The research paper “How Tax Reductions Affect Income Distribution Among Residents - Evidence from Monthly Personal Income Tax Data” by researchers Lu Yuanping, Zhao Ying from IIDPF was published in the 10th issue 2023 of Journal of Financial Research.
Abstract
The initial intention of China's personal income tax system is to regulate the distribution of residents’ income, primarily through adjusting the basic expenses deduction standard to change the degree of tax progression, thereby affecting individual wage and salary tax burdens and the macro income distribution status. To address the difficulties in using monthly data for analysis, assumptions about income distribution that deviate from reality, and the accuracy of tax data in existing research, this paper used monthly accounting data from the Urban Household Survey in China from 2010 to 2012, coupled with the policy adjustment in 2011 of the personal income tax basic expenses deduction standard from 2,000 yuan to 3,500 yuan, and built an individual-year-month Difference-in-Differences (DID) model to assess how the adjustment of the personal income tax basic expenses deduction standard affects individual wage and salary tax burdens and macro income distribution. The results indicate: (1) The personal income tax reform led to a reduction of about 36.31% in individual tax burdens, with individuals earning monthly incomes between 2,000 and 16,100 yuan being the most affected by the adjustment of the basic expenses deduction standard, while those with higher incomes were more affected by tax bracket adjustments; (2) Although the tax reform reduced personal income tax burdens, its regulatory effect on social income distribution at the macro level has not only not strengthened but has somewhat weakened; (3) Post-reform, the increase in individual after-tax income has a limited impact on labor supply, but it does increase improvement-type consumption in the basic consumption structure of low-income groups and also promotes service consumption expenditure among high-income groups. The conclusions of this paper suggest that future reforms of the personal income tax should consider both the positive effects of raising the basic expenses deduction standard to reduce individual tax burdens and the potential risks of lowering tax progressivity and exacerbating the pattern of income distribution.
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Journal of Financial Research (monthly), established in 1980, is supervised by the People's Bank of China and sponsored by the China Society for Finance and Banking. It is a formal publication distributed both in China and internationally. Journal of Financial Research (monthly) has become an authoritative academic publication in China, holding a significant position in the research of financial theory and practical examination. It is rooted in the practice of financial reform and development, leading the forefront of academic, policy-oriented, and practical research. In 2005, Journal of Financial Research was honored with the highest government award in China's news and publishing industry, the Third National Journal Award. Its main columns include Commentary, Theoretical Garden, Global Finance, International Banking, Business and Management, Overseas Literature, Elite Forum on Chinese Economy, Financial Observations, Financial Technology, and Financial Markets, etc.