The Design Of The Individual Income Tax Rate System In China

Individual income tax has always been the focus and difficulty of China’s fiscal reform.As the most significant indicator of the individual income tax system,the tax rate structure is always the core issue.However,after undergoing major reforms,China’s current individual income tax system is still criticized by people.The tax rate system is undoubtedly the main focus of all parties’ arguments.The purpose of the tax rate system reform is to adapt to the current economic and social development.At present,China has entered the new normal.One of its characteristics is the innovation driven by economic growth,and human capital is a direct factor that determines technological innovation.It is also an important component of a country’s social capital and is of great significance to the development of the national economy and society.With the deepening of the strategy of "revitalizing the country through science and education" and the strategy of "strengthening the country through the talents," China’s human capital stock is experiencing explosive growth.In the new economic normal,human capital will undoubtedly play a more important role.In this background,it is very necessary for us to rethink the following questions:First.what are the key factors determining the structure of China’s individual income tax rate under the new situation?Second,what are the main flaws for individual tax in China?Third,how does the individual income tax rate system in China affect the accumulation of human capital?Fourth,if we consider both income and human capital,how should China design a individual income tax rate system?To answer the above questions,this paper establishes a relatively complete logical framework.Chapter 1 is an introduction.It mainly introduces the background and significance of the research.It reviews the effects of labor income tax on human capital and the existing research in the optimal income tax,and expounds the three main theory and principal innovations.The U.S.individual income tax system has a long history,and the academic results are abundant.Therefore,chapter 2 comprehensively reviews the individual income tax system of the United States,especially the evolution of the tax rate system,and summarizes the economic and political reasons behind the previous reform of tax rates.In particular.this article focuses on the introduction of the Tax Reform Act 1986 in the United States.It specifically analyzes the background,causes,contents,effects and gains and losses of the United States in order to provide useful practical references for the reform in China.So what are the problems with our current tax system?Therefore,chapter 3 combs the history of China’s modern individual income tax system from its establishment to the present,and summarizes the main problems and causes of the current tax rate system in China.As a contrast,the last section of chapter 3 also briefly introduced the individual income tax rate system of the world’s major developed countries and some developing countries,and clarified the reform direction of individual income tax in China.After a detailed historical review and experience summaries.this paper begins with a modern economic theory to explore the theoretical basis,the influencing factors,and the scientific methods for designing the tax rate system.In chapter 4,this paper constructs an indefinite general equilibrium model containing the effect of "leaming-by-donging",analyzing the effect of tax rate on economic variables such as human capital accumulation.Then,through the panel regression model,combined with the data from 2002 to 2012,the research conclusions are verified,which provides theoretical support for the methods selection of marginal tax rate for labor income tax.Based on the previous three chapters,Chapter 5 improves Mirrlees basic model of Diamond(1998),Piketty,and Saez(2013)and incorporates human capital into the formula for calculating the optimal labor income tax rate.Then,51 875 micro-sample data provided by CHIP data are used to fit the distribution of pre-tax and post-tax labor income,human capital distribution,income elasticity and optimal marginal tax rate of labor income tax of urban residents in 1995,1999,2002,2007,2008 and 2013.At last,Chapter 6 summarizes the main conclusions of the study and proposes policy recommendations based on the previous studies.Through the above analysis,this paper draws the following conclusions:1.The United States tax reform has brought us three implications for a tax reform:first,to simplify the individual income tax rate system;second,not to rely entirely on theoretical economics to guide the real economy:third,the individual income tax rate in China should not be mainly aimed at adjusting the income distribution.2.There are three main problems in China’s current individual income tax rate system:First,the current individual income tax has a adjustment of little effect,because the current structure of China’s individual income tax system is not totally reasonable;and the key point to narrow the income gap relies on increasing the income of low-income groups rather than on individual income tax transter function.Second,the tax rate structure is out of line with the economic and social development.On one hand,there are many types of tax rates systems and they are completely independent of each other.T his feature leads to a lack of fairness in individual income taxes for income from different sources.On the other.institutional arrangements that classifying individual income tax rates and designing tax rate structures according to the income resources have been unable to adapt China’s current economic and social development.Finally,the individual income tax rate system does not consider human capital,while human capital is crucial to the economic development of our country.3.The theoretical model of the effect of labor income tax rate on human capital.shows that on the path of balanced growth,the marginal tax rate of labor income has a greater inhibitory effect on the accumulation of human capital than the incentive effect,but the former is weakened by learning-by-doing;after entering the steady state.the labor income margin The tax rate has nothing to do with the accumulation of human capital.It has a crowding-out effect on leisure and utility consumption and will increase investment in physical capital.Empirical research confirms the basic conclusions of the theoretical model.At this stage,the inerease of one percentage point in the average tax rate of personal income tax in China’s personal income tax can reduce the accumulation of human capital by about 1 percentage points,and this effect will increase without the learning-by-doing effect.It can be seen that in China’s current individual income tax system,the tax rate structure of labor income has a certain inhibitory effect on the accumulation of human capital.On the ground of sustained,stable and rapid economic development,proper adjustment of the tax structure will not only help stim ulate labor supply and human capital accumulation,but also increase fiscal revenue.4.For taxpayers in top 1%of income distribution,the top marginal tax rate is a negative number close to zero.For other residents,the optimal marginal tax rates present a "saddle-shaped" three-dimensional surface.There is an obvious "saddle point" in the figure.At the Saddle Points,human capital and labor income tax rates have hardly changed over time.The numbers is stable around 30 years and 12%respectively,while the incomes have been increasing year by year.When the labor income is right at the saddle point,and the human capital is the minimum or the m aximum,the marginal tax rate is the lowest,which is 0%.When the human capital is consistent with the saddle point,and the labor income is the current maximum,the marginal tax rate is the highest.In other words,before human capital reaches saddle point,the optimal tax rate increases with income and human capital.When human capital exceeds saddle point value,the optimal tax rate increases with income,but decreases with human capital.At this time,the optimal rate of tax increse is slower than before the saddle point.The innovations in this paper are mainly reflected in the following four aspects.1.From the perspective of human capital,the tax rate system design of individual income tax was reconsidered.Firstly,this paper integrates human capital and income into the Mirrlees optimal tax rate model,and derives the optimal marginal tax rate formula that includes these two factors,which lays a theoretical foundation for the simulation of the optimal marginal tax rate for labor income of urban residents in China.Second,the distribution function of human capital is estimated,which has not been found in the domestic literature.In this paper,the log-normal distribution,the gamma distribution,the Weibull distribution,the log-logistic distribution and the normal distribution are estimated for the human capital.It is concluded that our country’s human capital fits the log-logistic distribution best.Third,using the sum of the educational years and working years of 39,020 samples from the CHIP database as an agent variable for human capital provides a new idea for estimating the marginal tax rate of labor income tax.The reason is that there is no definite research result to confirm that the role of school education in human capital accumulation is more important than work experience,and vice versa;and the use of observable data to estimate the results has more policy implications.2.This paper introduces learning-by-doing effect into a dynamic general equilibrium model that describing the effect of individual income tax on human capital,and obtains conclusions with obvious economic significance that differ from existing studies.It is more realistic to introduce the learning-by-doing effect into the model,and it can better clarify the relationship between the labor income tax rate and the accumulation of human capital.The theoretical conclusions include:In the path of balanced growth,the marginal tax rate of labor income has a greater inhibitory effect on the accumulation of human capital than the incentive effect.but the former is weakened by learning-by-doing effect:after the economy enters into the stable state,the marginal tax rate of labor income has nothing to do with the accumulation of human capital.It has crowding out of leisure and utility consumption,and will increase physical capital investment.3.This paper systematically reviews the history of the reform of the individual income tax rate system in the United States from 1861 to 2017,which provides a useful reference for China’s individual tax reform.It divides the process of individual tax reform in the United States into six stages,and then describes the causes and backgrounds behind tax reform.It also summarizes the factors influencing the reform of the US individual income tax rate system,and calculates the average and marginal tax rates adopting 191 3-2013 US tax-related data.These results enlighten the reforms of indiv idual tax in China.4.That this paper combines wage income with business income,and uses a uniform method to estimate the marginal tax rate applicable to both,simplifies the tax system.It will not only streamlines the current relatively complicated individual incone tax rate structure and promote the transformation of the individual income tax into a combination mode with comprehensive and classified characteristics,but also solves the problem of tax inequity due to inconsistent tax rate systems.