Environmental Taxation and Regional Inequality in China

Abstract:

In response to the severe environmental problems, China implemented the Environmental Protection Tax Law in early 2018. Although the tax is levied based on producers, the taxation burden can be transferred to consumers through products’ increasing price. Based on the MRIO model and the official calculation method of environmental tax, our study quantifies the taxation induced by household consumption and the tax intensity of residents from both provincial and city-based perspectives. The national tax revenue due to household consumption is estimated to be 32 billion Yuan in 2012, only one seventh of the related economic loss from premature mortality. Due to China’s regional imbalanced economic development and pollution transfer caused by inter-regional trade, our study reveals that tax intensities in different regions are unmatched with their affluence levels under current environmental tax, which aggravates regional inequalities. We further analyze some scenarios of alternative levy mechanisms. If each province or city imposes taxes to products it consumes (rather than produces, as in the current mechanism), with the tax rate linearly dependent on its per capita consumption expenditure, this would effectively reduce inter-provincial and inter-city inequality. Moreover, if tax revenues could be used to support emission control, such as installing suites of ULE technology in the power and industrial sectors nationally, regional economic inequality would be further alleviated while improving the environment and reducing tax payers’ economic burden.