On The Progressivity Of Personal Income Tax With Redistributive Effects

Personal income tax is one of the main instruments for achieving a government's income redistribution objectives. It is levied on personal income directly and usually progressive so that the poorest members of society pay little or no tax, while the rich make much larger contributions. The degree of personal income tax progressivity determines the effect of redistribution. In China personal income tax is weak in regulating income differences, so it is necessary for us to study progressivity.This paper mainly talks about two questions, one is the optimal progressivty of income tax, the other is how to get the needed progressivty.Progressivity allows the government to redistribute from rich to poor, but high degree of income tax progressivity harms economic growth and has efficiency costs. The paper introduces several classical models of the optimal income taxation theory that studies the equity-efficiency trade-off. Combining with the situation of our country some conclusions about China can be reached.The actual progressivity of personal income tax is determined by both the provisions of the tax code and individual efforts to legally save of illegally evade taxes. In combination, the progressivity is determined by tax rate schedule, tax allowances, tax deductions, tax credits and tax evasion. After explaining these five factors one by one, we build on a Gini-based decomposition formula developed by Pf?hler to explore the roles of tax rate schedule, tax allowances, deductions, tax credits and tax evasion in determining the overall progressivity. Comparing with these five factors in personal income tax law of China, we propose some suggestions to the forthcoming reform of personal income tax.