Environmental Taxation and Regional Inequality in China

Abstract In order to combat environmental pollution, China enacted the Environmental Protection Tax Law in early 2018. Yet the impacts of the environmental tax on individual regions with different socioeconomic statuses, which are crucial for social justice and public acceptance, remain unclear. Based on a Multi-Regional Input-Output (MRIO) Table and a nationally regulated tax payment calculation method, this study analyzes the distributional impacts of the environmental tax due to each province’s consumption from both inter-provincial and rural-urban aspects. The national tax revenue based on the current levy mechanism is estimated to be only one seventh of the economic loss from premature mortality caused by ambient particulate matter (PM2.5). The taxation may slightly alleviate urban-rural inequality but may not be helpful with reducing inter-provincial inequality. We further analyze two alternative levy mechanisms. If each province 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 moderately increase the national tax revenue and effectively reduce inter-provincial inequality. To better compensate for the economic cost of air pollution and reduce regional inequality, it would be beneficial to increase the tax rate nationwide and implement a levy mechanism based on provincially differentiated levels of consumption and economic status.