Evaluating the Income Redistribution Effects of Special Additional Deductions inIndividual Income Tax: Evidence from CFPS Data

Background On January 1, 2019, the "Provisional Measures for Special Additional Deductions for Individual Income Tax" was officially implemented. This measure covers significant expenses such as medical, educational, housing, and pension costs, aiming to reduce taxpayers' burden and marking a key step towards comprehensive income taxation reform in China. However, given its relatively short implementation period, the effectiveness of this policy remains to be thoroughly evaluated. Objective This study aims to explore the impact of the "Provisional Measures for Special Additional Deductions for Individual Income Tax" on income distribution among Chinese residents, particularly focusing on its role and limitations in regulating income disparity and enhancing tax fairness. Methods Combining qualitative and quantitative analysis methods, this research uses original data from the 2016 and 2018 China Family Panel Studies (CFPS). It employs control variable and micro-simulation methods for empirical analysis. Key indicators such as the Gini coefficient, MT index, and K index are utilized to assess the impact of special additional deductions on income redistribution effects. Results Income disparity among Chinese residents is currently significant, and the individual income tax system has played a positive role in income redistribution. However, due to the targeted nature of special additional deductions, which benefit specific groups, there is a tendency to widen income disparities. Although the implementation of the individual income tax system has helped narrow income gaps, the increase in special additional deductions has weakened the redistributive effect of the basic deductions. The reordering effect of comprehensive income under the individual income tax system is nearly zero, while the increase in special additional deductions has enhanced the progressive nature of taxation and resulted in a tax reduction effect. Conclusion It is recommended to gradually expand the scope of comprehensive income by including business income and, once tax administration levels are further improved, incorporating interest, dividends, and rental income into comprehensive income. A negative income tax policy should be implemented for low-income groups, and the deduction amounts for high-income earners should be adjusted progressively with increasing income. Additionally, a family reporting system should be introduced, where the family unit acts as the taxpayer, offering diverse reporting options for taxpayers to choose based on their specific circumstances.