Each step forward in tax reform implies fairer tax burden sharing and more accurate livelihood support. When a tax is truly a powerful instrument for regulating income distribution, and when every taxpayer feels the fairness and temperature of the tax system, this years-long change in the tax system truly fulfils its historic mission。
The reform of personal income tax in china is at a new crossroads。
In deploying this year's fiscal reform mandate, the ministry of finance, in its report on central and local budget performance in 2025 and the draft central and local budget in 2026, called for further study of the improvement of the personal income tax system, which combines integration and classification, to better perform the role of redistribution regulation。
This is three years later, and the budget report again refers to a tax reform. Unlike the “tax relief” dividend that has been emphasized previously, the focus of this reform has shifted to “redistribution”, behind which the pursuit of a more “fair” tax system is behind it。
The modern tax law entails the political function of regulating financial behaviour, promoting social functions of equitable distribution and guaranteeing economic development. Among them, the social function of promoting equitable distribution is central, where personal income tax plays an important role。
To date, china has undertaken seven rounds of tax reform, each of which combines the multiple relationships of equity and efficiency, organizational income and reconciliation of distribution, with a focus on different phases. For example, in the seventh round of tax reforms, which began in 2018, during the “1355” and “1455” periods, the public felt more of the tax relief dividend。
Today, the “fifty-fifty five” programme proposes to increase the efficiency and precision of tax regulation, improve the system of taxation and taxation of natural persons, and introduce a uniform tax on labour income. The full effect of the specific surcharge policy is to increase personal income tax credits. Explore improved mechanisms for regulating the tax on capital gains and strengthen tax regulation for high-income persons。
All of these requirements refer to “redistribution”. According to lee xuhong, vice-president of the beijing national school of accounting, the most significant feature of the “fifty-five” plan is the increased focus on “precision” and “systemic synergy”, not only on the improvement of the tax system itself, but also on the functioning of a single tax in a pattern of income distribution, the harmonization of tax equity and income distribution, and a clearer orientation and more mature design of the reform。
The tax's “minorization” dilemma
The seventh round of tax reforms has been reshaped in many aspects of the tax system。
For example, for the first time, the introduction of an integrated tax model, an increase in the number of tax points, and seven specific additional deductions for children's education have significantly reduced the tax burden for low- and middle-income people, with tax cuts of over $440 billion in 2019. The combination of integration and classification models has also taken a major step forward in promoting equitable income distribution。
However, a number of members of the academic community believe that our personal income tax system has the function of regulating income distribution, but has a more limited effect. Reasons include small tax revenues, low average tax rates and insufficient tax collection capacity。
A study of the in-laws of the faculty of finance and finance of the people's university of china found that a small amount of the combined tax has increased the income redistribution effect of a single tax, but that the average tax rate of a single tax has fallen significantly and the overall income redistribution effect of a single tax has diminished, influenced by basic cost deductions, special deductions, tax structure, etc。
In the case of a tax rise from $3,500 to $5,000, the director of the institute of public policy and governance of the shanghai university of finance and economics, tshiwei ta, counted a sum: those with a monthly income of less than $3,500 would receive no reduction, and those with a monthly income of between $3,500 and $5,000 would receive a tax reduction of up to $45; for high-income taxpayers applying the 45 per cent maximum marginal tax rate, the tax reduction would be $675。
“each increase in the basic deduction cost is more pronounced in the case of high-income groups.” according to tian ji wei, the adjustment of income distribution for the whole of the individual income tax was partially offset by the high cost deduction standard。
At the same time, the number of taxpayers who actually pay a tax in the country is too small owing to the high standards of deduction, the number of items deducted and the size of the deduction。
The data on the collection of tax credits for the year 2023, issued by the national tax administration, show that more than 70 per cent of those who receive the combined income do not pay the tax, and that more than 60 per cent of those who actually pay the tax account for less than 30 per cent of the remaining amount are subject to a minimum slotting rate of 3 per cent, which is lower. According to liu zhiguang, a professor at the faculty of economics of the university of jordan, our individual taxes are currently characterized by “tax exemptions for low-income groups, a concentration of the burden of middle-income groups and insufficient contributions from high-income groups”。
This directly affects the size of a tax. In 2025, our tax revenues of $161. 87 billion were 9. 18 per cent. Taxes are a trillion dollars in size, but, proportionally, they remain small. There is a consensus within the industry that a single tax can be truly revenue-regulating only if it is done on a large scale。
Steady expansion of business income
In order to smooth the transition of reforms without increasing the burden on taxpayers, the seventh round of tax reforms introduced a comprehensive tax on wages, remuneration for labour, royalties and remuneration for four items of work; individual income tax was calculated separately on the basis of the rules for earnings from business, interest, dividends, dividends, rental of property, transfer of property, incidental gains, etc。
This “small integrated, large classification” model is still far from the ideal tax system. Thus, “the policy of progressive expansion of integrated collection, the sound taxation of business income, capital gains and property proceeds” is the clear direction of reform in the framework of the 15th five-year plan。
The fact that the ministry of finance had made it clear during the “1455” period that the expansion of the combined collection of taxes had not yet taken place underscores the complexity of the exercise。
In his view, the relatively slow advance in the collection of income from labour is due, on the one hand, to significant differences in the way in which income from different types of work is obtained, in the payment chain and in the volatility of income, and to technical and institutional difficulties in its design; on the other hand, the lack of complete access to tax information-sharing mechanisms, the invisibility and diversification of income from new forms of business, such as the platform economy, flexible employment, the difficulty of integrating accurately and in a timely manner into the system of regulation, and the need to balance reforms with fiscal sustainability with group tax expectations, which further increases the difficulty of moving forward。
The creation of conditions for the steady integration of business income into the collection of combined proceeds is considered a priority by the academic community。
The director of the centre for financial and tax law studies of the chinese university of political science and law stated in the main that there were no significant obstacles to the integration of labour-related income into the business, which was more similar to the tax structure, deductions and declarations. Their integration in the combined proceeds would prevent tax avoidance from being made more equitable through the conversion of income。
At present, there is a greater overlap in the scope of operations between the definition of income from personal labour and income from business in our tax system; as the economy of casual workers becomes more prevalent, it becomes increasingly difficult to distinguish between income from production and income from labour. Previously, most of the incidents of tax evasion by some star networks had resulted in the illegal exploitation of loopholes in the system. If the two were collected together, the problem would be solved。
But the problem also exists. According to tian ji wei, from the standpoint of regulation, there are a large number of taxpayers who operate, a wide range of businesses and, in particular, difficulties in accounting for the costs of individual businesses, and many operators are unable to provide complete proof of costs and costs, “can face management difficulties”。
There are also differences in tax rates. Under our current personal income tax law, four combined earnings, such as wages, are taxed uniformly at a rate of 3 to 45 per cent over-compulsory tax; the income from an individual's business is taxed separately, and 5 to 35 per cent over-compulsory tax is applied. Individually owned enterprises and partnerships are not subject to corporate income tax, but are subject to personal income tax on the basis of business income。
Completing the short tax on capital gains
The greater controversy is: should the proceeds of capital be included in a comprehensive collection
According to liu guang's study, income from the labour business category has long occupied a dominant position in the current tax, while income from the capital property category, such as interest, dividends, property leases and transfers, is less than 30 per cent and has declined steadily since 2019。
Unlike the seven tiers of excess progressive tax applied to the combined proceeds, the current flat rate of 20 per cent for all categories of capital assets in the country, combined with a large amount of exempt tax benefits for capital and wealth, makes the tax system inadequate in terms of coverage of wealth stocks and capital gains。
For some time now, the founders of some enterprises have received only a symbolic annual salary of one dollar or even no remuneration, and behind them are tax avoidance considerations for high-income groups operating through capital. The “fifty-five” plan outlines “exploring mechanisms for improving the tax reconciliation of capital gains” in order to fill the institutional gap in this direction。
From the perspective of international experience and tax equity, liu qilong said that tax policies on income derived from capital assets should be systematically improved and that, within the framework of the clean-up of tax incentives, capital gains should be gradually incorporated into the taxable income of individuals。
He added that tax evasion through capital conversion, cross-border arrangements, etc., needed to be prevented by “strengthening tax regulation for high-income people”。
However, scholars are more cautious about whether or not to include all capital gains in a combined collection。
According to in-ki, a combined collection of capital gains may affect the mobility of capital gains and lead to capital outflows. At the same time, it is not appropriate to include all capital gains in the portfolio in the short term, taking into account such factors as the introduction of high-end talent, incentives for enterprise innovation and incentives for long-term investment。
The text suggests that progress could be made steadily, for example, by incorporating short-term capital gains, such as dividends, dividends over a six-month period, high speculative profits, in the first place, and avoiding significant increases in the burden on taxpayers or capital market volatility。
Specialized surcharge policies focus more on structural optimization
Another focus of the academic community's attention is the precision of the policy of special deductions。
At present, except for medical treatment for major personal illness, which is effectively deducted within the limit of $80,000, the remaining six special deductions are subject to flat deductions, such as a monthly deduction of $2,000 per infant and child care, a monthly deduction of $1,000 for interest on housing loans and a monthly deduction of $3,000 for old-age maintenance (one-child)。
Quota deductions are simple and easy, but clearly do not reflect the actual burden differences between households and individuals。
In response, xuhong lee suggested that a dynamic adjustment mechanism be developed to rationalize the deduction criteria and extend coverage, taking into account consumer spending, price levels and changes in household structure. At the same time, the policy is being improved, focusing on priority areas such as old age, childcare, housing and education, and fine-tuning the deduction criteria and improving the targeting of policies。
Liu ziguang said that, in the future, when the conditions were ripe, the reform pilot could be carried out in conjunction with consumer end payment, i. E. Invoicing. The application of a valid evidence-based crediting of classification limits, such as invoicing, would, on the one hand, enhance policy precision and, on the other hand, facilitate the integrity of the entire vat chain。
The economist has advanced the idea of refining the special deduction policy, which should be explored in returnable。
Under the current system, he said, a specific deduction policy could only work if the taxpayer actually had to pay a tax. However, more than 70 per cent of the taxpayers who receive the combined proceeds are ultimately exempt from individual income tax, which means that, for the majority of low- and middle-income groups, they will not benefit from any policy dividend, in any case by expanding the items and criteria for special deductions。
After the introduction of the tax credit rule, the formula for calculating the taxable amount of personal income tax is: taxable amount = taxable amount multiplied by tax rate applicable - tax credits。
“the introduction of refundable tax credits to enable low- and middle-income groups to obtain real financial subsidies for eligible deductions in cases where the combined proceeds are lower than the exemption, with a substantial `negative income tax' adjustment effect.” according to liu, this will significantly increase the reach and effectiveness of the policy and truly benefit the groups most in need of policy support。
Research has also been done to measure the income redistribution effect of individual income tax, following the replacement of cost deductions by taxable credit systems, which has increased significantly in the event that tax revenues remain constant。
There are many different paths to tax reform. Looking back at the threshold of “155,” the chinese tax system has undergone a historic shift from classification to integration and classification. It is clear, however, that there is still a long way to go before a fair, efficient and modern tax system is established。
It is certain that, for you and me, every step of the tax reform process implies fairer tax burden-sharing and better livelihood support. When a tax is truly a powerful instrument for regulating income distribution, and when every taxpayer feels the fairness and temperature of the tax system, this years-long change in the tax system truly fulfils its historic mission。
(the original version is published in the chinese youth newspaper, edition 05 of 21 april 2026
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Chinese youth
From “declining” to “modifying” the logic of “15” tax reforms change
