Income-Inequality-and-Progressive-Income-Taxation-

53AmericanEconomicJournal:AppliedEconomics2009,1:2,53–63=10.1257/app.1.2.53Currentdebatesaboutpolicyreforminleastdevelopedcountries(LDCs)oftenfocusonimprovingthedeliveryofsocialservices,thedesignofmarket-friendlyeconomicinstitutions,theeffectivenessofpoverty-reductionprograms,ortheroleoftradeandmarketliberalization.Perhapssurprisingly,theyrarelydealexplicitlywithtaxreformandtheneedtodevelopmodernincometaxsystemsinthosecountries.1Thisisunfortunateforatleastthreereasons.First,poorcountriesoftenrelyexcessivelyonhighlydistortionarytaxinstrumentssuchastaxesontradeorindirecttaxesonspe-cificconsumptiongoods.Next,incometaxationcanhelptoincreasethetaxrevenuesneededtofinancepublicgoods.IncountriessuchasChinaandIndia,taxrevenuesarecurrentlyaround10–15percentofGDP,farbelowanycountryintheWestthathasbeenabletodevelopapropereducation,health,andinfrastructuresystem.Finally,manyLDCshavewitnessedasharpriseinincomeinequalityduringtherecentperiod.Progressivetaxationisoneoftheleastdistortionarypolicytoolsavailablethatcontrolstheriseininequalitybyredistributingthegainsfromgrowth.Inthispaper,wechoosetofocusonthecaseofprogressiveincometaxationinChinaandIndia.AlthoughaprogressiveindividualincometaxsystemhasbeeninplaceinChinasince1980,ithasreceivedverylittleattention,probablybecausethefractionofthepopulationwithincomeabovetheexemptionthresholdwasnegligibleuntilthe1990s(lessthan1percent).Usingannualtabulationsfromurbanhousehold1See,e.g.,thelistoftopicscoveredinWorldDevelopmentReportsoverthepastfewyears.*Piketty:ParisSchoolofEconomics(PSE),48BoulevardJourdan,75014Paris,France(e-mail:[e-mail]);Qian:BrownUniversity,BoxB,DepartmentofEconomics,Providence,RI02912(e-mail:[e-mail]).WegratefullyacknowledgefinancialsupportfromtheMacArthurFoundationGrant.WearegratefultotheUrbanHouseholdIncomeSurveyTeamofChina’sNationalStatisticalBureau(NSB)forhelpinguswiththedataandtoGeShozhongattheShanghaiCaiJingUniversityforsharinghisexpertiseinChina’staxsystemWangYoujuan.WealsothankYeJiangforexcellentresearchassistance.†Tocommentonthisarticleintheonlinediscussionforumvisitthearticlespageat:=10.1257/app.1.2.53.IncomeInequalityandProgressiveIncomeTaxationinChinaandIndia,1986–2015†ByThomasPikettyandNancyQian*ThispaperevaluatesincometaxreformsinChinaandIndia.Thecombinationoffastincomegrowthandunder-indexedtaxscheduleinChinaimpliesthefractionoftheChinesepopulationsubjecttoincometaxhasincreasedfromlessthan0.1percentin1986toabout20percentin2008,whileithasstagnatedaround2–3percentinIndia.Chineseincometaxrevenues,asashareofGDP,increasedfromlessthan0.1percentin1986toabout1.5percentin2005and2.5percentin2008,whiletheconstantadaptationofexemptionlevelsandincomebracketsinIndiahavecausedthemtostagnatearound0.5percentofGDP.(JELD31,H24,015,023,P23,P35)54AmErICAnEConomICJournAL:APPLIEDEConomICsAPrIL2009incomesurveyscollectedbyChina’sNationalStatisticalBureau(NSB),fortheperiod1986–2003,wecomputeseriesonlevelsandsharesoftopincomesinChinaoverthisperiod,aswellasseriesontheoreticalnumbersoftaxpayersandtotalincometaxreceipts(basedonactualtaxlaw),whichwecomparetoactualreceipts.2Wealsomakeprojectionsabouttheevolutionofthenumberoftaxpayersandtotalreceiptsforthe2004–2015period,assumingconstanttrendsforbothincomelevelsandincometaxschedules.WewerealsoabletocompareourfindingsforChinawithsimilarseriesforIndia.TheIndiantaxadministrationhasbeencompilingdetailedtabulationsofincometaxreturnseveryyearsincethecreationofaprogressiveincometaxinIndia(1922).IndiantaxreturntabulationswererecentlyexploitedbyAbhijitV.BanerjeeandPiketty(2004,2005)tostudythelong-runevolutionoftopincomesharesinIndia,andweuseandupdatetheirresultsasacomparisonpointforourChineseseries.Ourmainresultissimplebutpowerful.Thecombinationoffastincomegrowthandunder-indexedtaxscheduleinChinaimpliesthatChineseincometaxrevenuesgrowveryfastasafractionofgrossdomesticproduct(GDP),whiletheconstantadaptationofexemptionlevelsandincomebracketsinIndiapreventstheincometaxfromplayingsuchapowerfulrole.Accordingtoourestimates,thefractionofthepopulationinChinasubjecttotheincometaxhasincreasedfromlessthan0.1percentin1986toabout20percentin2008,whileithasstagnatedataround2–3percentinIndia.IncometaxrevenuesinChinahaveboomed,fromlessthan0.1percentofGDPin1986toover1.5percentin2005,and2.5percentin2008,whileinIndia,theyhavestagnatedataround0.5percentofGDP.OurprojectionsindicatethatChineseincometaxrevenuescouldwellexceed5percentofGDPby2015.Therestofthepaperisorganizedasfollows.SectionIdescribestheNSBdatausedinthispaper.InSectionII,wepresentourfindingsfortheevolutionoftheincometaxinChinaandIndia.SectionIIIoffersconcludingremarks.I.DataandMethodologyTheChinesedatausedinthispapercomesfromtheurbanhouseholdincomesurveyscollectedbyChina’sNSB.ThesesurveysaredesignedtoberepresentativeofurbanChina.Between13,000and17,000householdsweresurveyedeachyearuntil2002.Thesampleroseto45,000–50,000householdsin2002and2003.Theindividualleveldatafromthesesurveysarenotavailableforallyears,andwe