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Evaluating the Impure Chinese VAT Relative to a Pure Form in a Simple Monetary Trade Model with an Endogenous Trade Surplus


  • John Whalley
  • Li Wang


China's VAT while seemingly conventional has two major impurities. One is that a separate export rebate system exists where rebate rates are linked from rates paid on creditable inputs. The other is the use of an income base for which there is no crediting of taxes on capital good, rather than the more conventional consumption base with expensing of investment expenditures. Here we argue that in a conventional competitive model both impurities would typically involve a welfare loss, but if we use a numerical calibrated equilibrium model with a monetary structure capturing by these Chinese features in which the trade surplus is endogenously determined and the exchange rate is exogenously set, things are different. These impurities effectively act as added taxes on domestic production (lowed export rebate rates, taxes on a larger VAT base) and tax exporting. Tax exporting reduces exports which lowers the surplus and accumulation of foreign currency. In a static model, a reduced surplus is welfare improving. Using 2002 data, we thus find that China's impure VAT system yields welfare gains in contrast to what a conventional model would show. These results are important since there are arguments being made inside and outside China for changes to be made and move closer to a pure VAT. Our results suggest that unless there are wider changes first in macro-structure, such changes may not be welfare preferred.

Suggested Citation

  • John Whalley & Li Wang, 2007. "Evaluating the Impure Chinese VAT Relative to a Pure Form in a Simple Monetary Trade Model with an Endogenous Trade Surplus," NBER Working Papers 13581, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13581
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    References listed on IDEAS

    1. Dirk Willenbockel, "undated". "Structural Effects of a Real Exchange Rate Revaluation in China: a CGE Assessment," EcoMod2006 272100102, EcoMod.
    2. Dawkins, Christina & Srinivasan, T.N. & Whalley, John, 2001. "Calibration," Handbook of Econometrics,in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 58, pages 3653-3703 Elsevier.
    3. Whalley, John, 1979. "Uniform domestic tax rates, trade distortions and economic integration," Journal of Public Economics, Elsevier, vol. 11(2), pages 213-221, March.
    4. Chen, Chien-Hsun & Mai, Chao-Cheng & Yu, Hui-Chuan, 2006. "The effect of export tax rebates on export performance: Theory and evidence from China," China Economic Review, Elsevier, vol. 17(2), pages 226-235.
    5. Ben Lockwood & David Meza & Gareth Myles, 1994. "When are origin and destination regimes equivalent?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 1(1), pages 5-24, February.
    6. Lockwood, Ben & Meza, David & de Myles, Gareth D, 1994. " The Equivalence between Destination and Non-reciprocal Restricted Origin Tax Regimes," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(3), pages 311-328.
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    Cited by:

    1. Hashimzade, Nigar & Huang, Zhanyi & Myles, Gareth D., 2010. "Tax fraud by firms and optimal auditing," International Review of Law and Economics, Elsevier, vol. 30(1), pages 10-17, March.
    2. Li, Aijun & Lin, Boqiang, 2013. "Comparing climate policies to reduce carbon emissions in China," Energy Policy, Elsevier, vol. 60(C), pages 667-674.

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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