Growing (Un)equal: Fiscal Policy and Income Inequality in China and BRIC+

This paper investigates the empirical characteristics of income inequality in China and a panelof BRIC+ countries over the period 1980–2013, with a focus on the redistributive contributionof fiscal policy. Using instrumental variable techniques to deal with potential endogeneity, wefind evidence supporting the hypothesis of the existence of a Kuznets curve—an inverted Ushapedrelationship between income inequality and economic development—in China and thepanel of BRIC+ countries. In the case of China, the empirical results indicate that governmentspending and taxation have opposing effects on income inequality. While governmentspending appears to have a worsening impact, taxation improves income distribution. Eventhough the redistributive effect of fiscal policy in China appears to be stronger than what weidentify in the BRIC+ panel, it is not large enough to compensate for the adverse impact ofother influential factors.