A lot of people seem to be under the impression that the Chinese government under Xi Jinping is dedicated to improving the welfare state and reducing inequality. This idea has always mystified me a bit, since there doesn’t seem to be much evidence for it in policy or even in rhetoric (here, for example, is Xi denouncing “welfarism” for making people lazy). Now we have an analysis of reforms to the individual income tax that took place in 2018: Mohan Dai et al., “The Redistribution Effect of China’s Individual Income Tax: A Comparison of Horizontal Equity and Vertical Equity,” Journal of the Asia Pacific Economy, May 26, 2025, 1–22, https://doi.org/10.1080/13547860.2025.2508183.
The authors find that while the reforms modestly increased horizontal equity (the principle that people in similar economic circumstances should be taxed similarly), they decreased vertical equity (the principle that the rich should be taxed more than the poor), for an overall increase in inequality:
[W]hile the 2018 IIT reform enhanced horizontal equity through standardized deductions and expanded exemptions, it significantly weakened vertical equity due to reduced average tax rates and progressivity. The shift to comprehensive income taxation exacerbated this trend by disproportionately benefiting high-income groups through labor remuneration tax cuts. Special additional deductions, though well-intentioned, exhibited regressive outcomes as higher-income households claimed larger absolute benefits.
What were the mechanisms behind this result?
First, attenuated redistribution capacity. The post-tax Gini coefficient increased by 1.34% under the new regime than under the old regime (0.50038 vs. 0.49380), despite remaining below the pre-tax level (0.51530). This weakened redistribution effect is quantified by a 30.6% decline in the MT index (0.01492 vs. 0.02150).
Second, horizontal-vertical equity trade-off. Horizontal equity modestly improved (?0.00456 vs. ?0.00488), reflecting reduced tax burden disparities among taxpayers with equivalent incomes. However, this gain was eclipsed by a 26.2% contraction in vertical equity (0.01948 vs. 0.02639). This is driven by two mechanisms: a 17.8% reduction in the average tax rate (9.1% vs. 11.1%) on the one hand; and diminished progressivity, as captured by the Kakwani index (0.195 vs. 0.212) on the other hand.
Third, structural drivers of regressivity. The shift to comprehensive taxation eliminated tax arbitrage opportunities across income categories, enhancing horizontal fairness. However, bracket restructuring – expanding lower-rate thresholds (3%, 10%, 20%) while retaining high marginal rates (30%–45%) – redirected tax savings disproportionately to upper-middle incomes. Concurrently, raising the standard exemption exempted low-income households but failed to counterbalance the regressive features of special allowances. This delivered larger absolute benefits to high earners due to their higher claim rates and deductible expenses (e.g. mortgage interest, elite education).
I’m not a tax expert, but it seems like a careful piece of work. And props to Professor Shen Guangjun, who appears to have supervised the project but did not take sole author credit; the two undergrads and the one grad student who worked on it are listed with him as co-authors in simple alphabetic order.