Dynamic equity in personal income tax design: Theory and application to Vietnam’s 2026 reform

Type of the article: Research ArticleAbstractStatic personal income tax governance in fast-growing economies can produce systematic equity erosion, as nominally fixed deductions and brackets gradually increase the effective tax burden on low- and middle-income households during periods of sustained income growth. This study develops a dynamic equity framework for evaluating personal income tax (PIT) design and applies it to Vietnam’s 2026 PIT reform as an illustrative case. Drawing on welfare economics, optimal tax theory, and contextual equity arguments, the study constructs a normative framework that treats PIT parameters as adaptive variables and evaluates reform effects using welfare-theoretic criteria. The framework identifies equity lag, defined as the divergence between a fixed PIT schedule and evolving economic conditions, as a central governance failure. The Vietnam case suggests that five years of parameter stagnation are consistent with the emergence of a systematic equity lag among low- and middle-income formal workers, a pattern illustrated through simulation analysis rather than full empirical validation. In this sense, the deduction increases may be interpreted as a Kaldor-Hicks welfare improvement concentrated in the lower and middle portions of the formal wage distribution. However, a one-time adjustment without an embedded updating mechanism is unlikely to prevent the recurrence of equity lag as growth and inflation resume. Sustaining distributional gains, therefore, requires a shift from episodic legislative correction to adaptive PIT governance through indexation rules, mandatory review schedules, and regionally calibrated deduction thresholds.