Rebalancing in China: a taxation approach

Damien Cubizol (cubizol@gate.cnrs.fr)
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Damien Cubizol: Univ Lyon, CNRS, GATE L-SE UMR 5824, F-69130 Ecully, France

No 1732, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: The rebalancing of the Chinese economy is analyzed through a heterogeneous taxation of various types of firms. Based on a two-country dynamic general equilibrium model, the paper applies tax reforms to raise consumption, reduce some firms' overinvestment and maintain a high level of welfare. To rebalance consumption and investment, taxation may allow reallocating a part of the labor force to firms that are not overinvesting. Moreover, the correction of distortions in production factor costs (capital and labor) is necessary during certain reforms applied in the model; that is, on the one hand, higher credit costs for State-Owned Enterprises (SOEs) and, on the other hand, a catch-up of foreign firms' wages by domestic firms (public and private). In this model, firms' credit cost is a key channel because it impacts both firms' investment and household consumption (through returns on savings). These consumption and investment reforms bring welfare benefits to households, and the results are close to direct welfare maximization. In this framework, the rebalancing of the domestic demand does not require the readjustment of the external financial position because the aggregate savings rate remains high and the supply of domestic assets is reduced. Finally, another theoretical framework proposes a heterogeneous taxation of consumption across home and foreign goods to enhance consumption.

Keywords: The Chinese economy; tax reforms; financial intermediation; consumption; investment; welfare; foreign assets (search for similar items in EconPapers)
JEL-codes: F20 F30 H20 H30 P20 P30 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cna, nep-dge, nep-pbe, nep-pub and nep-tra
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