Analysis Of The Welfare Effects Of Personal Income Taxes Reform

Personal income taxes not only shoulder the task of increasing gove-rnment revenue, but also is to adjust the distribution of wealth in the folk, narrow the income gap, promote social fairness and improve the social welfare since its emergence. There are many times of reform after 1980 when the institution of Chinese personal income tax were established,but it did not achieve the expected goal.’The overall program to deepen the r-eform of fiscal and tax system’has been taken the personal income tax re-form as one of the six major tax reform measures,and taken optimizing the allocation of resources, safeguarding the unity of the market, promo-ting social justice, national security, improving social welfare level as the goal,which was reviewed by the political bureau of the CPC central com- mittee on June 30,2014.Based on the input-output table of 2010,we formulate the Social Ac-countting Matrix of 2010, which is the basical data of the computable ge-neral equilibrium (CGE) model. It has highly practical value obviously to analysis the welfare effects of Chines personal income taxes reform based on the computable general equilibrium (CGE) model.Firstly, through analyzing the relationship between income distribut-ionand income tax, we confirm the personal income tax is an effective m-eans of adjusting income distribution and income distribution is the basis of the formulateing personal income tax system, we fitted the income dis-tribution function based on the relationship between income distribution and income tax. According to the actual conditions of China we build dy-namic recursive CGE model, and take the income distribution function into the model to creative income heterogeneity module in the CGE mo-del, by adding the income heterogeneity module in the CGE model we can research the influence on different residents’ welfare of the personal income tax reform more clearly.Secondly, we take 2010as the base period and formulate the Social Accounting Matrix (SAM) based on the input-output table,what’s more, we use the cross entropy method to balance the SAM.Finally, based on the SAM we use the dynamic recursive CGE mo-del tosimulate the impact of the integrated comprehensive personal inco- me tax, tax base, tax payment unit and reducing tax rates on the welfare effects for indivials or family and the rest of the social and economic indicators.Short-term simulation results shows that the personal income tax ba-se integrated reform itself to improve low-income groups income effect is little, if accompanied by corresponding government financial subsidy po-licy, it can increase income of low-income groups, and thus improve their welfare. The personal income tax base integrated reform can directly inc-rease income of middle-income groups, and then to improve the welfare status directly,but the higher income groups will deteriorate income and welfare state, social total welfare level will fall. Reducing tax rates can enhance the level of welfare of the low-income groups and reduce the ad-verse effects for high income group, but still will reduce the level of the overall social welfare. Tax unit (as a family unit) and tax base integrated combination can improve the quality of life of thelow-income families better, and in this case, total social welfare level will be improve.Simulation results for a long time in all circumstances of the three kinds of simulation show that within three to five years after the reform of personal income tax, the impact on the residents’utility expands along the direction of the short-term impact, the steady state level will come aft-er 3 to 5 years. In other words, comprehensive reform in the long-term only has horizontal effect, without growth effect.Through the analysis of simulation results, in order to increase the social welfare level, on the one hand, the comprehensive reform of per-sonal income tax should be combined with reducing tax rates, on the oth-er hand, personal income tax reform must be complementary with other measures. In addition, in the long run, It is necessary to develop the econ-omy for increasing the social welfare level.