China's value-added tax reform, capital accumulation, and welfare implications

This paper analyzes the effects of China's upcoming value-added tax (VAT) reform of removing investment from the tax base on capital accumulation and the welfare of the rich and the poor. Three alternative methods to make up for the loss of tax revenue are considered. The VAT reform with consumption tax being endogenous increases capital accumulation and the utility of both the rich and the poor. The VAT reform with the labor income tax rate being endogenous increases capital accumulation; and it decreases the utility of the rich and increases the utility of the poor (increases the utility of both the rich and the poor) if the rich has a higher rate or the same rate of time preference (if the rich has a lower rate of time preference). The VAT reform, accompanied by a cut in transfers to the poor, has no effect on capital accumulation if the rich and the poor have the same rate of time preference; it decreases (increases) capital accumulation if the rich has a higher (lower) rate of time preference; and it increases the utility of the rich and decreases the utility of the poor.     

A Comparison of Menu Costs in Open and Closed Economies with a Mixed Industrial Structure

In this paper we develop Dixon and Hansen (1997) to allow for two-sector small open economy in which the non-traded sector is monopolistic. The closed economy version of the model generalises Dixon/Hansen to allow for diminishing returns on the traded sector. We compare the short-run impact of menu costs on the economy and also the size of menu costs needed to sustain nominal rigidity in both the open and closed economies. We find that whilst the welfare gains from monetary expansion are of a similar magnitude, nominal rigidity can occur for much smaller menu costs than in the closed economy case. Hence we argue that menu costs and the resultant nominal rigidities are more likely to be important in an open economy.     

基础设施建设支出、结构性减税与最优政策选择

财政政策的最优政策选择问题对于国家宏观调控政策的出台具有指导意义。既往的研究忽略了利用动态一般均衡的方法探求具有双重外部性的基础设施建设支出与结构性减税支出的政策选择问题。本文利用引入基础设施建设支出和结构性减税的新凯恩斯DSGE模型,测算比较基建支出和结构性减税的政策福利效应。研究表明：具有双重外部性的基础设施建设支出不仅可以通过提高生产效率的方式促进产出,还可以通过挤入居民消费的方式加强政策福利效应。经过测算,短期的基建支出乘数大于结构性减税的政策乘数。同时,基建支出长期平均产出乘数小于结构性减税的平均产出乘数。与结构性减税政策相比,增加基建支出对于财政资金有限的政府是短期内更加有效的产出刺激政策,但在长期中,结构性减税政策不仅具有较高的政策效应,还可以从消费、劳动、投资等角度实现结构性政策目标。进一步研究发现,地区经济发展水平的不同会导致各地区的最优政策选择存在差异性：发达地区可以通过结构性税收政策解决结构性问题的同时实现长期经济增长;而欠发达地区则更应该注重运用基础设施建设为主的支出政策以促进经济增长;但随着人口逐渐从欠发达地区流出,提高欠发达地区的基建支出是否是可行之策,还需要考虑区域协调发展等诸多因素。     

Tax policy implications for a two‐engine growing economy

In an endogenous growth model with two engines of R&D and capital, we investigate the environment of “inclusive growth” for tax reallocations (tax increases or tax credits) to gain broader benefits in terms of promoting the overall GDP growth without an increase in income inequality. Our results show that a tax increase in the capital‐good sector can result in inclusive growth, boosting overall growth and reducing income inequality, provided that the status quo tax rate is not too high. Surprisingly, tax credits are not able to achieve such inclusive growth. While the GDP growth rises, a tax credit in the R&D sector not only increases income inequality but also decreases the aggregate employment, if the labor mobility cost between the final‐good and R&D/capital‐good sectors is relatively low. This provides a caution to policymakers given the fact that research tax credits have served as a common incentive to strengthen the R&D environment.     

Foreign capital,welfare and urban unemployment in the presence of agricultural dualism

In a two sector mobile capital Harris–Todaro model, such as [Corden, W.M., Findlay, R., 1975. Urban unemployment, intersectoral capital mobility, and development policy in a dual economy. Economica 42, 59–78], an inflow of foreign capital in the presence of protectionist policy is welfare deteriorating as well as unemployment accentuating. But, the developing countries have chosen liberalized investment and trade policies as their development strategies and have been able to attract a considerable amount of foreign capital during the last two decades. A relevant question is why these countries are yearning for foreign capital given its detrimental effects as predicted by the conventional theoretical literature on trade and development. This paper makes an attempt to address the above issue in terms of a three sector Harris–Todaro model with agricultural dualism and a non-traded final commodity. In the given setup, an inflow of foreign capital is likely to improve welfare and does not necessarily worsen the problem of unemployment. The paper may also be useful to explain as to why many of the developing economies have experienced ‘jobless growth’ in the liberalized regime.     

Can good events lead to bad outcomes? Endogenous banking crises and fiscal policy responses

In this paper, we study the impact of changes in the urban labor force and foreign direct investment on the banking sector, using a dynamic general equilibrium model with a financial sector. Numerical simulations are performed using stylized Chinese data, and bank failures are generated through increases in the growth rate of the labor force, a revaluation of the exchange rate, or an increase in debt issue to finance the government deficit, as compared to a benchmark scenario in which banks remain solvent. Thus bank failures can result from what might seem to be either beneficial economic trends or correct monetary and fiscal policies. We introduce fiscal policies that modify relative factor prices by lowering the capital tax rate and increasing the tax rate on labor. Such policies can prevent banking failures by raising the return to capital. It is shown that such fiscal policies are, in the short run, welfare reducing.     

Immigrant Specificity and the Relationship between Trade and Immigration: Theory and Evidence

Studies routinely document that immigrant employment concentrates in non‐traded goods sectors and that many immigrants have low inter‐sectoral mobility. We consider these observed characteristics of immigrant employment with regard to the question of how immigration affects a nation's pattern of production and trade. We model an economy producing three goods; one is non‐traded. Domestic labor and capital are domestically mobile but internationally immobile. Allowing that some new immigrants will become specific to the non‐traded goods sector, the model indicates that the effects of immigration on output and trade depend importantly on the sectoral pattern of employment of both new and existing immigrants. Empirical investigation in a panel data set of OECD countries supports the model's prediction that immigration raises the output of non‐traded goods. Consistent with the model, we also find that immigration and trade are complements. Given its empirical support, the model's implications for immigration policy are then discussed.     

The value-added tax reform and labor market outcomes: Firm-level evidence from China

The tax incentives designed to stimulate firm investment may have a large and unexpected impact on labor market outcomes. Using a comprehensive data set on Chinese manufacturing firms during the period 1998–2007 with a difference-in-differences approach, we examine the impact of the value-added tax reform in 2004 on the firm-level labor market outcomes. We find that firms in eligible industries and pilot regions (treated firms) enjoying lower costs of purchasing fixed assets under the reform tended to increase capital investment and reduce employment simultaneously relative to firms that did not have tax incentives (the control firms). Compared with the control firms, the treated firms became more capital intensive but had declines in labor share in value added and average wage. We also find that the employment adjustment is associated with increase in the share of skilled workers in terms of engineers and technicians, but not workers with a college degree or higher.     

The Timing of Redistribution

We investigate whether late redistribution programs that can be targeted toward low income families, but that may distort savings decisions, can “dominate” early redistribution programs that cannot be targeted as a result of information constraints. We use simple two‐period overlapping generations models with heterogeneous agents under six policy regimes: a model calibrated to the U.S. economy (benchmark), two early redistribution (lump sum) regimes, two (targeted) late redistribution regimes, and finally a model without taxes and redistribution. Redistribution programs are financed by a labor tax on the young generation and a capital tax on the old generation. We argue that if the programs are small in size, late redistribution can dominate early redistribution in terms of welfare but not in terms of real output. Better targeting of low income households cannot completely offset savings distortions. In addition, we find that the optimal transfer and tax policy implies a capital tax of 100% and transfers exclusively to the young generation.     

Government budget,public-sector wages and capital taxes in a small open economy: A Hong Kong case

This paper examines the welfare implications of adjustments in public-sector wages and capital tax rates for a small open economy in a general equilibrium setting. The individually and jointly optimal wage and tax policies are derived and interpreted. Facing reductions in land sales and falls in foreign interest rates, a cut in public workers' pay is needed to make their wage comparable to the private sector and a hike in capital taxes is recommended for a budgetary consideration. Using a computable general equilibrium model for Hong Kong, we numerically evaluate the various optimal policies which not only confirm the theoretical results but also provide quantitative estimates of the optimal policy variables.     

Tax reform,capital allocation and welfare gains in Norway

Summary This paper analyzes the potential welfare gains to the Norwegian economy of implementing a tax reform that broadens the tax base and lowers tax rates on capital income. For this purpose a dynamic general equilibrium model where agents have perfect foresight is developed. The model is highly aggregate, with only one production sector and one household sector, but it incorporates a very detailed treatment of the taxation of capital income. This includes a two-way classification of capital assets into three ownership classes: corporate, non-corporate and household, and across two types of assets: long-lived and short-lived. This suffices to capture those elements of the Norwegian tax code that give rise to the most important distortions, both intratemporally and intertemporally.I have benefited greatly from detailed comments from Don Fullerton, A. Lans Bovenberg and an anonymous referee. Please direct all correspondence to the author to: Fiscal Affairs Department, International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431.     

Imperfect Intersectoral Labor Mobility and Monetary Shocks in a Small Open Economy

In this paper, we model the assumption of imperfect labor mobility across sectors in the New Open-Economy Macroeconomics framework to assess its impact on output, inflation, and welfare. Following a permanent home monetary expansion in a small open economy, we find that the above-mentioned assumption leads to: (i) less expansionary effects on (traded) output in the short term, although also less contractionary in the long term; (ii) lower short-term inflation but higher in the long term; and (iii) less intertemporal welfare, with even a ??beggar thyself?? problem being possible.     

To Spend the U.S. Government Surplus or to Increase the Deficit? A Numerical Analysis of the Policy Options

This paper provides a numerical analysis of the likely benefits from adopting alternative ways of reducing the projected fiscal surplus (as of the summer 2001) in the United States economy. Calibrating a small growth model, our results suggest that investing the surplus in public capital is likely to yield the greatest long-run welfare gains, although decreasing the capital income tax is only marginally inferior. Both these options dominate increasing government consumption expenditure or decreasing the tax on labor income. By shifting resources from consumption toward capital the two superior policies involve sharp intertemporal tradeoffs in welfare; significant short-run welfare losses are more than compensated by large long-run welfare gains. By contrast, the two inferior options are gradually welfare-improving through time. A crucial factor in determining the benefits of reducing the government surplus through spending is the size of the government sector relative to the social optimum. We find that the second-best optimum is to increase both forms of government expenditure to their respective social optima, while at the same time restructuring taxes by reducing the tax on capital and raising the tax on wage income to achieve the targeted reduction in the surplus. J. Japan. Int. Econ., December 2002, 16(4), pp. 405–435. Department of Economics, University of Washington, Seattle, Washington; and Department of Economics, Terry College of Business, University of Georgia, Atlanta, Georgia. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E62, O41.     

The impact of an accelerated depreciation tax policy on employment: Evidence from China

We examine the impact of an accelerated depreciation tax policy (ADP) on employment. As a tax incentive policy, we expect an ADP to impact firm behavior significantly, but its effect on employment remains uninvestigated. Leveraging the two-stage implementation of an ADP in selected industries in China in 2014 and 2015 and using a difference-in-differences research design, we find that: 1) the ADP significantly increases employment, which is consistent with the output effect hypothesis; and 2) the ADP increases firms’ labor demand, mainly by stimulating investment in fixed assets and easing their financial constraints. Additional analysis suggests that the impact of ADP on employment is more salient for small firms, non-state-owned firms, and high growth firms, and skilled labor employment, indicating that the ADP is more effective for firms with high financial constraints and hiring skilled labor to accompany the increase in capital investment.     

浅析固定资产投资对GDP的影响

固定资产对一个企业来说是其主要的劳动手段,固定资产的投资间接得影响到了一个经济体的产出。本文通过模型间接的从固定资产投资的角度研究了其对GDP的影响.从计量经济学的检验结果看无论是公有经济还是个体经济对GDP都存在线性的影响,进一步证明了固定资产投资对一国社会总产出的影响.     

Trade and Tax Reforms in a Cash‐in‐Advance Economy

We examine the effects of both tariff‐only and coordinated trade‐tax reforms on market access, government revenue, and welfare for a small monetary economy, under the assumption that a certain fraction of purchases of each good must be financed with cash held in advance. We show that if the cash requirement ratio in the exportable sector is greater than that in the importable, then, contrary to previous results, (i) a uniform radial reduction of tariffs has ambiguous effects on both welfare and market access, (ii) tariff and consumption tax reforms that leave consumer prices unchanged may be more efficient in improving market access and welfare than a reform that involves only tariffs, and (iii) export and production tax reforms that keep producer prices unchanged may be welfare deteriorating.     

Dual Income Taxation: A Promising Path to Tax Reform for Developing Countries

The dual income tax combines a progressive tax on labor income and a lower flat tax on income from capital. Unlike flat tax systems, a dual income tax provides developing countries greater flexibility in addressing tax competition while retaining progressivity. Countries could use the move to a dual income tax system not just as an opportunity to rationalize the taxation of income from business operations and investment but also as a vehicle for broader reform of their tax systems.     

Is there any gain from social security privatization?

Increasing calls for a social security reform of switching from the pay-as-you-go (PAYG) system to a funded system has been seen in recent decades. This paper examines the effect of this reform on capital accumulation and the welfare of each generation. Three methods are used to finance the pension debt, government debt financing, tax financing, and government asset financing. With government debt or tax financing, the market equilibrium remains unchanged and all generations are as well off in the new system as in the PAYG system. Thus, switching from the PAYG system to a funded system is neutral. With government asset financing, the interest rate will decrease, private capital will increase, but the total output may either increase or decrease. The welfare effect is also ambiguous in general, depending on the rate of return of government assets. With plausible parameters, our simulation shows that the reform will lower the interest rate, increase private capital, and lower government capital in the short run, but raise government capital and increase output in the long run.     

Productivity,Preferences and UIP Deviations in an Open Economy Business Cycle Model

We show that a flex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (1) traded and non-traded sectors; (2) financial market incompleteness; (3) preference shocks; (4) deviations from UIP condition for the exchange rates; and (5) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.     

Welfare Effects of Capital Taxation in a Small Open Economy

In a small open economy, the welfare effect of capital taxation depends on the allocation of the tax revenue as well as the tax system. If tax revenues are used to finance debt or government spending, an increase in either residential or territorial capital taxation will reduce the welfare of the representative individual. If tax revenues are transferred intergenerationally, an increase in the residential capital tax rate will increase the steady-state welfare when the after-tax interest rate is greater than the growth rate. If the revenue is rebated to the tax payer, an introduction of territorial capital taxation may increase welfare when the growth rate is relatively high. In the case where either the revenue from residential capital taxation is rebated to the tax payer or the revenue from territorial capital taxation is transferred intergenerationally, the welfare-maximizing tax rate appears to be zero.