Estimating tax and government spending multipliers in China

Yanwei Gu and Pinjie Lyu

Applied Economics, 2024, vol. 56, issue 59, 8934-8950

Abstract: In recent years, China has implemented unprecedented fiscal policies, prompting crucial questions: are tax cuts effective in stimulating output and is the output effect from tax cuts greater than government spending in developing countries? This article addresses this ambiguity by providing a novel method to identify China’s tax and government spending shocks in a SVAR framework. The results show that both tax cuts and increased government spending positively impact output. The estimated tax multiplier is 2.4 (3.6) after 8 (20) quarters while the government spending multipliers are 0.3 (0.8), suggesting that tax cuts have a greater impact on output than government spending. The results above survive after a set of robustness checks. The findings contribute to the ongoing debate on the effectiveness of fiscal policy tools in developing economies and suggest that targeted tax measures could be a potent instrument for stimulating economic activity.

Date: 2024
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DOI: 10.1080/00036846.2023.2295306

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