A Study On The Effects Of China's Individual Income Tax On Income Distribution

With the high development of China's economy in recent years, the income gap between residents is widening, the Gini coefficient fluctuated from 0.46 to 0.49. Though it has declined since 2009, it was still higher than the international guard lines. The moderate income gap can stimulate the competition and promote the growth of economy, but once the gap is beyond the reasonable range, it will cause the warp of the economy,consumption and investment structure, which will result in the non-sustainability of the economy.Since the individual income tax was imposed in 1980, the tax revenue has increased year by year, its proportion in the total tax has improved significantly, it became the forth largest tax in 2011. On one hand, the individual income tax can meet the needs of macroeconomic regulation by increasing the fiscal revenue. On the other hand, according to the principle of capacity burden, it levies heavier taxation on high earners and lighter taxation on low earners in the second stage of income distribution, which can narrow the income gap.This article has calculated the Gini coefficient before and after the individual tax between 1989 and 2013. The conclusion is that the individual tax has reverse adjustment in 1989-2000 and 2010-2013. Although it has played a positive role in 2001-2009, the effect is very weak. This paper has built a time series econometric model to investigate the effect of low, middle and high earner groups to the after-tax Gini coefficient. The result has shown that the disposable income and average tax of the middle income group and the high income group played an important role in the after-tax Gini coefficient. Increasing the disposable revenue of the middle income group and the average tax rate of high income group are effective measures to narrow the income gap. Based on this and learn the perfect individual income tax system in western developed countries, the paper has put forward some suggestions on individual personal income reform and improvement in theview of the tax system and management.