The Effects Of The Personal Income Tax Reforms On Distribution And Consumption Of China In2008and2011

With the deepening of economic reform, Chinese residents’ income level and life qualityhas been significantly improved. With the gap widening between rich and poor has becomeChina’s major risks to social harmony and stability. Meanwhile, consumption as one of thecentral elements to promote economic growth is to ensure the smooth running of the economy.Persistently low consumption rate is not conducive to a sound mechanism for economicgrowth and achieve sustainable economic development. How to use effective policyinstruments to adjust income distribution and expand consumer demand reasonably have beenclosely watched by the public. In recent years, a series of personal income tax reform of fullyadjusting the income and expanding the consumption have been carried out. However, takinginto account the various content of reforms and the limited level of administration, thereforms has been challenged whether the goals achieved by the community. In this paper, thedistribution effect and the consumption effect of the2008and2011personal income taxreforms have been studied empirically, with testing the effectiveness of the tax reforms in2008-2012.In terms of income distribution effects, combining the fact that the income gap iswidening with the model of progressivity decomposition, the paper argues that personalincome tax generally played a positive role in regulating income distribution, however theactual effect is very weak. With the introduction of the income distribution function, the taxevasion factor has been brought into an empirical model. We analysis the direction and theextent of the distribution effect of the tax factors’ adjustment. Conclusions include theexemption raised in2008reduced the progressivity of the tax system and the average tax rate,thus that severely inhibit individual income redistribution function; the overall reform of2011weakened the redistributive effect of personal income tax, because it promoted theprogressivity of taxation on one hand and greatly reduced the average tax rate on the otherhand. Meanwhile, tax evasion makes changes of the uncertainty in the tax systemprogressivity larger.In terms of consumption effect, this article reviewed the theory that combining taxpolicies with consumer demand. On the basis of explaining the mechanism of the consumption effect of personal income tax, we established the short-term fluctuationsequation in consumer demand with various influencing factors in order to quantitativelyanalysis of the actual effect of the reform on consumer demand. This paper argues thatalthough these two tax cuts increased disposable income of residents not much, however thetax reforms led to the deterioration of income distribution to some extent that inhibited theconsumption demand. The ultimately resulting incremental of spending is about0.15percentage and0.57percentage, thus the stimulating effect on consumption is not significant.Based on the empirical analysis of the distribution and the consumption effect, the paperproposed policy recommendations that accelerating the transformation of levy system,improving the tax system design, strengthening efforts to tax administration, innovating thepersonal income tax system and other tax system.