The "15th Five-Year Plan" outline proposes to promote a clear increase in the household consumption rate, raise the income of low-income groups, boost the proportion of the middle-income group, and foster an olive-shaped distribution pattern. Although expanding domestic demand and unleashing consumption potential has become a key focus for promoting high-quality economic development, there are still problems in areas such as individual income tax optimization and income redistribution.

For instance, the current state of the consumer market is driving the need for tax reform. According to data from the National Bureau of Statistics, China's total retail sales of consumer goods reached 50.12 trillion yuan in 2025, a year-on-year increase of 3.7%, with final consumption expenditure contributing 52.0% to economic growth. Consumption has become the "main engine" and "ballast stone" of economic growth. However, during the same period, the national per capita disposable income was 43,377 yuan, with the median per capita disposable income only at 36,231 yuan—the median accounting for just 83.5% of the average, reflecting a persistently large income distribution gap. Grouped by quintiles, the per capita disposable income of the low-income group was only 10,150 yuan, the lower-middle-income group 22,702 yuan, while the high-income group reached 103,778 yuan, a disparity of more than ten times between the high and low income groups. This indicates that the consumption capacity of middle- and low-income groups is constrained by income levels, and consumption potential has not been fully unleashed.

Meanwhile, in the first half of the year, the cumulative real per capita disposable income grew by 4.2% year-on-year, down 1.2 percentage points from the same period last year, and 0.5 percentage points lower than the real GDP growth rate during the same period; per capita consumption expenditure grew by 2.7% in real terms, down 2.6 percentage points. During the same period, the average propensity to consume of residents was 64.6%, down 1.0 percentage point year-on-year, the lowest for the same period since 2023. Insufficient consumption demand is largely an income distribution issue, mainly manifested in the low share of labor remuneration in national income and the low proportion of residents' primary distribution income in GDP. This also shows that residents' income growth lags behind economic growth, which likewise constrains the release of consumption potential.

For example, there is a contradiction between the current individual income tax system and residents' income growth. The basic deduction for comprehensive income under China's IIT is currently 5,000 yuan per month (60,000 yuan per year), a standard that has been in place for nearly eight years since 2018. According to data from the National Bureau of Statistics, the per capita disposable income of urban residents has grown from approximately 39,251 yuan in 2018 to 56,502 yuan in 2025, an increase of about 44%, yet the IIT threshold has not been adjusted accordingly. Considering inflation, the purchasing power of 5,000 yuan in 2018 is equivalent to about 7,000 yuan in 2025, meaning the real threshold has been passively declining. Notably, data from the 2025 IIT annual reconciliation shows that more than 70% of people owed no tax after reconciliation, and among those who did owe tax, over 60% only applied the lowest 3% tax rate. The top 10% of income earners bear about 90% of the total IIT, while the top 1% of high-income earners contribute more than half. On the surface, middle- and low-income groups basically pay no tax, but the problem is that the long-term failure to adjust the threshold leaves the middle-income group—especially the "sandwich layer" with monthly incomes between 10,000 and 20,000 yuan—still facing a visible tax burden, and this group happens to be the main force of consumption upgrading.

At the same time, China's economy shows obvious K-shaped divergence. The contraction of real estate and traditional manufacturing has led to the loss of low-skilled jobs, while high-tech manufacturing and the digital economy face "recruitment difficulties," with a structural contradiction of "some have no work, some work has no workers." Although flexible employment such as food delivery and ride-hailing has become an employment reservoir, the excessive number of workers has led to declining per-order income, further exacerbating income uncertainty for the middle-income group.

For instance, the structure of special additional deductions policy still needs optimization. Currently, apart from allowing actual deduction of serious illness medical expenses within an 80,000-yuan limit, the other six special additional deductions are all fixed-amount deductions, such as 2,000 yuan per month for infant care, 1,000 yuan per month for housing loan interest, and 3,000 yuan per month for supporting elderly parents (for only children). The fixed-amount deduction method is simple and easy to implement, but it clearly cannot accurately reflect the differences in actual burdens of different families and individuals, and lacks targeting and precision. Under the current system, special additional deductions only take effect when taxpayers actually owe IIT. However, more than 70% of taxpayers with comprehensive income ultimately do not need to pay IIT, meaning that for the majority of middle- and low-income groups, no matter how much the items and standards of special additional deductions are expanded, they cannot enjoy any policy benefits. In addition, urban-rural differences are also a dimension that cannot be ignored.

It is worth noting that the average propensity to consume of rural residents is significantly higher than that of urban residents. From 2020 to 2025, the average propensity to consume of urban residents averaged 63.0%, while that of rural residents was as high as 82.8%. However, the urban-rural income gap remains large, with the urban-rural income gap reaching 2.31 times in 2025, among which the property net income gap is as high as 8.87 times and the wage income gap is 3.30 times. Narrowing the urban-rural income gap has a multiplier effect on unleashing consumption potential. Tax reform should fully consider urban-rural differences, appropriately favor rural residents in policy design such as special additional deductions, and truly benefit more groups in need of policy support.

To this end, several suggestions are proposed. First, raise the IIT threshold to truly benefit the people and enrich the people. It is suggested to raise the IIT threshold to 100,000 yuan per year, which is the proper meaning of more fairly sharing the fruits of economic development with all the people. According to relevant calculations by the School of Taxation of Southwestern University of Finance and Economics, if the threshold is raised from 5,000 yuan per month to about 8,333 yuan (100,000 yuan per year), the group with monthly taxable income between 5,000 and 10,000 yuan would see the largest tax reduction, with the marginal tax rate dropping from 10% to 3%, saving about 350 to 500 yuan per month. For a "dual-income" family with monthly incomes of about 15,000 yuan each, the couple could save about 8,000 to 12,000 yuan in taxes annually, and this increase in disposable income would directly translate into consumption power.

Second, optimize the tax rate structure and reduce the marginal tax burden on the middle-income group. Currently, the highest marginal tax rate of 45% on comprehensive income applies to the portion of annual taxable income exceeding 960,000 yuan, which is relatively high among major economies worldwide. An excessively high marginal tax rate is not conducive to attracting high-end talent or incentivizing innovation and entrepreneurship, and may also lead high-income groups to shift income to capital gains channels with lower tax rates through tax planning, thereby weakening the regulatory function of the tax system. According to data from the State Taxation Administration, the top 1% of income earners currently pay more than half of the total IIT. Even if the highest marginal tax rate were reduced to 40%, high-income groups would still bear the main tax burden, without affecting the basic function of IIT to "adjust high incomes and benefit low incomes." In addition, while optimizing the tax rate structure, attention should also be paid to increasing residents' wage income and transfer net income. Currently, wage income and transfer net income together account for about three-quarters of residents' per capita disposable income, and increasing these two types of income has a multiplier effect on increasing urban and rural residents' income. From 2020 to 2025, the growth rates of wage income and transfer net income were 0.26 and 0.17 percentage points higher, respectively, than the growth rate of per capita disposable income. It is suggested that, in tandem with tax reform, the mechanism for determining wages and reasonable growth for workers should be improved, the mechanism for adjusting minimum wage standards should be refined, and the dividends of tax cuts should be more directly converted into disposable income for middle- and low-income groups.

Third, adopt a comprehensive approach to systematically unleash consumption potential. Middle- and low-income groups are the main force of the consumer market, and only by reducing their tax burden can the foundation for consumption growth be consolidated. In 2025, China's trade-in policy for consumer goods drove related commodity sales of 2.61 trillion yuan, benefiting 366 million people, fully demonstrating the leveraging effect of burden-reducing policies on consumption. It is suggested that relevant departments accelerate the removal of unreasonable restrictions in the consumption field, systematically implement policies to unleash consumption potential, introduce IIT policies that better fit current social development, support consumption expansion through income growth, and foster a larger market through consumption expansion. At the same time, a dynamic adjustment mechanism should be improved, and deduction standards should be reasonably adjusted and coverage expanded in light of changes in residents' consumption expenditure, price levels, and family structure. Policy precision and adaptability should be strengthened, focusing on key livelihood areas such as elderly care, childcare, housing, and education, with more detailed deduction standards and enhanced policy targeting. Combined with the pilot reform of instant invoicing at the consumer payment terminal, itemized and categorized deduction limits based on valid vouchers such as invoices should be implemented—on the one hand improving policy precision, and on the other hand promoting the completeness of the entire VAT invoicing chain. Research should be conducted to explore the introduction of a refundable tax credit mechanism, enabling middle- and low-income groups, even when their comprehensive income falls below the exemption threshold, to still receive actual fiscal subsidies for eligible deduction items, forming a substantive "negative income tax" adjustment effect and enhancing the coverage and effectiveness of the policy.

Fourth, focus on improving the social security system to improve residents' permanent income expectations. A high propensity for precautionary saving is an important factor constraining household consumption. Consumption subsidies are one-off transfer payments, while what affects consumption is the expectation of permanent income. It is suggested to accelerate the construction of inclusive, basic, and bottom-line livelihood projects, and to promote the extension of compulsory education years, increase basic pension insurance for urban and rural residents, and optimize the supply of affordable housing in accordance with the principle of "better early than late, better fast than slow." Public service expenditure should be reasonably increased, improving the supply capacity and quality of public services through government consumption, while easing residents' concerns about consumption through transfer payments, forming a "combined punch." It is also necessary to broaden channels for residents' property income and stabilize residents' wealth stock. Residents' property net income accounts for less than 10% of disposable income, 12.4 percentage points lower than in the United States, and residents' wealth consists of more real estate than liquid assets, with deposits outweighing stocks and funds among liquid assets. Against the backdrop of property market adjustment and interest rate declines, the comprehensive reform of capital market investment and financing should be deepened, the quality of listed companies improved, and dividend distribution encouraged to increase residents' property income through multiple channels. At the same time, stabilizing financial markets, especially the real estate market, will help stabilize residents' wealth stock and enhance residents' consumption capacity and willingness.