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A proposed tax reform for China: Enhancing consumption and pension sustainability

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  • Chen, Zhaoyong
  • Leung, David
  • Mai, Joseph

Abstract

This study examines the long-run effects of a proposed tax reform in China that shifts the burden from income taxes to consumption taxes, addressing the dual challenges of an aging population and low household consumption. Using a heterogeneous-agent overlapping generations (OLG) model with earnings and health risks, we evaluate the tax reform that reallocates fiscal burdens while accounting for marital status and gender. Our findings show that demographic aging significantly raises income and payroll tax pressures, reducing consumption and welfare. In contrast, consumption tax-based reform enhances capital accumulation, sustains pensions without raising payroll taxes, and improves welfare. The results show the value of consumption taxation in promoting fiscal sustainability and efficiency in aging societies.

Suggested Citation

  • Chen, Zhaoyong & Leung, David & Mai, Joseph, 2025. "A proposed tax reform for China: Enhancing consumption and pension sustainability," China Economic Review, Elsevier, vol. 94(PA).
    • Handle: RePEc:eee:chieco:v:94:y:2025:i:pa:s1043951x25001397
    DOI: 10.1016/j.chieco.2025.102481
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    Keywords

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    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I10 - Health, Education, and Welfare - - Health - - - General
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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