Perfecting China 's Individual Income Tax System

The current individual income tax system in China was established in1993. Owing to low levels of economic development in China and low coverage of individual income tax, it did not draw much attention in the last century. Nevertheless, as China’s economy booms, growing public concern is given to individual income tax. Especially in recent years, despite of the frequent adjustment in individual income tax in China, voice is still struggling to quell the calls for reform of the individual income tax system. According to the needs of China’s economic and social development, a thorough improvement of the individual income tax system has become an inevitable part of the tax reform in China.However, what should be the principles and demands of reasonable individual income tax system? Many scholars have responded to this in the history. The theory varied with schools and times. From these diversified views, we can conclude that individual income tax can raise revenue, redistribute individual income, stabilize economy and avoid price distortion. In respect of the principle of individual income tax, it should meet the requirement of being fair, efficient, stable, clear, and cost effective. To apply the principle of fair, an individual income tax consisting of comprehensive tax base, integrated tax system, and excessively progressive tax rate will be preference, which is also what most foreign countries adopted.On the contrary, Chinese individual tax uses category income tax system, with individual as the tax unit, which is away from the principle of fairness. In addition, the individual tax only accounts a minor part of tax revenue. Accompanied with the insufficient development of society and economy, individual income tax has failed to effectively regulate income distribution in China.Lastly, we analyzed the effect the individual income tax on taxpayers. Theoretically, taxation can alter the behavior on taxpayers. To find out the exact impact the shift of individual income tax on taxpayers, we used the data from China Health and Nutrition Survey to compute the reactions from taxpayers.The parameter includes the compensated and uncompensated elasticities of taxable income. Results showed an overall a compensated elasticity of0.178and an income effect of1.01, the latter of which is contrary to the theoretical prediction. High earners tax adjustment to make a larger correction, with a high uncompensated elasticity of1.369. Yet state-owned and collective enterprises and institutions showed a low level of behavioral effects. Therefore, in our view, to perfect China’s individual income system, we should impose comprehensive income tax system, extend the individual income tax base and lower tax rates.