Rebalancing and the Chinese VAT: Some numerical simulation results

Chunding Li () and John Whalley

China Economic Review, 2012, vol. 23, issue 2, 316-324

Abstract: 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. We modify the traditional general equilibrium tax model to capture endogenous trade imbalances along 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 equilibrium 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 basis can decrease China's trade surplus by over 40%, and additionally increase Chinese and world welfare. This has implications for present G20 discussions on finding ways to adjust global trade imbalances.

Keywords: Value added tax; Destination basis; Origin basis; Numerical simulation (search for similar items in EconPapers)
JEL-codes: D58 F14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Working Paper: Rebalancing and the Chinese VAT: Some Numerical Simulation Results (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:23:y:2012:i:2:p:316-324

DOI: 10.1016/j.chieco.2011.12.002

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