Optimal Income Tax for China

This paper develops a model of optimal income taxation, estimates China's skill distribution function based on the data from a recent survey, and finds the optimal marginal and average income tax rates for China. It shows that both the optimal marginal and average tax rates increase at decreasing rates, and become rather flat at high‐level skills. China's current marginal tax rate increases at a decreasing rate at low‐level skills and increases at an increasing rate at high‐level skills. To be optimal, the low income groups in China should be subsidized, the tax threshold should be raised, and the highest marginal tax rate should be reduced.