The Economic Analysis Of The Individual Income Tax Exemption In China

Individual income tax is one of the most important taxes in China; in 2013 individual income tax revenue accounted for 5.91% of the national tax revenue, and individual income tax has a great effect on adjusting income distribution gap. Since a new round of reform of the individual income tax in 2011, income tax problems especially the tax exemption become a hot issue between scholars once again. Because the tax exemption of the individual income tax is the basis of paying taxes, reasonable tax exemption have contributed to make tax burden fairer, promotes economic development, reduces the financial burden and regulates the income gap. Although it has made many adjustments for the tax exemption standard in our country, it did not fundamentally solve the problem. The increase of tax exemption of this round reflects the government concerning for the interests of taxpayers; it also reflects individual income tax exemption system is not perfect at present in our country. The current tax exemption standard has many problems; it doesn’t take into account about the differences between regions, the family burden and inflation. It is necessary to consider from these aspects in the next individual income tax reform, at the same time, develop a set of individual income tax exemption system which is suitable for the situation of our country is looming.This paper studies the determination of individual income tax exemption standards and the direction of reform. We use the theoretical model of optimal income tax rates of the previous studies, and introduce the variable tax exemption into the model to make a new model. First we use research method of the quantitative method through mathematics to analyze tax exemption and arrive at the conclusion of tax exemption having positive effects on social welfare level; the social welfare level is an increasing function of tax exemption. Then we use the research method of comparative by comparing the tax exemption system with America, Japan and Taiwan, and we found that the current tax exemption system in our country has a lot of shortcomings, such as it does not consider the elements of inflation, the family burden, and lack of the policy of husband and wife joint declaration of individual income tax. At last by linking up with urban per capita consumption expenditure, the average urban each number of workers burden, we establish a simple calculation formula about the tax exemption, and calculate urban per capita consumption expenditure which taking the burden of urban residents into account,the suitable tax exemption in the domestic various regions, and we find that the suitable tax exemption in the domestic various regions are greater than the differences, so the it is necessary to consider regional differences in setting up tax exemption system. The article finally summarizes the shortcomings of the current individual income tax exemption system and put forward some feasibility advices for the next reform.