China's Income Tax Reform and Its Impacts

Personal income tax is a very small portion of China's total tax revenue, yet enterprises pay more than 90 percent of the country's taxes. This paper proposes a reform of personal income tax and suggests that shifting some of the tax burden from producers to consumers. Increase employee's wage payment by a certain amount. To keep the enterprises in the same financial situation, the government should reduce the corporation's direct taxes or valueadded tax by the same amount. Increase the personal income tax rate and keep household at the same real income level as before the tax reform. Using a newly designed recursive dynamic computable general equilibrium model (CGE) that differentiates seven productive sector by ownership and 22 labour groups by age and gender benchmarked to a year 2000 Social Accounting Matrix (SAM) of China, this paper quantitatively evaluates the differences between taxing consumers and producers. The simulation results show that the proposed reform may significantly improve real economic growth. Meanwhile, the new tax system may improve the income equality of the society, household savings, investment and government tax revenue without sacrificing society's standard of living.