Measuring the Redistributive Effects of China's Personal Income Tax

Abstract

Personal income tax is a commonly used redistributive instrument to deal with inequality. Whether it achieves that efficacy requires an appropriate measurement. This paper aims to examine the redistributive effects of personal income tax (PIT) based on the generalized entropy indexes. Compared with the commonly used approach based on the Gini coefficient, the generalized entropy indexes are more sensitive to the structural features of the redistributive effects and can lead to more reliable evaluation about the redistributive policy adjustments. Based on this new approach, we assess the redistributive effects of the 2011 PIT adjustment in China by using the urban household survey data. Different from previous studies, our results show that the 2011 PIT adjustment has effectively reduced the inequality within high income group, and if hidden income is taken into consideration, the overall inequality reduction resulted from the tax adjustment turns out to be positive. This finding highlights the importance of judging the redistributive effects of PIT on the basis of right household income data and that China should pay more attention to the hidden income in designing the redistributive tax rules.