Does Indirect Tax Increase the Income Gap between Urban and Rural Areas? —Based on the Analysis of Thayer Index

Abstract

In the process of economic and social development, serious income gap exists between urban and rural areas in our country, indirect tax—as our main taxes should play income distribution function to narrow the income gap between urban and rural areas. By using the consumption expenditure data of urban residents, the indirect tax burden of urban residents is estimated. The indirect tax burden of rural residents will be estimated by using the indirect tax data and the rural population. Compared with their respective income levels, we can draw the conclusion that the indirect tax is regressive between urban and rural residents. Using Tal index between 1994 and 2013 to measure urban and rural residents income gap, the empirical analysis of commodity tax shows that value added tax has a negative effect on income gap between urban and rural areas; business tax and consumption tax has a positive effect on income gap between urban and rural areas. However, negative effects brought by the VAT tax are greater than the business tax and consumption tax, indirect tax whose main body is VAT is worsening income distribution as a whole. The reform program to replace the business tax with a value-added tax will be expanded so that the proportion of value added tax will further increase. Combined with the empirical results, we put forward the policy which can perfect the indirect tax’s influence on income gap between urban and rural areas.