhan University |
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Abstract Summary: Guided by the principles that “rich people help the poor” and “redistribution puts more emphasis on equity”, China recently implemented a new concept of shared development based on changes to the fiscal distribution system. As an important part of the financial poverty relief mechanism, taxation policies have played an important role in promoting the targeted alleviation of poverty. In this paper, we examine the poverty reduction effects of cuts to indirect taxes under the unified framework of the targeted alleviation of financial poverty. Our analysis addresses the lack of research on tax poverty alleviation in the literature. By evaluating whether the tax reduction policies for indirect tax can provide immediate relief for the poor, we also provide theoretical support for the large-scale tax cut policies that China is currently implementing to help reduce poverty.
We use CFPS2012 household survey data and the China input and output tables in 2012 to calculate the indirect tax burden of households using a micro-simulation method based on the premise of shifting forward. We use the pro-poor growth index provided in the literature as a reference. Inspired by the index, which measures the “trickle-down effect” of the economy, we also construct a quantitative method for identifying and measuring the pro-poor nature of the tax system. Specifically, we use three poverty lines, two equivalent size adjustment methods, and three ways of weighting the poor population to conduct a comprehensive analysis of the pro-poor characteristics of indirect taxes. Furthermore, we estimate the generational differences in the indirect tax burden among family members of different ages.
We present a number of empirical findings. First, indirect tax is a form of “negative income” and the collection of indirect taxes increases the breadth, depth, and intensity of poverty. Second, our empirical analyses show that the pro-poor index of indirect tax is greater than 1 in both the urban and rural samples, which indicates that indirect taxes are not pro-poor. Thus, policies aimed at reducing indirect taxes can help the poor, although they provide more benefits to urban poor households than rural poor households. However, tax reduction policies provide little help for the severely poor who struggle to feed and clothe themselves. Third, value-added tax has a more obvious pro-rich effect than consumption tax and sales tax. Because consumption tax covers some luxury goods, it can play a “pro-poor” role in redistributing income. However, the pro-poor index of consumption tax is still greater than 1 most of the time, largely because rural low-income groups spend part of their income on items such as alcohol and tobacco, which are subject to consumption tax, and indirectly bear the consumption tax on fuel when they travel. Fourth, children, adults, and the elderly are all bearers of indirect taxes. Our empirical results show that poor families pay a higher proportion of indirect taxes for raising children. In contrast, they pay a smaller proportion of indirect taxes for supporting the old.
Based on the empirical results of this paper, we propose the following policy suggestions. First, the government should continue to step up efforts to promote large-scale indirect tax reduction policies to support the targeted alleviation of poverty, and use differentiated value-added tax and consumption tax adjustment strategies to change the “pro-rich nature” of indirect tax. Second, the government should combine the indirect tax cuts with policies that give full play to the auxiliary role of direct tax in alleviating poverty, and gradually form a multi adjustment system in which different taxes are coordinated to alleviate and reduce poverty. Third, in the long run, China's tax system should be gradually transformed to the pattern that main proportion of revenue is derived tares from direct taxes rather than indirect taxes.
Overall, the government can achieve fairer income distribution by reducing the proportion of indirect tax and increasing the progressive structure of the tax system. However, tax is not the only mechanism for alleviating financial poverty. The government should also ensure that the basic needs of the poor are met through public transfer payments and improve the social security system to resolve the pension problems faced by poor households.
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Received: 21 May 2018
Published: 27 June 2019
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