The Deduction Of Individual Income Tax:International Comparisons And Case Study Of China

In the process of improving the individual income tax system, everyone pays more attention in expense deduction, because it is one of the most visible elements of the system. Considering with the low level of tax collection and management, we deducted with a unified standards in1980, when personal income tax system was initially established in China. After decades of development, the capacity of tax collection and management has been greatly improved, but there is no substantial progress in the reform of deduction, while many foreign countries have already formed a detailed and comprehensive expense deduction system. It will not only compromise the fairness and reasonableness of the expense deduction, but also restrict the income distribution function of individual income tax, if we continue to apply a unified expense deduction, though we can save administration costs and taxpayer’s tax costs. Therefore, the reform of expense deduction is imperative.Based on this realistic background, this paper classifies expense deduction according to functional orientation and introduces the different types of deductions. Given the practice of foreign countries, this thesis introduces income-unrelated fixed deductions and income-unrelated fixed deductions, and analyzes the livelihood deduction and it’s adjustment of the United Kingdom, the United States and Taiwan. Then the result shows that their adjustments of livelihoods deduction are related to the inflation index, while it is irrelevant to per capita GDP, per capita income, per capita consumption expenditure and consumer spending burden by each worker. This paper also summarizes special deductions of foreign countries, and describes a method of deduction for work-related expenses, which combining standard deduction with itemized deduction, and some special deductions for spouses, children, the elderly, disabled, etc.. Then this essay introduces the reform process of China’s expense deduction, and presents some shortcomings of China’s deduction in terms of formulating and adjusting livelihoods deductions, setting projects of deductions for work-related expenses and special deductions. Finally, this paper proposes some policy suggestions, such as using household registration system to deduct household expenses, introducing adjustment mechanism of livelihood deduction, adopting income-unrelated fixed deductions, normalizing the deductions for work-related expenses by public reimbursement system, setting interest on housing loan deduction and other special deductions, etc.