Regressive Effects and Countermeasures of individual income tax deferred pension insurance

Abstract

In order to reduce the society¡¯s dependence on the first pillar of endowment
insurance and improve its flexibility, it is imperative for China to develop personal
pension insurance. Deferring individual income tax is a type of tax incentive that can
stimulate middle and high income earners to participate in personal pension insurance,
but it also creates the regressive effect of income reverse regulation, because middle
and high income earners can enjoy a larger decline in current period¡¯s tax rate, more
tax exemptions for capital gains, and greater gap between inter-period tax rates .
Regressive effects originate from the regressive tax system in relation to personal
income tax, this tax system¡¯s design can be optimised such that its incentive function
can be taken advantage of, while its regressive effect is suppressed. By shifting part of
the retirement responsibility to middle and high income earners¡¯ themselves, the
government can concentrate its financial resources on providing elderly support to low
income earners, thereby making these individuals the real beneficiaries of the
individual income tax deferral preferential policy. The first pillar of the social security
system is to seek fairness, while the third pillar is to pursue efficiency. The presence of
regressive effect of individual income tax deferral should be accepted by society as
long as it can be controlled within a tolerable extent.