New Round of Individual Income Tax Reform and Residents' Consumption Potential:A Study Based on Comprehensive Tax Payment and Special Additional Deductions
ZHAI Guangyu, XUE Yankai, LI Jingyi
School of Finance/School of Public Finance and Taxation, Dongbei University of Finance and Economics
Summary:
Promoting consumption to boost domestic demand is an important focal point for fostering a new development pattern and driving China's economic growth. However, current domestic demand shortfalls remain a prominent issue, and the role of consumption in fueling economic growth urgently needs further enhancement. Based on the 2024 Central Economic Work Conference designating “comprehensively expanding domestic demand” as the primary task for 2025 economic work, how to effectively unleash residents' consumption potential has become a critical issue in economic development. As a key policy tool for adjusting residents' disposable income, Individual Income Tax (IIT) directly influences consumption behavior. China's new round of IIT reform in 2018 has provided a new pathway for releasing consumption potential, which marked a major transition from a classified tax system to a classified-comprehensive tax system and introduced special additional deductions for the first time. However, existing studies predominantly focus on its income distribution effects, with insufficient exploration of its consumption-stimulating effects. In the context of low consumption willingness and to expand domestic demand, three key questions arise: Can the new round of IIT reform effectively stimulate consumption？ What are the differential impacts of policy clauses on consumption？ How does its effect vary across different groups？ Based on the microdata from the China Family Panel Studies (CFPS) in 2018 and 2022, this paper calculates the changes in households' tax payable using residents' income data, and identifies two types of households: those affected solely by adjustments to the standard of expense deductions and tax rate brackets, and those affected simultaneously by comprehensive taxation and special additional deductions. By applying a first-difference model, this study comprehensively quantifies the impact of the new round of IIT reform on total household consumption and tax sensitivity, with a focus on analyzing how comprehensive taxation and special additional deductions drive consumption potential. Finally, heterogeneity analysis is conducted across two dimensions: enhancing the effectiveness of IIT reform policies and evaluating the synergistic effects of policy combinations. Our study yields three key insights: First, the IIT reform has significantly boosted household consumption, with the consumption growth of households affected by comprehensive taxation and special additional deductions being more pronounced. Second, residents exhibit notable tax sensitivity, though such sensitivity diminishes as the intensity of tax shocks increases. Third, the effect of the IIT reform is heterogeneous: it exerts a more pronounced influence on household consumption among small families, those with higher education levels, households under strong liquidity constraints, and regions with developed e-commerce and industrial agglomeration. This effect is primarily reflected in increased household expenditures on housing, transportation and communication, preventive health care, and education and training, thereby contributing to the upgrading of residents' consumption structure. Based on the above research findings, the following policy recommendations are proposed: First, target areas of substantial family burdens and consumption potential, further improve IIT policies by promoting the shift of the declaration model from individual to household, appropriately expanding the scope and standards for deductions related to housing, children's education, elderly care, etc., and fully unleashing family consumption potential. Second, strengthen the effectiveness of policy transmission, enhance policy implementation efficiency by accurately interpreting tax reform content through official channels and leverage big data platforms to achieve precise matching of tax incentives, improving policy implementation effects. Third, establish a multi-dimensional coordination mechanism: through integrated measures such as providing consumption subsidies, offering financial support, developing the platform economy, and actively harnessing the industrial agglomeration effect, convert the disposable income released by tax reform into effective demand. This paper makes innovative marginal contributions from four dimensions. First, in terms of the research content, it conducts a timely analysis of the consumption effects of the new round of IIT reform, breaking through the limitation that existing literature mostly focuses on the consumption effects of early-stage tax reforms or the distribution effects of the new round of IIT reform. Second, in terms of the depth of research perspective, it decomposes the impacts of different policies in the new round of IIT reform on household consumption, thus providing a new entry point for subsequent studies on the effects of IIT reform. Third, in terms of the pertinence of policy recommendations, based on the conclusions of heterogeneity analysis, it provides theoretical support and empirical evidence for improving IIT policies and enhancing the implementation effect of tax reform policies. It also offers references for adopting supply-side measures to synergize with IIT policies in promoting consumption. Fourth, in terms of the methodological soundness, it accurately groups families through policy clauses to achieve a quantitative analysis of the consumption effects of different IIT reform regulations. By drawing on the core advantages of early classic literature and integrating cutting-edge methods from existing studies, it optimizes variable construction and data processing. The conclusions are more consistent with theoretical expectations and practical needs, offering reference value for further accurate analysis of the consumption effects of IIT reform in the future.
翟光宇, 薛严慨, 李静怡. 新一轮个税改革与居民消费潜能——基于综合课征和专项附加扣除的研究[J]. 金融研究, 2025, 540(6): 39-57.
ZHAI Guangyu, XUE Yankai, LI Jingyi. New Round of Individual Income Tax Reform and Residents' Consumption Potential:A Study Based on Comprehensive Tax Payment and Special Additional Deductions. Journal of Financial Research, 2025, 540(6): 39-57.
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