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Optimal taxation, differential mortality, and endogenous human capital accumulation in China

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  • Chen, Ye
  • Kumru, Cagri S.
  • Zhang, Yurui

Abstract

This paper analyzes the optimal tax combination using a model that incorporates differential mortality and human capital accumulation. We calculate the optimal combinations of the capital income tax, consumption tax, and progressive labor income tax rates for the Chinese economy under four different model settings: a standard life-cycle model without human capital accumulation (NHC), an NHC model with differential mortality (NHC+DM), a life-cycle model with human capital accumulation (HC), and an HC model with differential mortality (HC+DM). Our results of implementing the optimal capital income tax rates in the Chinese economy are 8.1%, 7.9%, 2.6%, and 15.4%, respectively. The optimal labor income tax includes a 41.6% marginal tax rate with a 98,010 yuan fixed deduction, a 21.0% marginal tax rate with a 97,253 yuan deduction, a 3.1% marginal tax rate with a 96,225 yuan deduction, and an 18.5% marginal tax rate with a 97,535 yuan deduction, respectively. In a nutshell, we find that the optimal tax bundles under each model are different for China. It would be better to incorporate both human capital accumulation and differential mortality for a more comprehensive model for optimal taxation analysis in China.

Suggested Citation

  • Chen, Ye & Kumru, Cagri S. & Zhang, Yurui, 2024. "Optimal taxation, differential mortality, and endogenous human capital accumulation in China," China Economic Review, Elsevier, vol. 88(C).
  • Handle: RePEc:eee:chieco:v:88:y:2024:i:c:s1043951x2400186x
    DOI: 10.1016/j.chieco.2024.102297
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