The Impact Of Individual Income Tax And Pension Wealth On Household Portfolio Composition

Before 2011,Individual income tax covers 9 taxable items and a progressive tax rate from 5%to 45%is applied.A higher level of tax deduction works to increase wages,which could induce a change of portfolio specialization.A change in individual income tax rates would affect incomes,pensions,interest,and dividends.Therefore,a change in individual income taxes might affect household portfolio composition by changing real income.In addition,it could affect household portfolio composition by changing the relative return of assets.Pension wealth is an important guarantee for the lives of people after retirement,it is an important component of lifetime revenue.Therefore,pension wealth would affect portfolio composition.China experienced rapid economic growth in the last decade,and as a result,the average income of Chinese families has been increasing dramatically.Household portfolio composition shows how a family saves and in what way personal wealth increases.The decisions of a household,as the basic unit of economic activity,have many implications for China's labor market,real estate market,financial market and the social cost of financing.This paper examines the impact of individual income tax and pension wealth on choices of household assets and assets composition,using a set of cross sectional data of 2011 CHFS.The paper chooses 7 types of assets which include house property,deposits,risk financial assets,non-financial assets,currency,passage cars and debt.The results in this study confirm that the marginal tax rate and pension wealth have important impact on the probability of holding all the assets and the relative share of demand for households' assets.The probit estimates showed that a higher marginal tax rate tends to decrease the probability of holding more housing and cars.A higher percentage of pension wealth in permanent income may increase the probability of holding more housing,deposits and currency,while it will decrease the probability of holding cars.The percentage of pension wealth in values of net assets has a negative effect on the probability of holding house property,non-financial assets,risk financial assets and debt.Estimates for the asset demand equations show that an increase in marginal tax rate will increase the demand for deposits and risk financial assets.The percentage of pension wealth in permanent income mostly is insignificant,while the percentage of pension wealth in values of net assets has a significant effect on demanding for cars,risk financial assets,currency and debt.