Rebalancing and the Chinese VAT: Some Numerical Simulation Results
This paper presents numerical simulation results that suggest that China can both reduce its trade imbalance and receive welfare benefits by switching the value added tax (VAT) regime from the current destination principle to an origin principle. With the tax on exports exceeding that no longer collected on imports, revenues rise and exports fall. VAT regime switching is thus a possibility for China to receive a double benefit, rebalancing trade with a welfare gain. This has implications for present G20 discussions on finding ways to adjust global trade imbalances. Under a destination principle, imports are taxed but input taxes are rebated on exports (as currently). Under an origin basis imports are not taxed, but no export rebates are given. Previous VAT literature stresses the neutrality of tax basis switches, which simply reflect moving between consumption and production taxes, but neutrality only holds when trade is balanced. In the unbalanced trade case for countries with a trade surplus, such as China, an origin basis offers a lower tax rate on an equal yield basis and reduced exports. We use a two country endogenous trade imbalance general equilibrium global trade model with endogenous factor supply, a fixed exchange rate and a non-accommodative monetary policy structure which supports the Chinese trade imbalance. We calibrate model parameters to 2008 data and simulate counterfactual equilibria for VAT tax basis switches in which the trade imbalance changes. Our results suggest that given China's trade surplus VAT regime switching to an origin can decrease China's trade surplus by over 50%, and additionally increase Chinese and world welfare. The rest of the world's production and welfare improves simultaneously.
|Date of creation:||Jan 2011|
|Date of revision:|
|Publication status:||published as LI, Chunding & WHALLEY, John, 2012. "Rebalancing and the Chinese VAT: Some numerical simulation results," China Economic Review, Elsevier, vol. 23(2), pages 316-324.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shoven, John B. & Whalley, John, 1977. "Equal yield tax alternatives : General equillibrium computational techniques," Journal of Public Economics, Elsevier, vol. 8(2), pages 211-224, October.
- 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.
- Genser, Bernd, 1996.
" A Generalized Equivalence Property of Mixed International VAT Regimes,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 98(2), pages 253-62, June.
- Genser, Bernd, 1994. "A generalized equivalence property of mixed international VAT regimes," Discussion Papers, Series II 241, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
- Dong Yan & Whalley John, 2011.
"Model Structure and the Combined Welfare and Trade Effects of China's Trade Related Policies,"
Global Economy Journal,
De Gruyter, vol. 10(4), pages 1-21, January.
- Yan Dong & John Whalley, 2009. "Model Structure and the Combined Welfare and Trade Effects of China's Trade Related Policies," NBER Working Papers 15363, National Bureau of Economic Research, Inc.
- Shoven,John B. & Whalley,John, 1992.
"Applying General Equilibrium,"
Cambridge University Press, number 9780521319867, September.
- Grossman, Gene M., 1980. "Border tax adjustments: Do they distort trade?," Journal of International Economics, Elsevier, vol. 10(1), pages 117-128, February.
- Alfredo M. Pereira, 1995. "Equal Yield Tax Alternatives and Government Deficits," Public Finance Review, SAGE Publishing, vol. 23(1), pages 40-71, January.
- Whalley, John, 1979. "Uniform domestic tax rates, trade distortions and economic integration," Journal of Public Economics, Elsevier, vol. 11(2), pages 213-221, March.
- Berglas, Eitan, 1981. "Harmonization of commodity taxes : Destination, origin and restricted origin principles," Journal of Public Economics, Elsevier, vol. 16(3), pages 377-387, December.
- Martin Feldstein, 1974. "Incidence of a Capital Income Tax in a Growing Economy with Variable Savings Rates," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 505-513.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16686. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.