| Personal income tax is a direct taxation to personal income tax. Since the United Kingdom in 1799 the first modern, after more than two centuries of development and improvement, the personal income tax has become a modern-governmental means to organizing financial income, distribution income and stability of economic operation. It has become a major taxes in most developed countries and become more and more important in developing countries.Tax capacity is a widespread concern with the public issue. Because personal income tax is not only the result of functioning, but also the foundation of government functioning. But there has not been agreement on how much the revenue is and how much the revenue should be. Since reform and opening up in 1978, income gradually increasing and gap between rich and poor has become the foundation sources for the introduction of personal income tax. China introduced the personal income tax in September 1980, until 1994, formally established the modern personal income tax system. While personal income taxes are young, but it has been fast developing and filled with controversy. The current national personal income tax has become the fourth largest taxes based on the speed of development. Personal income tax is the fastest growing in the scale. In 1981, personal income tax summed to amount of 50 million yuan, less than 0.01% of total tax revenues and less than 0.001 percent of GDP to personal income tax. In 2007, personal income tax reached 318.498 billion yuan, which is 6.98 percent of tax revenues and 1.276 percent share of GDP, an average annual rate of as high as 50.64%. Extent from the controversial point of view, people, government and tax authorities have their own interests and aspirations of points. The interests of every citizen makes personal income tax become concerned about, and tax capacity makes personal income tax become the highest expectance of the government. Incomplete information makes personal income tax collection has become the most difficult problems. All parties need to have an opinion: how much capacity does personal income tax have? For China, how much personal income taxs are the most suitable? It is significant to study on personal income taxing capacity, reasonably definite of the scope of individual income tax functions and standardize personal income tax scale and structure of income.This article combines the normal analysis and empirical analysis. This article is divided into 8 chapters. Chapter 3-8 is the main body of this article. Chapter 3-4 is the basic theoretical analysis, while chapter 5-8 is China's personal income tax empirical analysis of tax capacity.Chapter 1 is Introduction. It introduces the main topics of this article, the key concepts, the structure of the framework and innovative points and shortcomings.Chapter 2 is Literature Review. It summarizes the concept of tax capacity and influence factors on personal income tax from the study in China and foreign countries and evaluates estimates and the optimal degree of tax capacity of personal income tax and the personal income tax system and the reform of collection and management model.Chapter 3 is the determinants and mechanism of tax capacity of personal income tax. In order to explore the determinable factors of personal income tax tax capacity, I will sort out the tax capacity of the personal income tax for the two levels: the first level is potential tax capacity. Macroeconomic and income distribution determine the sources of taxation, which with the tax system determines the potential personal income tax tax capacity. The second level is the reality of tax capacity, which is the personal income tax real income under the premise of the potential tax capacity being eventually. Taxpayer's behavior is the main points to decide the potential tax capacity into real tax capacity. Taxpayer's behavior is decided by collection and management mode, the taxpayer characteristics and social environment. Internal tax environment, collection and management models and the characteristics of the conditions of the taxpayer determine the behavior of taxpayers. External tax environment, social environment also impact taxpayer conduct from a cost perspective. Collection mode, the taxpayer characteristics and the external social environment determine the conversion rate from potential tax capacity to real income, formatting the real tax capacity at established the potential tax capacity. Chapter 4 is optimal personal income taxs capacity. In the personal income tax form, the government adjusts personal income tax by designing taxes system and setting up collection and management models. So, what is the best personal income tax tax capacity? The author first built the personal income tax function, in which losses of economic efficiency be the economic costs of personal income tax and government's costs be used as administration costs, both constituting a cost function, while improving the degree of social equity as benefit function.Then benefit function minusing cost function equals to total utility function. Personal income tax has been the best point of tax capacity when the total effectiveness of the personal income tax to achieve maximum value. Finally the author analyzed the reality of constraints how to affect the optimal, such as incomplete information, government revenues tend to maximize. This is the theoretical part of the completion of this article.Chapter 5 is China's current personal income tax capacity. It is the start of the empirical part. Based on chapter 3-4's theoretical foundation, I use detailed data in Shandong Province to carry out an empirical analysis of tax capacity. Because of the potential tax capacity are not easily to observation, the author first constructed a breakdown of the items. Estimating of personal income tax in the potential tax capacity of Shandong Province in 2000-2007 shows that China's potential tax capacity and the reality of tax capacity does not exist a large gap. However, the reality of tax capacity is less than the potential tax capacity, which is prevailing in various countries. Determining the capacity of standard of personal income tax should compare with optimal tax capacity. Well, the reality of China's personal income taxs to achieve the optimal capacity? The second part of this chapter will compare our country's actual situation and the normative analysis of optimal conditions for the earning power. Finally comes to China's personal income potential tax capacity are not low, but the real tax capacity is lower.Chapter 6 analyzes the defects of factors to the insufficiency of the real personal income tax tax capacity. Based on the conclusions of Chapter 5,I search a reality the reasons for the low tax capacity. It is found that quantifiable macroeconomic, the primary distribution of income, the tax system and collection and management mode have positive correlation with the real personal income taxs by cointegration model. Then, it analyzes the deficiencies of determinants of personal income tax and its impact on the real earning power of personal income tax.Chapter 7 is the policy proposals for enhance personal income tax tax capacity. It raised the policy recommendations to improve personal income tax tax capacity, including how to adjust macro-economic structure, norm income distribution, reform the individual income tax system, optimize the collection and management system and improve the external environment.The main innovative points are as follows.1. In the study object, it proposed "taxable to GDP-taxable personal income -taxable personal income. "Taxable personal income" is an extension of personal income on tax law and an extension of the "taxable of GDP". It shows that the income mastered by tax authorities is be able to the personal income tax and starting point of personal income tax. This study further clear sources of personal income tax to a key point.2. Finding distinguishes between potential and real tax capacity can help decompose and analyze of influencing factors of the tax capacity. Potential tax capacity is defined as the personal income tax tax capacity under a certain social pattern. Real tax capacity must eventually form the real incomes at certain potential tax capacity. There are three factors to determine the potential tax capacity, on this basis, there are also three main factors to determine the real tax capacity. The influencing factors can be quantified through cointegration test and error correction model to verify the causal relationship.3. Constructing of a personal income tax utility function solves the optimal of tax capacity of personal income tax by extremal method. By building personal income tax utility function including social cost-benefit function, the problem of the optimal tax capacity of personal income tax turn into question of the utility function for solving extremum problem.4. To innovate the measure to estimate potential personal income tax. For open economy, it takes tax items decomposition method, in accordance with the personal income tax items of statistical data will be broken down into wage income, operating income and property income, estimates of their classification. For the underground economy, it uses of the amended cash ratio, to make it more in line with China's financial status.5. Combining of practice, put forward a series of targeted policy recommendations. Firstly, put forward the introduction of third-party sources of information programs to solve information asymmetry between leviers and tax-payers. It improves the comprehensive treatment on taxation. Secondly, for sources of personal income, it raises the idea of macroeconomic adjustment from the relationship between the open economy and the underground economy and the taxable proportion of the open economy. It designs the normal order in the distribution of income, which is transparent and rule by law. Finally, it suggests a comprehensive improvement of personal income tax system to improve personal potential income tax capacity and how to optimize the collection and management measures and how to improve the social environment for real tax capacity.
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