Why Is the Redistributive Effect of the New Individual Income Tax Reform Limited? Evidence from Special Additional Deductions

The 2018 individual income tax (IIT) reform not only transformed China's IIT from a schedular income tax system into a system combining comprehensive and schedular taxation, but also introduced special additional deductions for the first time, institutionally addressing the longstanding lack of family-related information in individual income tax filing. Using a large-sample dataset of individual income tax records, this paper focuses on estimating the redistributive effect of the special additional deduction policy. The results show that the current special additional deduction policy reduces the redistributive effect of the individual income tax system. The main reason is that the tax-reduction effect of pre-tax deductions is tied to the top marginal tax rate applicable to each taxpayer, so that high-income groups benefit more from the special additional deduction policy, while some middle- and low-income groups cannot even meet the threshold required to enjoy the policy. To correct this regressive adjustment across income groups, this paper conducts counterfactual policy optimization simulations: replacing pre-tax deductions with tax credits can effectively reduce the extent to which special additional deductions weaken the redistributive effect; furthermore, if the remaining credit amount is allowed to be refunded to taxpayers, the redistributive effect turns from negative to positive, truly achieving a win-win outcome for people's livelihood and equity. Finally, subject to the requirement of fiscal balance, this paper compares the feasibility of different schemes and, on this basis, proposes directions and options for reforming and optimizing special additional deductions.