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Bring into Full Play the Positive Effects of Individual Income Tax



Zhang Junwei, Department of Macroeconomic Research of DRC

Ever since the tax sharing reform in 1994, the role played byindividual income tax relating to the collection of financial revenue and income distribution adjustment has become more and more apparent. But according to statistical analysis, its income adjustment function has not been brought into full play. Now that the Chinese economy has entered the state of new normal, we need to expand domestic demand, change the development mode, push for the sharing of development achievements and realize social equality and justice. All of these require us to bring into full play the positive effects of individual income tax.

Individual income tax reform should be focused on the following points.

First, we should hold a rational attitude toward therole played by income tax in terms of the adjustment of income distribution. We need to combine the reform of individual income tax with state-owned capital management and the establishment of budget system, the improvement of social security system and primary distribution system. The key point is to support the basic living standard of low income people so as to form an appropriate income distribution structure through incremental reform across the board.

Second, the goal of individual income tax reform is to enhance the tax adjustment on high incomesocial groups. Tax erosion could be checked through increasing taxes on high income social groups’ operational income and asset income; loopholes of inheritance tax and the absence of gift tax could be stopped up through tax increment on high income social groups’ transferring payment tax. As for the reform objective of establishing an income tax based tax system, it could be achieved by including more residents into the taxpayer scope (in this way, the amplification of tax exemption will become apparently lower than that of resident income). At the same time, circulation tax should be reduced at a proper time and in agradual manner.

Third, the system design of individual income tax should further reflect social justice. We should learn from international experience and implement an individual income tax system based on the family unit.

Fourth, tax refund system should be established, changing tax collection and administration from “income tax is withheld and paid by institutions”mode to a “self-declaration” mode. The key is to follow the principle of “enforcing deduction and enlarging the scope of collection” and establish a tax refund system.1.It should be clarified by tax law that everyone is a taxpayer and has the responsibility to declare his or her income truthfully.2. Establish a system of withholding tax. Based on the evaluation of a taxpayer’s income, his or herinstitution could withhold the due taxes. 3.Excessive withholding tax should be returned to the taxpayer according to his or her actual income declaration.4.We must guarantee that withholding tax be higher than the actual payable tax so that taxpayers could get some material benefits from initiative income declaration.

Fifth, we should enhance information exchange and sharing so that taxation efficiency could be raised. Since people have various sources of income, necessary information exchange and sharing is needed between different tax authorities and between tax authorities and business administration institutions, banks, security companies and real estate registration agencies.


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