Abstract: This paper presents a model by which non-median voters decide fiscal redistribution. The model reveals that the rich will use its own capital to produce the GDP that the government expects. Thus, the rich negotiate with the government about the amount of tax exemption, resulting in the rich paying less tax. The median voters, in order to prevent the government from being captured, set the tax rate to a low enough level. Therefore, government uses transfer payments to attract the rich to invest in the production of GDP and the result is that the rich get more transfer payments. Empirical analysis shows that Chinese government has provided capital tax incentives and financial subsidies so as to attract capital, which makes high earners gain more and leads to even more severe income inequality. This paper suggests that the redistribution program should be supervised and the transparency of redistribution get improved so that the redistribution will be in accordance with the principle of fairness and justice.
Keywords: Income Inequality, Fiscal Redistribution, Government Capture
source:Finance & Trade Economics ,No3,2014