The Unified Enterprise Tax and SOEs in China

John Whalley and Li Wang

No 12899, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Currently proposals are actively circulating in China to move to a unified enterprise tax structure with similar tax treatment of state-owned enterprises (SOEs), other private enterprises (OPE) and foreign investment enterprises (FIEs). FIEs presently receive significant tax preferences through a sharply lower tax rate, tax holidays and other provisions. Here we use analytical representations of SOE behavior, which differ from that of the competitive firm, to argue that a unified tax structure may not be a desirable tax change and that typically a higher tax rate on SOEs is called for on efficiency grounds. Using a worker control model with endogenously determined shirking, taxes on SOEs reduce shirking and a reduced SOE tax rate under a unified tax relaxes discipline on SOEs and losses result. Our results indicate a 0.26% of GDP welfare loss using 2004 data from a unified tax, and larger loss relative to an optimal tax scheme. Alternatively, if we use a managerial control model variant, we find a 0.19% welfare loss from a unified tax, and larger losses relative to initial higher SOE tax rates.

JEL-codes: H2 P3 P35 (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-cna, nep-dev, nep-pbe and nep-tra
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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