China’s Tax Reform Eases Burden on Low-Income Earners

China’s personal income tax (PIT) system has successfully played its role of “adjusting high, benefiting low” — reducing the tax burden on ordinary workers while ensuring higher-income individuals contribute the majority of tax revenue, according to a commentary published by the Economic Daily on June 22. The assessment comes as China’s annual tax settlement mechanism enters its seventh year, with over 160 million people having completed their declarations by the end of May 2026.

The “Adjust High, Benefit Low” Reality

Official data from the State Taxation Administration paints a striking picture of who pays China’s personal income tax. Over 70% of individuals who earn comprehensive income do not need to pay any PIT at all. Of the remaining roughly 30% who do pay, more than 60% are taxed at the lowest 3% bracket. At the top end, the wealthiest 1% of earners — those with annual incomes exceeding 1 million yuan (approximately US$138,000) — contribute more than half of all PIT revenue, while the top 10% of earners account for over 90%.

In 2025, China’s PIT revenue reached 1.6187 trillion yuan (about US$224 billion), an increase of 11.5% year-on-year, accounting for nearly 10% of total tax revenue. The growth was driven largely by a more active capital market, faster growth in certain industries, and intensified tax collection efforts targeting high-income individuals.

Seven Years of Reform

China’s current PIT framework was established with the landmark 2018-2019 reform, which raised the basic deduction threshold to 5,000 yuan per month (60,000 yuan per year), introduced a “comprehensive + categorical” taxation model for the first time, and added seven categories of special additional deductions covering children’s education, elderly care, housing, medical expenses, and infant care. The reform also established the annual settlement mechanism, transforming tax collection from a withholding system to a self-declaration model.

As China Youth Daily reported in April, the 2019 reform reduced the tax burden on low- and middle-income earners by over 440 billion yuan in its first year. However, experts quoted in the report noted that the current system still faces structural challenges.

The Threshold Debate

A key point of contention among experts is whether to raise the basic deduction threshold from its current 5,000 yuan per month. Some National People’s Congress deputies, including Yu Miaojie, President of Liaoning University, and Dong Mingzhu, Chairwoman of Gree Electric, have proposed raising the threshold to 10,000 yuan per month or 100,000 yuan per year to ease burdens on middle-income families and stimulate consumption.

But other experts caution against this approach. Professor Tian Zhiwei of Shanghai University of Finance and Economics argued that “each time the basic deduction standard is raised, it is actually high-income individuals who benefit more from the tax reduction.” Professor Shi Zhengwen, Director of the Tax Law Research Center at China University of Political Science and Law, told Beijing News that any adjustment should be based on the principle of “not taxing basic living expenses of individuals or families.”

The Next Phase: From Tax Cuts to Structural Reform

The “15th Five-Year Plan” (2026-2030) signals a strategic shift in China’s tax reform direction. Rather than continuing broad-based tax cuts, the plan calls for expanding the scope of comprehensive taxation, strengthening the taxation of business income, capital gains, and property income, and improving the redistributive function of the PIT system.

Li Xuhong, Vice President of the Beijing National Accounting Institute, explained that the next phase will move from “large-scale incentives” toward “institutional improvement.” The goal is to gradually expand the comprehensive taxation scope, ultimately moving from the current “preliminary combination” toward a “more thorough combination” of comprehensive and categorical taxation.

Challenges Ahead

Currently, only four types of labor income — wages, remuneration for services, author’s remuneration, and royalties — are combined into comprehensive income taxed at progressive rates of 3% to 45%. Other income types, including business income, investment income, and property income, are taxed separately, often at lower flat rates. This “small comprehensive” model creates inequities: individuals with similar total incomes can face very different tax burdens depending on how their income is categorized.

Professor Liu Zhikuo of Fudan University noted that China’s PIT currently exhibits a pattern of “low-income groups exempt from tax, middle-income groups bearing concentrated burden, and high-income groups contributing insufficiently.” He and other experts advocate for including capital gains more effectively in the tax net and exploring refundable tax credits — a “negative income tax” mechanism that would provide direct cash transfers to low-income families who currently cannot benefit from deductions.

What to Watch For

As China navigates its “15th Five-Year Plan” period, several key questions remain: Will the basic deduction threshold be raised? How will the government balance taxing capital gains more effectively without triggering capital flight? And can the tax authorities successfully track and tax the growing gig economy and platform economy income? The answers will have significant implications for income inequality, fiscal sustainability, and China’s broader goal of “common prosperity.”

As the Economic Daily commentary concluded, “Connected on one side to national governance and on the other to people’s livelihood, the role of personal income tax in economic and social development is becoming increasingly prominent.”