Why Are Diversified Personal Income Tax Credits Prevalent in OECD Countries? An Examination Based on Wage Tax Models

Since the late 1990s, diversified personal income tax credits have become increasingly prevalent in OECD countries. This study employs wage tax models to simulate calculations on policies governing personal income tax credits in OECD countries, aiming to analyze the reasons for their widespread adoption. The findings reveal that many OECD countries incorporate income phase-out mechanisms into their tax credit systems, coupled with refundable features in Child Tax Credits (CTC) and Earned Income Tax Credits (EITC), to address income inequality by capping high incomes and supplementing low incomes. Additionally, eligibility thresholds are designed within CTC and especially EITC structures to encourage labor force participation and increase working hours. Through various tax credits, these policies target households with children, single-parent families, and single-earner married couples to alleviate socioeconomic challenges. The conclusions hold significant implications for drawing successful international experiences in tax credits to build the personal income tax credit systems in China.