Distributional And Financial Effects Of Personal Income Tax Reform

Personal income tax is the important method for a modern government to organize the revenue, fairly distribute the social wealth, regulate the operation of the economy, and become one of the main tax types in many countries. With the rapid development of economy, personal income levels have been greatly increased, and people's income gap is growing even bigger. Personal income tax reform is a must. In 2005, the 18th plenary session of the 10th NPC Standing Committee adopted , providing that since January 1, 2006, the standard deductions from wages and salaries will cost 800 yuan per month to 1,600 yuan a month, expected to effectively narrow the income gap. However, there is a big controversy from all sectors of the society to the effects of the current tax reform. The main reason is lack of a scientific policy evaluation tool. The design and evaluation of the tax system needs the support of macroeconomic models, but the traditional macroeconomic models (the macro-econometrical model and computable general equilibrium model) have adopted the typical individual analysis mode or aggregate analysis mode, which can't be used to analyze the distribution effect of the income tax on different individual income and the effect of individual income changes on a country' revenue.In 1957, Orcutt of the United States had proposed an effective method called micro-simulation to solve the problem. Since 1980s, with the rapid development of the computer technology and the government's progressive micro data, many Western economists have developed micro-simulation models which are suitable for their own national conditions. The models have been used to analyze the individual income distribution effect and financial effect of the tax system, transfer payment system, old-age insurance system and a social relief system. Many micro-simulation models have become the essential tools to design and evaluate the public policies in Western countries. In 1993, 1997 and 1998, three international academic conferences on micro-simulation and policies analysis had been hold, that showed using micro-simulation to analyze public policies had become hotter and hotter. And it will become an effective tool to develop and evaluate the public policies.This paper provides a static micro-simulation model to analyze the effects of the personal income tax reform. This model is based on panel data, and it supposes that the demography character, economic meaning and other attributes of the sample are invariable. The model is made up of the following parts:(1)Income correction module. This is used to correct the micro income data, in order to keep the consistency between the micro income data and the regional income data.(2)Income updating module is used to update the income micro data to the target year.(3)Implementation module of the tax system simulates the individual disposable income in target year.(4)Estimating module of the tax effects. That is used to estimate the related policies indexes from 2006 to 2007. Followed by the implementations of these modules, we can evaluate the effects of the tax reform--financial effect, income inequality and the equity of the tax burden and soWe carry out the model by applying Visual Foxpro, the whole simulation process is based on a database. The database includes micro and macro databases, the micro database stores a place's panel data, including household database and individual database. Each record in the household database is on behalf of a family's population structure and income information; each record in the individual database represents an individual state, including employment status, the profession belonging to, social security situation, personal income and other features. The macro database stores the time series data of macroeconomic variables, including wage increases in various sectors, tax level of regional economy, the payment level and coverage of social securities. The run of the simulation model will change the individual and household income states, and naturally accumulating to the tax changes of regional economy.We do some simulation experiments of individual income tax policies by micro-data in Jilin province, which is used to analyze the distributional and financial effects of the personal income tax reform. The paper has began with the current income distribution situation of Jilin Province in 2006, and then done a comparative analysis between before and after the personal income tax i v reform, we have also introduced regional economic problems to the effects study of personal income tax reform.Based on the technology, we will update the micro data to 2007, using simulating analysis to get the short-term forecast of the personal income tax reform effects. The results show: although new personal income tax system cannot narrow income inequality and reduces fiscal income, but tax justice can be accomplishing. At the present stage in our country, to strengthen supervision is a more effective way to narrow the income gap. In addition, the social protection for the low-income groups is more effective than a simple tax adjustment.These researches expand the application of the micro-simulation model in macroscopic economy, and make the foundation for the development and application of the micro-simulation model in the future.