Growing (un)equal: fiscal policy and income inequality in China and BRIC

This article investigates the empirical characteristics of income inequality in China and other large emerging market economies over the period 1980-2013, with a focus on the redistributive contribution of fiscal policy. Using instrumental variable techniques to deal with potential endogeneity, we find evidence supporting the hypothesis of the existence of a Kuznets curve - an inverted U-shaped relationship between income inequality and economic development - in China and the panel of BRIC + countries. In the case of China, the empirical results indicate that government spending and taxation have opposing effects on income inequality. While government spending appears to have a worsening impact, taxation improves income distribution. Even though the redistributive effect of fiscal policy in China appears to be stronger than what we identify in the BRIC + panel, it is not large enough to compensate for the adverse impact of other influential factors.