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The Unified Enterprise Tax and SOEs in China

  • John Whalley
  • Li Wang

Currently proposals are actively circulating in China to move to a unified enterprise tax structure with similar tax treatment of state-owned enterprises (SOEs), other private enterprises (OPE) and foreign investment enterprises (FIEs). FIEs presently receive significant tax preferences through a sharply lower tax rate, tax holidays and other provisions. Here we use analytical representations of SOE behavior, which differ from that of the competitive firm, to argue that a unified tax structure may not be a desirable tax change and that typically a higher tax rate on SOEs is called for on efficiency grounds. Using a worker control model with endogenously determined shirking, taxes on SOEs reduce shirking and a reduced SOE tax rate under a unified tax relaxes discipline on SOEs and losses result. Our results indicate a 0.26% of GDP welfare loss using 2004 data from a unified tax, and larger loss relative to an optimal tax scheme. Alternatively, if we use a managerial control model variant, we find a 0.19% welfare loss from a unified tax, and larger losses relative to initial higher SOE tax rates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12899.

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Date of creation: Feb 2007
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Handle: RePEc:nbr:nberwo:12899
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  1. Shoven, John B. & Whalley, John, 1972. "A general equilibrium calculation of the effects of differential taxation of income from capital in the U.S," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 281-321, November.
  2. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
  3. Shoven, John B & Whalley, John, 1984. "Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey," Journal of Economic Literature, American Economic Association, vol. 22(3), pages 1007-51, September.
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