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Personal Income Tax Reform in China in 2018 and Its Impact on Income Distribution

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  • Peng Zhan
  • Shi Li
  • Xiaojing Xu

Abstract

In the context of personal income tax (PIT) reform in China in 2018, this paper examines some of the major issues of concern regarding the reform and income distribution. Using the China Personal Income Tax Micro‐simulation model, the paper compares the differences between the 2011 and 2018 PIT systems, and finds that residents relying on different income sources may face a large degree of real tax rate change. Once the tax system is altered to PIT 2018, the coverage of PIT for wage earners will decrease from 46.9 to 23.4 percent, the income redistributive effect will drop from 1.95 to 1.22 percent and the PIT's role in fiscal revenue will also be negatively affected. Nevertheless, if individual income continues to grow, the share of PIT in fiscal revenue is expected to return to the 2018 level in 2022, but its income redistribution function is difficult to recover in the short term. The paper finds that the effect of PIT on income distribution depends on the tax structure. Gradual transition to an “entirely comprehensive” tax system when conditions are appropriate will achieve better income redistribution results at a lower average tax rate.

Suggested Citation

  • Peng Zhan & Shi Li & Xiaojing Xu, 2019. "Personal Income Tax Reform in China in 2018 and Its Impact on Income Distribution," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 27(3), pages 25-48, May.
    • Handle: RePEc:bla:chinae:v:27:y:2019:i:3:p:25-48
    DOI: 10.1111/cwe.12279
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    Cited by:

    1. Michal Krajňák, 2020. "Je daň z příjmů fyzických osob ze závislé činnosti v České republice progresivní? [Is Personal Income Tax on Dependent Activity in the Czech Republic Progressive?]," Politická ekonomie, Prague University of Economics and Business, vol. 2020(5), pages 534-553.
    2. Yangyang Shen & Shi Li & Xiaobing Wang, 2021. "Impacts of Two Tax Reforms on Inequality and Welfare in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 29(3), pages 104-134, May.
    3. Joseph Teyu Chou & Chien-Hao Fu, 2022. "Which Families Benefited from the Recent Personal Income Tax Reform in Taiwan: Evidence from the Administrative Data," Journal of Family and Economic Issues, Springer, vol. 43(3), pages 433-451, September.
    4. Vanesa Jorda & Jose M. Alonso, 2020. "What works to mitigate and reduce relative (and absolute) inequality?: A systematic review," WIDER Working Paper Series wp-2020-152, World Institute for Development Economic Research (UNU-WIDER).
    5. Liu, Guanchun & Liu, Hangjuan & Liu, Yuanyuan & Yang, Jinyu & Zhang, Yanren, 2024. "Personal income tax and corporate innovation: The key role of inventors’ financial incentives," Journal of Banking & Finance, Elsevier, vol. 164(C).
    6. Zhang, Xiekui & Huang, Yihan & Fenglan Wei,, 2024. "The incentive effects of the macro tax burden on economic growth: A negative or positive incentive effect? Analysis based on panel data," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 128-147.

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