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Rebalancing and the Chinese VAT: Some numerical simulation results

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  • LI, Chunding
  • WHALLEY, John

Abstract

This paper presents numerical simulation results that suggest that China can both reduce its trade imbalance and receive welfare benefits by switching the value added tax (VAT) regime from the current destination principle to an origin principle. We modify the traditional general equilibrium tax model to capture endogenous trade imbalances along with endogenous factor supply, a fixed exchange rate and a non-accommodative monetary policy structure which supports the Chinese trade imbalance. We calibrate model parameters to 2008 data and simulate counterfactual equilibrium for VAT tax basis switches in which the trade imbalance changes. Our results suggest that given China's trade surplus VAT regime switching to an origin basis can decrease China's trade surplus by over 40%, and additionally increase Chinese and world welfare. This has implications for present G20 discussions on finding ways to adjust global trade imbalances.

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Bibliographic Info

Article provided by Elsevier in its journal China Economic Review.

Volume (Year): 23 (2012)
Issue (Month): 2 ()
Pages: 316-324

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Handle: RePEc:eee:chieco:v:23:y:2012:i:2:p:316-324

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Web page: http://www.elsevier.com/locate/chieco

Related research

Keywords: Value added tax; Destination basis; Origin basis; Numerical simulation;

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References

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  1. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521266550, November.
  2. Ben Lockwood & David Meza & Gareth Myles, 1994. "When are origin and destination regimes equivalent?," International Tax and Public Finance, Springer, vol. 1(1), pages 5-24, February.
  3. Shoven, John B. & Whalley, John, 1977. "Equal yield tax alternatives : General equillibrium computational techniques," Journal of Public Economics, Elsevier, vol. 8(2), pages 211-224, October.
  4. Berglas, Eitan, 1981. "Harmonization of commodity taxes : Destination, origin and restricted origin principles," Journal of Public Economics, Elsevier, vol. 16(3), pages 377-387, December.
  5. Whalley, John, 1979. "Uniform domestic tax rates, trade distortions and economic integration," Journal of Public Economics, Elsevier, vol. 11(2), pages 213-221, March.
  6. Grossman, Gene M., 1980. "Border tax adjustments: Do they distort trade?," Journal of International Economics, Elsevier, vol. 10(1), pages 117-128, February.
  7. Feldstein, Martin S, 1974. "Incidence of a Capital Income Tax in a Growing Economy with Variable Savings Rates," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 505-13, October.
  8. Yan Dong & John Whalley, 2009. "Model Structure and the Combined Welfare and Trade Effects of China's Trade Related Policies," NBER Working Papers 15363, National Bureau of Economic Research, Inc.
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Cited by:
  1. John Whalley, 2012. "External Sector Rebalancing and Endogenous Trade Imbalance Models," Contemporary Economics, University of Finance and Management in Warsaw, vol. 6(4), December.

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