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Rebalancing in China: a taxation approach

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  • Damien Cubizol

    () (Univ Lyon, CNRS, GATE L-SE UMR 5824, F-69130 Ecully, France)

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 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 State-Owned Enterprises (SOEs) and, on the other hand, a catch-up of foreign firms' wages by domestic firms (public and private). In this model, firms' credit cost is a key channel because it impacts both firms' investment and household consumption (through returns on savings). These consumption and investment reforms bring welfare benefits to households, and the results are close to direct welfare maximization. In this framework, the rebalancing of the domestic demand does not require the readjustment of the external financial position because the aggregate savings rate remains high and the supply of domestic assets is reduced. Finally, another theoretical framework proposes a heterogeneous taxation of consumption across home and foreign goods to enhance consumption.

Suggested Citation

  • Damien Cubizol, 2017. "Rebalancing in China: a taxation approach," Working Papers 1732, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  • Handle: RePEc:gat:wpaper:1732
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    The Chinese economy; tax reforms; financial intermediation; consumption; investment; welfare; foreign assets;

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F30 - International Economics - - International Finance - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General
    • P30 - Economic Systems - - Socialist Institutions and Their Transitions - - - General

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