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Tax Policy and Toxic Housing Bubbles in China

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  • Jia, Pengfei
  • Lim, King Yoong

Abstract

This paper explores the effects of a government tax policy in a growth model with economic transition and toxic housing bubbles applied to China. Such a policy combines taxing entrepreneurs with a one-time redistribution to workers in the same period. Under the tax policy, we find that the welfare improvement for workers is non-monotonic. In particular, there exists an optimal tax at which social welfare is maximized. Moreover, we consider the welfare effects of setting the tax at its optimum. We show that the tax policy can be welfare-enhancing, compare to the case without active policies. The optimal tax may also yield a higher level of welfare than the case even without housing bubbles. Finally, we calibrate the model to China. Our quantitative results show that the optimal tax rate is about 23 percent, and social welfare is significantly improved with such a tax policy.

Suggested Citation

  • Jia, Pengfei & Lim, King Yoong, 2018. "Tax Policy and Toxic Housing Bubbles in China," MPRA Paper 86576, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:86576
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    File URL: https://mpra.ub.uni-muenchen.de/86576/1/MPRA_paper_86576.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    China; Economic Transition; Housing Bubbles; Welfare;

    JEL classification:

    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy

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