Rebalancing in China: A taxation approach

Abstract

The rebalancing of the Chinese economy is analyzed through a heterogeneous taxation of various types of firms. Based on a two-country dynamic general equilibrium model, the paper applies tax reforms to raise consumption, reduce some firms' overinvestment (overcapacities) and maintain a high level of welfare. To rebalance consumption and investment, taxation may allow reallocating a part of the labor force to firms that are not overinvesting. Moreover, the correction of distortions in production factor costs (capital and labor) is necessary during certain reforms applied in the model; that is, on the one hand, higher credit costs for firms that face soft budget constraints (via financial transactions taxes) and, on the other hand, a catch-up of foreign firms' wages by domestic firms (via business taxes and social security contributions). These tax reforms bring welfare bene_ts to households and stabilize the welfare reaction to productivity shocks. Another interesting result is that in this framework, the rebalancing of the domestic demand in China does not require the readjustment of the external financial position. Indeed, the aggregate savings rate remains high and the supply of domestic assets is reduced. Finally, a second theoretical framework proposes a heterogeneous taxation of consumption across home and foreign goods to enhance consumption. AbstractThe rebalancing of the Chinese economy is analyzed through a heterogeneous taxation of various types of firms. Based on a two-country dynamic general equilibrium model, the paper applies tax reforms to raise consumption, reduce some firms' overinvestment (overcapacities) and maintain a high level of welfare.To rebalance consumption and investment, taxation may allow reallocating a part of the labor force to firms that are not overinvesting (via business taxes and social security contributions). Moreover, the correction of distortions in production factor costs (capital and labor) is necessary during certain reforms applied in the model; that is, on the one hand, higher credit costs for firms that face soft budget constraints (via financial transactions taxes) and, on the other hand, a catch-up of foreign firms' wages by domestic firms (via social security contributions).These tax reforms bring welfare benefits to households and stabilize the welfare reaction to productivity shocks. Another interesting result is that in this framework, the rebalancing of the domestic demand in China does not require the readjustment of the external financial position. Indeed, the aggregate savings rate remains high and the supply of domestic assets is reduced. Finally, another model proposes a heterogeneous taxation of consumption across home and foreign goods to enhance consumption.

Modeling Tax Revenue Determinants: The Case of Visegrad Group Countries

“…Durusu-Ciftci et al (2018) argue that taxation has significant implications for the gross domestic product per capita, especially taxes on consumption. Barrios (2020) points out the effect of tax reforms is one of the most essential issues in economic policy, and Cubizol (2019) emphasizes the model of tax reforms to increase consumption, reduce overinvestment, and attain an important level of welfare. When it comes to tax revenue, there are several determinants affecting it, and this research considers the effects of the main macroeconomic determinants in every country.…”