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Assessing effective VAT rates and tax efficiency at industry-level: The case of China

Author

Listed:
  • Chang, Gene H.
  • Chen, Ye
  • Chang, Kathryn J.

Abstract

In the real-world value-added tax (VAT) rates among industries are often non-uniform. Estimating effective VAT rates (EVATRs) at the industry level can increase understanding VAT burden and tax efficiency in individual industries. EVATRs should be solved endogenously in a general equilibrium framework, so the estimated EVATRs are consistent with the given data of the input-output relationship and industry net VAT revenues. We adopt this new approach to estimate the industry-level EVATRs and assess tax performance under China's multi-tiered VAT rate system on a set of newly released data. The results demonstrate many Chinese industries - in particular, all service industries - pay more VAT taxes than their statutory rates require. The VAT overpayment is mainly driven by unrefunded VAT for inputs by small firms, induced by government policies. We also find China and its industries have higher VAT tax efficiency than most OECD countries, which challenges the conventional preference for a uniform VAT rate regime.

Suggested Citation

  • Chang, Gene H. & Chen, Ye & Chang, Kathryn J., 2025. "Assessing effective VAT rates and tax efficiency at industry-level: The case of China," China Economic Review, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:chieco:v:93:y:2025:i:c:s1043951x25001129
    DOI: 10.1016/j.chieco.2025.102454
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    References listed on IDEAS

    as
    1. Gene H. Chang & Ye Chen & Kathryn J. Chang, 2024. "Effective VAT Rates, Tax Efficiency and Burden: Are Some Industries over-Taxed in China?," Chinese Economy, Taylor & Francis Journals, vol. 57(1), pages 1-17, January.
    2. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
    3. James Giesecke & Nhi Hoang Tran, 2012. "A general framework for measuring VAT compliance rates," Applied Economics, Taylor & Francis Journals, vol. 44(15), pages 1867-1889, May.
    4. Gottfried, Peter & Wiegard, Wolfgang, 1991. "Exemption versus zero rating : A hidden problem of VAT," Journal of Public Economics, Elsevier, vol. 46(3), pages 307-328, December.
    5. James A. Giesecke & Christopher King & Jason Nassios & Nhi Hoang Tran, 2021. "The impact of GST reform on Australia’s state and territory economies," Applied Economics, Taylor & Francis Journals, vol. 53(51), pages 5929-5947, November.
    6. Gene H Chang, 2022. "Theory and Programming of Computable General Equilibrium (CGE) Models:A Textbook for Beginners," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 12335.
    7. Morrow, Peter & Smart, Michael & Swistak, Artur, 2022. "VAT compliance, trade, and institutions," Journal of Public Economics, Elsevier, vol. 208(C).
    8. Sijbren Cnossen, 2022. "The C-inefficiency of the EU-VAT and what can be done about it," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(1), pages 215-236, February.
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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E16 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Social Accounting Matrix
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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