The Income Redistribution Effect Of China's Personal Income Tax: What The Micro-Data Say

TitleThe Income Redistribution Effect Of China's Personal Income Tax: What The Micro-Data Say
Publication TypeJournal Article
Year of Publication2014
AuthorsMa, Guangrong, Xu, Jianwei, and Li, Shi
JournalContemporary Economic Policy
Date Published2014/08
KeywordsChina, Income Redistribution Effect, Personal Income Tax, Progressivity, Tax Burden
Abstract

This paper uses continuous micro-level data to investigate the income redistribution effect of the personal income tax (PIT) in China beginning in 1997. We find that the average tax rate plays a larger role in determining the income redistribution effect of PIT than tax progressivity does. Although tax progressivity decreased as a result of rising personal incomes and a constant PIT policy prior to 2005, the income redistribution effect of the PIT improved as a result of the higher average tax rate. The tax reform beginning in 2006 increased tax progressivity but decreased the average tax rate, thereby weakening the income redistribution effect of the PIT. Further analysis indicates that the middle-income group was the only net loser before 2005, but it benefited from the PIT policy reform. A cross-country comparison shows that China has a lower PIT burden and higher progressivity than developed countries; in fact, China’s levels of progressivity and tax burden are similar to those of Latin American countries.

URLhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2180220