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wage income. However, the objective of the article is not to make specific

54THE CHINESE ECONOMY

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recommendations for such a restructuring, but rather to provide a relativelysimple illustration of how the Pareto distribution could be put to good ana-lytical use to address a PIT reform issue in a real country setting.

Postscript

After a protracted period of debate, China has doubled the level of the PIT’sbasic monthly allowance for wage income to RMB1,600, effective January1, 2006.

Notes

1. Xie’s statement is available at /ce/doc/cep2/200403173397.htm.

2. For an informative description of these taxes, see Li 1991.

3. Between August 1987 and the introduction of the present PIT in 1994 (effec-tively replacing the old PIT—see further below), the tax liability on wages and sala-ries of nonresidents was reduced by half.

4. An ICPE is essentially a household enterprise owned and managed by one ormore members of a household.

5. The main motivation behind the introduction of this tax—hence effecting theseparate taxation of residents and nonresidents—was the basic monthly allowanceprovided under the old PIT, which was judged to be too high for residents.

6. See the Personal Income Tax Law of the People’s Republic of China (1980, asamended); Regulations for the Implementation of the Personal Income Tax Law ofthe People’s Republic of China (1994); and various policy and administrative decreesissued by the Ministry of Finance, by the State Administration of Taxation, and byboth jointly.

7. The 1993 amendment also included an exemption of all interest from depositsand government bonds from tax. The deposit interest exemption was subsequentlyremoved in a 1999 amendment.

8. Taxpayers who do not have a domicile (habitual abode) in China but receivedomestic-source wages and salaries, or those who are domiciled in China but receiveforeign-source wages and salaries, are given an additional monthly allowance ofRMB3,200.

9. Recently, however, the local authorities of a number of “high-cost” cities, suchas Beijing, Guangzhou, and Shanghai, have also sanctioned supplemental monthlyallowances of various amounts (at a cost to their own budgets) for domestic residents,Some of the supplemental allowances even exceed the RMB800 basic monthly allow-ance as stipulated in the PIT law and regulations.

10. The main exception was the PIT collected from the oil sector, which accrued(and still accrues) to the central government.

11. For a review of relevant reform issues relating to the base of a PIT, see Zee2005.

12. For good discussions of the Pareto distribution, theory and applied, see Cowell1995 and Champernowne and Cowell 1998.

13. Note that the mean of this distribution is not defined for 1 ≥ α

.

56THE CHINESE ECONOMY

14. This would represent about 13 percent of the employed labor force (excludingthe agricultural sector), which is not an unreasonable figure, given that the basic monthlyallowance is not much below the national average monthly wage of RMB1,035 in2002. Published data on urban household income survey in the same year (see Na-tional Bureau of Statistics 2003) likewise suggest that the PIT rate schedule on wageincome covered at most only the top quintile of such households.

15. This compares with the national average of 3.5 percent (the ratio of total PITrevenue collected from wages and salaries to national total wage income). This dis-crepancy could be explained by the fact that, in the simulation model, wages earnedby those in the zero-rate band are ignored.

16. The revenue-neutral flat rate would be about 11 percent if the basic monthlyallowance is kept at RMB800.

References

Champernowne, D.G., and Frank A. Cowell. 1998. Economic Inequality and

Income Distribution. Cambridge: Cambridge University Press.

Cowell, Frank A. 1995. Measuring Inequality. Hemel Hempstead, UK: Prentice

Hall/Harvester Wheatsheaf.

Li, Jinyan. 1991. Taxation in the People’s Republic of China. New York: Praeger.National Bureau of Statistics. 2003. China Statistical Yearbook. Beijing: China

Statistics Press.

Zee, Howell H. 2005. “Personal Income Tax Reform: Concepts, Issues, and

Comparative Country Practices.” IMF working paper WP/05/87. Washington,DC: International Monetary Fund.

To order reprints, call 1-800-352-2210; outside the United States, call 717-632-3535.