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Evaluate Solutions to the Trade off Between Equity and Efficiency in China's Economic Development

Autor:   •  November 9, 2013  •  Research Paper  •  1,145 Words (5 Pages)  •  955 Views

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The economy in China has developed rapidly since 1978 with the policy of “open door reform”. However, one of the most important tasks for China is to balance equity and efficiency. In this essay, equity means distributing services or funds fairly amongst social members and efficiency expresses the wealth created with limited labour and time. The imbalance of these two elements is reflected in the widening gap between the poor and the rich and the inequity. For the purpose of this essay, three solutions will be scrutinised: improving the tax system, funding in education and encouraging migration. Even if each solution has its drawbacks, they can still rebalance equity and efficiency. These solutions will be evaluated using the criteria of time, cost and effectiveness.

It is essential that tax systems should be enhanced by the central government, especially income tax. This can be achieved by increasing the minimum income tax level or decreasing income tax rate. In such a case, personal consumption can be stimulated within the nation, which may boost economic development (Lardy, 2006). Feng et al. (1999) state that poor people tend to have more money to invest more in human capital with low taxations. Raising income taxes for the relatively high income class is another way to improve the fiscal policy. With more money collected from taxations to reallocate, it may encourage the investment in education from the poor as well (Feng et al., 1999). Both of them are not just beneficial for China in the short term but long term with respects to investing in education (Gupta et al., 1999) as well as solving the problem of income disparity.

While it is obvious that income tax reform brings a number of benefits, the reduction of income tax is hard to practise in China. This may be due to the reduction in income tax constitutes a small proportion of GDP (Lardy, 2006). Hence, it is ineffective to decrease income taxation because it cannot stimulate considerable personal consumption. In order to balance the budget, the Chinese government are likely to increase expenditure, which is costly (ibid.). Furthermore, it is estimated that the highest income tax rate is nearly 45 percent, thus, it is infeasible for raising the personal income tax rate of high-income class (Lin, 2008). A further difficulty in China is that weak administration and enforcement are barriers for balancing equity (Gupta et al., 1999).

Having improved income tax system, fairer redistribution is necessary for reducing inequity in China. This involves ensuring enough capital can be used to support, as mentioned above, basic education in rural areas, such as cutting the tuition fees of primary school for poor people. This has been shown to work in many cases. A fairer allocation of social welfare can enhancing social cohesion and avoids political instability. It seems positive for nation security (Feng et al., 1999). In addition, education can satisfy

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