Personal-Income-Tax Reforms and Effective-Tax Functions in China

Using household-level data, we estimate the effective-income-tax function for China, that is, a nonlinear relationship between income and effective income tax rates. The estimated function can be used in a wide range of applied works in macroeconomics and public finance. In addition, using this function, we investigate the effects of tax exemption increases on properties of the personal income tax system. The main empirical result is that the effective-income-tax function becomes more progressive; however, the trend toward that was halted by tax exemption increases. Furthermore, variations in local progressivity indicate tax reforms had unequal impacts on the redistribution effects across income intervals. Furthermore, the tax reforms temporarily reduced horizontal inequality.