| Since 2007,China’s GDP growth rate has been declining every year.In order to guide the smooth transition of economic growth rate and optimize the economic structure,the central government has carried out a new round of systematic tax structure optimization and tax rate adjustment.In 2008,China has completed the transition from production-type VAT to consumption-type VAT.After the replacement of business tax with value-added tax was fully implemented on May 1,2016,the State Council consolidated and reduced the VAT rates for three times.Under the framework of dynamic general equilibrium model,this paper mainly tries to study the short-term and long-term impact of VAT rate reduction and business tax change to VAT on macroeconomic variables in China,evaluates the current round of tax reform policies,and provides a theoretical analysis basis for the formulation of fiscal and tax policies in the future.In Chapter 2,we analyze the impact of replacing business tax with VAT on macro variables and industrial structure under a four-sector model.In Chapter 3 and Chapter 4,this paper analyzes the short-term and long-term effects of the VAT rate reduction on the macro economy under the single-sector model and the vertical structure model respectively,and compare the differences of the economic effects of alternative tax reduction schemes through counterfactual analysis.The chapter 2 analyzes the impact of replacing the business tax with VAT on industrial structure.We construct a four-sector dynamic general equilibrium model with product sector and service sector as well as upstream and downstream industry chain to describe the VAT deduction chain.In addition,contrary to the usual model assumptions,this paper takes services and final products together as the factor inputs for producing investment goods.We compare the difference of steady-state values of the model system under different assumptions.The transition dynamics of macro variable and the dynamic change of the industrial structure are simulated under the parameter that conforms to the real data.The results show that the assumption of the production function of investment products has a great impact on the results of the model.If the investment products are only produced by the final products,the "replacing business tax with VAT" policy will not affect the steady interest rate level,and thus has little impact on consumption,investment and output.When final services are also taken as input factors in the production of investment goods,the drop in the price of investment goods will reduce households’ demand for steady state interest rates,thus greatly increasing the steady state capital stock and investment demand,thus increasing output and consumption.After calibrating the parameters with real data,the numerical simulation results show that "replacing the business tax with VAT" policy will reduce the relative price of final services to final products by 3.09% in the long run,reduce the steady-state interest rate by 3.37% in the long run,and increase the steady-state wage level by 6.9% in the long run.However,the interest rate increased by 1.6% and the wage level decreased by 1.1% in the early stage of the tax reform.The "replacing the business tax with VAT" policy increases the steady-state level of final services and final products by 9.32% and 7.48% respectively in the long run,while increases the output growth rate of the two industries by 1.4% and 1.7% respectively in the short run.Meanwhile,in the long run,the tax reform increased household consumption of services by 5.56% and consumption of products by 2.26%,but in the early stage of the tax reform,household consumption of services and products both decreased by about 5%.The tax reform also increased household labor supply by 2.24%and welfare level by 1.99% in the long run.In the short term,the government’s tax revenue decreased by 12.76%,but with the increase of output and family income,the decline narrowed to 5.77%.At the same time,the simulation results show that the actual proportion of service output only increased by 0.38% in the long run,and even decreased by 0.07% in the early stage,which is obviously different from the actual data.The tax reform made about 1% of labor and capital flow from the tertiary industry to the secondary industry.In the actual data,the relative price of the service sector to the manufacturing sector decreased by 3.8% in the first quarter after the implementation of the policy.The simulation results of the model in this chapter show that the relative price decreased by 3.61% in the initial period of the implementation of the policy,which is close to the actual data.Chapter 3 introduces two expenditure rules of the government into a classic Ramsay model,and introduces the productive expenditure of the government into the model,discusses the long-term impact of permanent VAT tax reduction on the steady state of various macroeconomic variables,and analyzes the short-term impact of tax reduction policy in the transiton dynamics.The results show that the decrease of VAT rate affects output and other macro variables mainly through changing labor supply,and government expenditure rules play a decisive role in the effect of tax rate reduction.On the one hand,productive government expenditure will directly affect the marginal productivity of capital and labor,and on the other hand,it will amplify the effect of tax reduction through feedback effect.Specifically,for the case that government expenditure decreases with tax reduction,the comparative static analysis shows that the direction of impact of tax reduction on steady labor and output depends on the reciprocal of residents’ intertemporal consumption substitution elasticity ?.When?(27)1,tax reduction promotes economic growth;when ?(29)1,tax reduction slow economic growth.In the calibration,we set it equal to 1.5,and the numerical simulation shows that the income effect of tax reduction on leisure was greater than the substitution effect,so leisure increased and labor decreased,and finally the output decreased by 0.38% in the new steady state.Productive government spending greatly amplifies the impact of tax cuts through feedback effects.When the productivity of public capital is large enough,the income increase caused by tax reduction is offset by the income decline caused by output decline,so that the income effect is reduced,the substitution effect is dominant,and the labor supply in the new steady state will increase by 0.26% instead.Numerical simulation shows that when the productive of government spending be considered,under the expenditure rule of scenario 1,the reduction of VAT rate by 20% reduces the economic growth rate by 0.16% in the initial stage,and then the impact on the economic growth rate gradually decreases until it returns to the exogenous economic growth rate.In the new steady state,the output level will decrease by 4.12%,the consumer welfare will decrease by 1.81%,and the government tax revenue will decrease by 12.89%.In the scenario of government spending as a fixed proportion of GDP,as the government needs to finance its expenditure through lump sum tax or bond issuance,the substitution effect of tax reduction on residents’ leisure is always greater than the income effect.Residents will have less leisure and more work,and in the new steady state,the major macro variables will all rise proportionately.Productive government spending slightly magnified the effect.The numerical simulation results show that the reduction of VAT rate by 20%increases the economic growth rate by 0.42% in the initial stage,and then the economic growth rate gradually returns to the exogenous growth rate.In the new steady state,output increased by 1.16%,consumer welfare increased by 0.53%,and government proportional tax revenues fell by 8.1%.In the real data,so far,the government’s fiscal expenditure rules are more in line with the setting of scenario 2.Therefore,we believe that the reduction of VAT rate can improve labor supply and increase output level,but the impact is limited and not enough to curb the downward trend of growth rate.If the financing capacity of the government is restricted in the future,the productive expenditure of the government will decline,which will have a greater negative impact on the output level.Finally,we introduce heterogeneous residents into the model,and the simulation results show that the increase in the proportion of non-Ricardian households increases the effect of tax cuts,but the magnitude is very small.Tax reduction has different effects on the two types of consumers.Since Ricardian households will hold more capital after tax reduction,this income effect brings more consumption and leisure to Ricardian household,so the consumption growth of nonRicardian household is less than Ricardian household,and the growth of labor supply is greater than Ricardian household.The existence of non-Ricardian household increases the welfare level of Ricardian household.When the proportion of nonRicardian household increases from 0 to 60% of the population,the change in the welfare level of Ricardian household due to tax reduction increases from 0.525% to0.958%.In chapter 4,the basic model of chapter 3 is extended to a vertical structure model of both upstream and downstream firms.We studied the implementation of the tax policy impact on economic structure(including the impact on the scale of output of upstream and downstream firms and the movement of labor and capital between upstream and downstream firms)and the change in the relative price of intermediate products to final products.This chapter also compares the influence of the proportion of government spending on upstream products on the rate of change of steady state.We find that the impact of the VAT rate reduction under the expenditure rules in Scenario 1 differs from the results of the one-sector model in Chapter 3.Under logarithmic utility function,when the government spending has no productivity,onesector model shows that reduction of VAT rates has no effect on labor supply and output,but in the vertical structure model,the reduction of VAT rates reduces the output of upstream firms by 1.8%,increases the downstream firms’ output by 0.54%,and reduces the final product corresponding to GDP by 0.38%.This is mainly because when takes into account the government purchase of upstream products,reduce government spending will change the size of upstream output relative to the final output.Numerical simulation shows that when the proportion of government spending in the upstream increase,the effect of tax cuts for labor supply and output amplitude is also increasing.Under the expenditure rule of scenario 1,labor and capital flow from upstream firms to downstream firms.This is because the reduction of government tax revenue reduces the government’s demand for intermediate products.However,due to the decrease of final product tax rate,households’ demand for final products increases,and the reduction of government demand for final products is also smaller than that of intermediate products.When government spending has productivity,the effect of a decrease in VAT rates on steady state GDP falls from-0.38% to-4.65%,which is close to the results of the one-sector model in Chapter 3.The household’s utility level also decreased from 2.55% to 1.82%.Under the expenditure rule of scenario 2,the direction of impact brought by the decrease in VAT rate is the same as that of the one-sector model,with the output,labor and capital stock of upstream and downstream firms are same proportion increased by 2.19%,and the government’s proportional tax revenue decreasing by 6.73%.Productive government spending magnified the effect of the tax cut,boosting steady state output by 3.74%,a much larger effect than the one-sector model.Unlike Scenario 1,the impact of tax cuts gradually decreases as the upstream share of government spending increases.The decrease of VAT rate has no obvious effect on the relative price of intermediate products to final products in the steady state.However,in the transition dynamic,the relative price of intermediate products first declines and then returns to the new steady-state level under the government expenditure rule in scenario 1.Under the scenario two,the relative prices of intermediate goods first rise and then fall to the new steady state level.The reduction of distorting tax on intermediate products has a greater impact on output than the reduction of VAT rate.Assuming that replacing business tax with VAT reduces the distorting tax rate from 5% to 2%,the steady-state GDP increases by 1.16% and 5.47%respectively under the two government expenditure rules.The reduction of distortion tax makes the relative price of intermediate products for downstream firms drop,so the downstream firms use intermediate products to replace labor and capital in production.The price received by upstream firms increases after the distortion tax is reduced.At the same time,the increase of downstream demand causes upstream firms to expand production,so labor and capital flow from downstream firms to upstream firms.Finally,the counterfactual analysis shows that the reduction of capital tax has a greater impact on GDP growth and steady state,as well as consumer welfare,than the reduction of VAT,when the government cuts the same amount of revenue.This is because the decline of steady-state interest rate promotes the formation of private capital and increases the marginal productivity of other factors,which offsets the impact of the decline of public capital under the expenditure rule of Scenario 1 and strengthens the positive feedback effect under the expenditure rule of Scenario 2.Under the expenditure rule in Scenario 1,the VAT reduction reduces the GDP growth rate by0.13% initially and by 4.65% in the long run steady state level.The reduction of capital tex raises GDP growth by 0.6% in the initial period and 2% in the long run steady state level.Both of the two tax reduction schemes reduced the government tax revenue by8.4% in the initial stage,but the policy of reducing VAT made the government tax revenue continue to decline,the final reduction reached 12.05%,while the reduction of capital tax made the government tax revenue slightly increase later,the final reduction was 8.36%.Under the expenditure rule of Scenario 2,the reduction of VAT rate increases the economic growth rate by 1.32% at the initial stage and the long run steady state GDP by 3.74%.The reduction in capital tax rates raised economic growth by 2.09 per cent in the initial period and 11.44 per cent in the long run steady state GDP.Government revenues fell by 7.7% at the start of both tax cuts,but the VAT cut led to a final 5.32% drop in revenue,while the capital tax cut ended up increased by 0.49%.It can be seen from the research of this paper that "replacing business tax with VAT" reform has a great positive impact on the economy.Both the four-sector model in Chapter 2 and the vertical structure model in Chapter 4 show a large increase in steady-state output,and the GDP growth rate is increased by about 1.5% at the early stage of the policy implementation.Reducing VAT rates has a limited impact on economic growth and can even have a negative impact when government spending is reduced along with tax cuts.Under the background of transformation of economic growth mode in China,the government needs to make a trade-off between stabilizing economic growth and transforming government functions.In order to stabilize economic growth,the government still needs to issue bonds or other financing methods to ensure that government spending does not decline after tax reduction before China realizes the endogenous growth mode driven by innovation.In addition,the counterfactual analysis shows that the impact of reducing capital tax rate on GDP growth and steady state,as well as the impact on consumer welfare,is better than that of reducing VAT rate. |
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