Analysis On The Residtributive Effect Of Individual Income Tax Levied On Business Income

In 2011, China has reformed the law of Individual Income Tax, which increased the exemption volume from 2000 RMB per month to 3500 RMB per month, and also reshaped the tax rate schedule for wages and salaries and business income. This article analysis the redistributive effect of the IIT levied on business income from the aspect of comparing the Gini index of pre-tax income and post-tax income, which finds that the new IIT applied to business income has weakened the redistributive effect of IIT. After separating the redistributive effect into the functional relationship with average tax rate and progressivity, the article finds that the increase of exemption of business income from 2000 RMB per month to 3500 RMB per month has strengthened the progressivity of the IIT levied on business income, but the decrease of average tax rate of business income harmed the Vertical Equity, which led to the weakness of redistributive effect of the IIT levied on business tax. Also, the article analysis the entire redistributive effect of the reform and finds that the increase of exemption and the change in tax rate schedule of the IIT levied on business income both do harm to the entire redistributive effect of the IIT. So, the article says that in order to strengthen the redistributive effect of IIT, the government should make some change to increase the average tax rate of IIT, specially the part for business income, and when considering the reform of IIT, the government should take gray income into consideration.