Recently, two researchers Lu Yuanping and Zhao Ying from the Base and their collaborator have published their research achievement "How Do Tax Cuts Affect China's Income Distribution? Evidence from Monthly Personal Income Tax Data" in the 10th issue 2023 of the authoritative journal, Journal of Financial Research.
Abstract: China's individual income tax system is designed to regulate the distribution of residents' income, and the main means is to adjust the basic expense deduction standard to change the degree of tax progressiveness and then affect the individual wage and salary tax burden as well as macro-income distribution. To solve the problems in existing researches such as difficulty in using monthly data for analysis, deviation of income distribution assumptions from reality and accuracy of taxation data, this paper uses monthly bookkeeping data from China's Urban Household Survey (UHS) for the period from 2010 to 2012, and the 2011 policy that increased the basic personal income tax deduction from RMB 2,000 to RMB 3,500, and constructs an individual-year-month difference-in-differences (DID) model to assess how the adjustment of deduction affects both the tax burden on individuals' salaries and wages at the micro level and the macro-level income distribution. The findings showed that: (i) The reform of individual income tax has reduced individuals' tax burden by about 36.31%, in which individuals with a monthly income of RMB from 2,000 to 16,100 are affected most by the adjustment of the basic expense deduction standard, and groups with higher incomes are affected more by the adjustment of tax grades; (ii) Although the tax reform has reduced the burden of individual income tax, the adjustment effect of individual income tax on social income distribution has not been strengthened but has been weakened to a certain extent; (iii) The increase of individual after-tax income after tax reform has a limited impact on labor supply, but it increases the improved consumption in the basic consumption structure of low-income groups and also promotes the service consumption expenditure of high-income groups. The conclusion of this paper shows that the future reform of individual income tax should not only take into account the positive effect of improving the basic expense deduction standard and reducing individual tax burden, but also pay attention to the potential risk of reducing tax progressiveness and worsening income distribution patterns.
Introduction: The Journal of Financial Research (monthly) was founded in 1980. It is an official publication supervised by the People’s Bank of China (PBOC) and sponsored by China Society for Finance & Banking, with public distribution at home and abroad. It has become an authoritative academic journal integrating theory, policy and practice that occupies an important position in China's financial theoretical research and practical investigation, is rooted in the practice of financial reform and development, and leads the academic frontier. In 2005, The Journal of Financial Research won the Third National Award for Periodicals, the highest government award in China's press and publication industry. Its main columns include Commentary, Theoretical Garden, Global Finance, International Banking, Operation and Management, Overseas Literature, Forum on China's Economy, Financial Observation, Financial Technology, Financial Market, etc.