The Redistributive Effect And Welfare Effect Of China’s Individual Income Tax

The thesis examines the redistributive effect and welfare effect of China’s individual income tax using relevant models and data with the method of empirical study.The thesis investigates the following aspects of the redistributive effect of individual income tax.First, this thesis implements overall analysis on the redistributive effect of individual income tax. Household data is used in estimating the MT index of the period from2000to2011. The results show slight increase in the redistributive effect. The MT index reflects the redistributive effect is very weak. When splitting horizontal equity and vertical equity, it finds that the horizontal equity effect is weak, and therefore vertical equity effect dominants the redistributive effect. Kakwani’s decomposition method is applied investigating the average tax rate and the progressivity. The result presents that the average tax rate has been generally increasing, but it’s negative correlated with the progressivity, which conforms the law that Wagstaff et al found.Second, the impact of individual income tax on residents’ income is investigated. The income shares of the80%of the survey pool improve after paying tax, in contrast to the high earners’. However, the low earners’ income share benefits up to0.01%.The moderate earners benefit most from tax’s redistribution. The high earners’shares decline0.5%, according for the weak redistributive effect.Third, given the classified tax system, the article measures the redistributive effect of the salary income tax、the production income tax and capital tax. It implies that the salary income tax plays a vital role in redistribution; the production income tax has been progressive since2006and the capital tax’s redistributive effect begins weaken since2005. Thereafter, the paper conducts a mathematical proof on the progressivity of the salary tax’s exemption and rate structure. From the results:increasing in the exemption enhances the salary tax’s progressivity, but the overall progressivity falls as the exemption increases to a certain level; the rate structure is progressive.The empirical study on the individual income tax’s welfare effect is based on a social welfare function constructed by Atkinson inequality index. The article measures the change of social welfare under the index of the aversion to inequality at0.5and2. Result shows:the income tax generates a tiny welfare loss due to its weak redistributive effect; the welfare loss caused by the salary income tax maintains growth; the production income tax engenders more welfare loss compared with salary income tax account for its regression; the capital tax produces a increasing welfare loss since2005. When the degree of social aversion to income inequality deepens, the income tax generates lesser welfare loss, whereas ameliorating the income distribution gains welfare benefits less than the welfare loss caused by income falling.The thesis is organized as follows:Section1contains a short description of research significance、literature review and innovation; Section2presents some theories on the redistributive effect of the individual income tax; Section3illustrates the income tax’s redistributive effect; Section4analyzes the income tax’s welfare effect; Section5concludes.