Research On The Impact Of Individual Income Tax Deductions’ Increase On Urban Residents’ Consumption

In recent years,China’s economic growth has been slowing down,the pulling effect of investment in the "troika" that drives China’s economic growth has begun to gradually weaken due to the changes of economic environment.Meanwhile the exports have been greatly hindered by the impact of the COVID-19 and the China–United States trade war.Consumption,as another major engine that has long promoted China’s economic growth,has gradually become the main power source of China’s economic development.Consumption can be divided into government consumption and residential consumption,due to the latter’s dominance in China’s consumption,improving residential consumption can help promote sustainable and healthy economic development.While the Supply-side reform is implemented,how to improve the domestic demand has become one of the issues that is worthy of research.Many consumption theories show that income is a main influencing factor of residents’ consumption,increasing residents’ income can effectively improve their consumption.Nowadays,among many taxes in China,individual income tax has the closest connection with residents’ income,meanwhile the deductions is one of the most crucial factors that decides the amount of individual income tax.In the past,China’s individual income tax deductions has been reformed several times,and the latest reform in 2018 has been experienced for some time since its implementation.By studying the impact of China’s individual income tax deductions on urban residents’ consumption,we can understand its mechanism and influence,it can also help to improve China’s individual income tax deductions.Firstly,this dissertation briefly reviews the domestic and foreign literature on the impact of individual income tax deductions on residents’ consumption,then analyzes how deductions affects urban residents’ consumption,finding that deductions mainly affect residents’ consumption through their disposable income.The function of the impact of deductions on disposable income under specific circumstances is derived in detail by combining the calculation method of individual income tax,and is extended to urban residents’ consumption accordingly.In addition,the impact of various factors on urban residents’ consumption is analyzed in terms of income effect and substitution effect,which provides the theoretical basis.Secondly,this dissertation outlines the history and reform status of China’s individual income tax deductions,as well as the consumption of urban residents,which shows their overall consumption status,structure and changing trends.After that,the imperfections of the existing deductions in promoting urban residents’ consumption expenditure are pointed out,including the lack of dynamic adjustment,incomplete mechanism of deductions,etc.Subsequently,this dissertation uses the macroeconomic panel data of 31 provinces and cities in China from 2002 to 2020 for empirical analysis,takes the inertia factors of residents’ consumption into consideration and establishes a dynamic panel data model.By using the System GMM method,the result of the regression indicates that the individual income tax deductions has a positive impact on urban residents’ consumption.Meanwhile,the regressions are divided into eastern,central and western regions to explore the differences in the impact of deductions on urban residents’ consumption in different regions,and the most significant impact is found in the central region.After the regression analysis was completed,the model was tested for robustness by regressing again with retail sales of consumer goods per capita instead of the original explanatory variables.Finally,based on all these results,this dissertation summarizes and presents the conclusions drawn in the research process.In addition,considering the results of theoretical and empirical analysis,individual feasible suggestions are put forward according to the shortcomings of the current deductions in China.Meanwhile,this dissertation also draws some reference from the experience of individual income tax deductions in foreign developed countries and proposes the general directions that can be chosen for the future individual income tax reform in China,including importing family-based tax declaration,deductions phasing out mechanism and negative income tax system,etc.By introducing its advantages and limitations,it will help to further deepen the reform and improve the individual income tax deductions in China.