The effects of China’ s VAT enlargement reform on the income redistribution of urban households

Abstract

Background: China’s former goods and service tax (GST) system subjects sale of goods to VAT and provision of services to business tax. The VAT enlargement reform launched in 2012 aimed to replace the business tax with VAT step by step. This paper is intended to explore the redistribution effects of this reform. Methods: On basis of input-output model and statutory tax rates, this paper derives the measurement of full GST burden of households in China where both VAT and business tax are imposed. Using the 2012 urban household survey data, the redistribution effects of the VAT enlargement reform is estimated by comparing the Gini coefficient and general entropy indexes before and after the reform. Results: The VAT enlargement reform has improved the redistribution effects of China’s GST system mainly through lowering the average tax burden and reducing the inequality within the lowest-income group, though the inequality among different income groups was not reduced considerably. Conclusions: Compared with overall rate reduction, greater relief to necessity items could improve the redistribution effects of the future VAT system more effectively.