During a recent interview with Li Ping, Deputy Director of the Tax Research Institute under the National Taxation Administration, he emphasized the significant impact of personal income tax reforms implemented in China since 2018. These reforms combine comprehensive and categorized approaches to personal income tax, effectively playing a role in both adjusting the tax burden for higher-income earners and providing relief for lower-income individuals.

According to data from the tax administration, about 1% of individual income tax filers report annual incomes exceeding 1 million yuan, yet this small group contributes more than 50% of the total income tax collected. Moreover, those within the top 10% of income earners account for over 90% of the total personal income tax contributions. This trend aligns with the principle of fairness outlined in tax law that states tax burdens should be distributed according to the taxpayer’s ability to pay, which is consistent with practices in major countries around the world.

Li Ping highlighted that the personal income tax has been particularly effective in redistributing wealth, thus promoting social equity. He noted, “The ‘high’ adjustment role of personal income tax is quite evident, positively impacting the regulation of income distribution.”

He further explained how the reform has also benefitted lower-income groups. By reviewing the system for comprehensive income tax reporting, it becomes clear that many low-income individuals either pay very little tax or none at all following the tax reforms. “Most of the personal income tax is being paid by middle and high-income earners,” Li stated, reflecting the design of the tax system where high-income earners contribute more while lower-income earners pay less or none.

A significant change was made in 2018, which raised the basic deduction standard from 3,500 yuan to 5,000 yuan per month. This threshold, when compared to average national income, is relatively high on an international scale and adequately covers basic living expenses for most individuals. Additionally, several special deductions related to child education, elderly care, mortgage interest, housing rental, continuing education, and major medical expenses were introduced, with increased allowances for childcare and elder support announced recently.

Li emphasized that by mid-2023, approximately 67 million people benefited from these adjustments, resulting in a tax relief exceeding 70 billion yuan, an average reduction of over 1,000 yuan per person. Tax reductions for child education, elderly care, and childcare accounted for significant portions of this total, providing timely financial relief for households supporting both elderly and young family members.

He gave an example of how these deductions can significantly reduce tax burdens for families. For a taxpayer with one child, sharing education deductions with a spouse can lead to monthly deductions total of 1,000 yuan. Added to other deductions, a family supporting elderly parents can potentially reduce their taxable income by substantial amounts, allowing many to effectively pay no personal income tax at all.

Li noted that currently, over 70% of individuals with comprehensive income in China do not owe personal income tax, with more than 60% of the remaining taxpayers falling into the lowest tax bracket, paying minimal amounts.

Looking ahead, Li indicated that the tax department plans to strengthen the implementation of policies aligned with the agenda set by the Third Plenary Session of the 20th National Congress. This effort will focus on refining the combined personal income tax system to better regulate income distribution, enhance public services, and contribute to shared prosperity in society.