An Analysis Of Indirect Tax’s Progressivity And Income Redistributive Effect In China

As the rapid growth of China’s economy, the gap between rich and poor has become increasingly fierce, income distribution has become a key topic. Therefore, how to effectively narrowing income distribution gap is of great importance. Personal income tax is generally considered to be the best to play this role due to its good progressivity, but we believe that the poor means of personal income tax and poor collection management has limited its effect. On the contrary, indirect taxes if rationally designed, can more effectively distribute income with its wide scope and high level of taxation, and good collection management. By analyzing the progressivity index, welfare indicators and redistributive indicators of VAT tax, sales tax and consumption tax, we find out the key affecting factors. On the basis of studying the redistribution mechanism and affecting factors, we redesign the indirect tax system, and measure its progressivity and income redistribution effect, so as to make policy recommendations for China’s new round of tax reform.The paper is organized as follows:Chapter One is an introduction; it describes research background and significance of the problem. We find out theoretical basis for redistributive effect of indirect tax as well as former study methods and conclusions by Chinese and foreign literature reviews, This chapter also describes research ideas, research methods, the innovations and defects of the paper. Chapter Two describes the microscopic mechanism of indirect tax to redistribute income, laying groundwork for subsequent data calculation of empirical analysis and design of tax reform. Chapter Three describes the progressivity and redistributive effect of China’s current indirect tax. By calculating the progressivity index, welfare indicators and redistributive indicators of value-added tax, sales tax, consumption tax, and revising income redistribution concept by taking tax raised transfer payment income into consideration, we analyze progressivity and redistributive effects of indirect taxes, and finally sum up the affecting factors. Chapter Four redesign the indirect tax system and measures its progressivity and redistributive effect based on the mechanism in Chapter Two and calculation methods in Chapter Three ChapterFive summarizes the affecting factors of indirect tax’s redistributive effect and make policy recommendations from the perspective of improving income redistribution effect of indirect tax reform.Main conclusions of this paper are as follows:Factors affecting indirect tax progressivity and redistributive effects can be summarized as the level of economic development, tax system, tax collection management and government transfer payment system. A more progressive tax system, higher level of the tax collection and administration and more efficient government transfer payments system, means better redistributive effect of indirect tax. For now, the VAT tax is regressive, sales tax and consumption tax is progressive. Under the new tax system we designed, VAT is less regressive, consumption tax is more progressive. The new indirect tax shows better progressivity and redistributive effect.The innovations of this paper are as follows:(1) In the study of indirect tax income redistribution effect, we calculate the amount of tax and the tax burden of different income groups and different commodity. We find out that the income elasticity of consumption is the main factor affecting progressivity of indirect tax.The same goods may have different income elasticity of consumption for different income groups. We should mainly tax on commodities that have large income elasticity of consumption to improve the progressivity of indirect tax; (2) Taking the raising revenue for transfer payment function of tax into consideration, we extend the range of redistribution function of tax. We adjust Sen.’s welfare function as a measure of income distribution index. The above study find that, under certain tax revenue, the greater total amount of transfer payments and more progressive tax structure means better redistributive indirect tax, while in the case of certain transfer payment policy, the more total tax revenue means better redistributive effect. (3) We redesign the indirect tax system and measure its progressivity and income redistribution effects.