Social Sciences in China (Chinese Edition)

No.6, 2013

Has the Personal Income Tax Improved China’s Income Distribution? A Dynamic Assessment of the 1997-2011 Micro Data

(Abstract)

Xu Jianwei, Ma Guangrong and Li Shi

This study uses the micro household survey data to examine the income distribution effects of China’s personal income tax since 1997. The results show that in 1997-2005 when the tax system remained unchanged and the residents’ income went up, the income tax progressivity showed a downward tendency over the years. However, due to the increase of average effective tax rates (AETRs), the distribution effects of personal income tax continued to expand. And in 2006-2011 when the tax system reform was underway, the successive increases in the tax exemption limit and hierarchical adjustments of tax rates improved the income tax progressivity, while reducing the average effective tax rates and worsening the distribution effects of personal income tax. Different groups of people had drastically different tax payment shares and average tax burdens, such that the middle-income class became the main undertakers of increased personal income tax revenue during the period when the tax system remains unchanged, as well as the main beneficiaries from reduced tax burden due to the increase in the tax exemption limit. As compared with developed countries, China has a higher personal tax progressivity and a lower average tax rate, which have led to a limited role of personal income tax policies in the regulation of income distribution. This has something to do with the residents’ income level and the government’s tax capacity. Therefore, there is no once-and-for-all solution to the personal income tax reform. For now, it is imperative for us to increase the tax collection capacity while lowering the turnover tax rates.