Expanding the Middle Class and Advancing Reform in Personal Income Tax

This chapter explores the role and function of tax in realizing the idea of common prosperity. Taxation is a powerful tool for promoting economic growth and adjusting income distribution. Since the end of 2018, China has started reforms of personal income tax, implemented a combination of comprehensive and classified collection, and raised the tax threshold from 3500 yuan to 5000 yuan. It has also increased children’s education, expenditure on continuing education, and critical illness medical expenditure, etc. While the chapter highlights the progress made in China’s personal income tax reform, such as raising the tax threshold and implementing special additional deductions, which helps narrow the gap between the rich and the poor and promotes social equity, it also points out the imperfections of the current individual income tax system. The biggest obstacle the taxation system faces in realizing common prosperity is that the Chinese middle class generally feels a heavy tax burden, which can be shown in four aspects. Firstly, regional disparities and variations in overall family income are not fully taken into account. Secondly, individual income tax—often referred to as payroll tax—has increasingly become a tax burden for the middle-income class. Thirdly, it fails to distinguish between high income from labour and high income from capital. Finally, the seven-level excess cumulative tax rate is unfair to the salaried income class. This chapter also proposes six strategies to expand the middle-income group, including precise tax reductions and exemptions, which should be based on regional per capita income levels and differences in living costs, as well as overall household income and expenditure.