The Effect of an Introduction of Retail Sales Tax in China

Shiyu Li, Shuanglin Lin and Suresh Narayanan
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Shiyu Li: China Financial Policy Research Center School of Finance Renmin University of China Beijing, 100872, China Author email: lishiyu@ruc.edu.cn
Shuanglin Lin: National School of Development Peking University Beijing, 100871, China and Department of Economics College of Business Administration University of Nebraska Omaha Omaha, Nebraska, USA Author email: shuanglin@pku.edu, slin@unomaha.edu

Asian Economic Papers, 2018, vol. 17, issue 2, 1-20

Abstract: This paper develops a dynamic equilibrium model of overlapping generations to study the effect of an introduction of a retail sales tax (RST) in China. Total government tax revenue is fixed, consumption-type value-added tax (VAT) is reduced in response to the introduction of RST, and an output tax exists. An introduction of RST accompanied by a decrease in VAT increases capital accumulation and welfare in the steady state. In the transition period, an introduction of RST accompanied by a decrease in VAT increases capital accumulation but decreases the current generation's welfare. Simulations based on the data from China show that introducing an 8 percent RST increases capital accumulation by 0.43 percent in the steady state.

Date: 2018
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