Income inequality is high in the PRC for a country approaching high income status. Wealth inequality is much starker today than two decades ago and differences in gross regional product per capita between provinces remain sizeable. Limited redistribution via the tax and transfer system contribute to these differences. After analyzing trends in inequality and their drivers, this paper identifies reform needs in the tax system and central-local government fiscal relations to reduce inequality by enhancing redistribution mechanisms. Starting from the current tax system and fiscal relations, the paper develops a set of policy recommendations for consistent reforms.

JEL codes: H11, H21, H24, H71, H72, H75, D63