2000 Student-Faculty Fellows: Illinois Wesleyan University

People’s Republic of China:
A Study of the Effectiveness of the New Chinese Tax System

Mentor: Professor Zhenhu Jin, Department of Business Administration
Student Fellow: Yi Linda Zhang, ’02, Public Accounting

Yi Linda Zhang

The trip was a fulfilling experience for me because I was given the opportunity to learn things that cannot be learned in a classroom. It enabled me to apply the theories taught in the classroom and learned from textbooks. Learning the process of collecting data and conducing research in a foreign country made it an educational, yet fun, experience. Most importantly, it opened my eyes to the business world in China and significantly enhanced my knowledge of its economic system. I learned how to use and analyze the data we collected to get a better understanding of the country’s economic issues. The trip broadened my overall knowledge about the Chinese culture and society as well. This experience is invaluable and beneficial to my plan for pursuing a future career in East Asia. What I learned from this trip has a significant impact on my career goal and will be extremely helpful in my future career.

Prof. Zhenhu Jin

Very important on my research agenda is the Chinese economic reforms and the impact of reform measures on various aspects of the Chinese economy. Tax plays an important role in all decision making process and gaining a deep understanding of the new, emerging tax system in China will undoubtedly help me better understand the issues I studied before and give me a new perspective when I engage in future research.

This experience will also help me greatly in my teaching. The findings of our research is a classical case of how governments and central banks uses tax system and interest rates to redistribute wealth and to affect the economy. When lecturing on economic environment in Bus 301/302, I already used what happened in China and what we found in our research as a real example to illustrate the roles of government and central banks in economic life.

Research Findings

Under this new individual income tax law, a flat-rate tax of 20% was levied on savings interest earned in the Chinese currency Reminbi (RMB) and all foreign currency deposit accounts at Chinese domestic banking institutions. The interest tax was introduced to achieve the following objectives: 1) to stimulate consumer spending; 2) to redistribute income; and, 3) to encourage individual investment in the capital market. Our preliminary results indicate that the tax has indeed achieved its intended objectives. The increase in savings has slowed down and consistent price declines, which started more than two years ago, have stopped. More funds have since flown into the stock markets, which recently reached record highs.

Venues for Sharing

The first draft of the paper is being written. Although many revisions are expected, we plan to submit it to Journal of Contemporary China before the end of the year.