A Quantitative Study On China's Tax Reform And Policy Response To US Tax Cuts

In the context of global economic recovery,since the Federal Reserve called historical end to quantitative easing and restarted interest rate hikes,global monetary policy normalization has gradually been implemented.Under the gradual narrowing of the implementation of monetary policy,policy makers are more inclined to use fiscal policy to implement structural regulation.After Trump was elected President,he advocated a series of expansionary fiscal policies such as reducing taxes and increasing infrastructure investment to “make America great again”.The Tax Cuts and Jobs Act was signed by Trump on December 22,2017 and officially implemented on January 1,2018.The core of Trump's tax cuts is to cut the corporate income tax rate from 35% to 21%.As the world's second largest economy,US policy adjustments are bound to have a significant impact on China.The US corporate tax reform and the Federal Reserve's interest rate hikes and the reduction of its balance sheet would bring a series of complex shocks to Chinese economy.At the same time,China is facing the pressure of economic growth decline.Under the pressure of the Fed to raise interest rates and domestic de-leverage,China can no longer rely on loose monetary policy stimulus to stimulate economic growth.Tax reduction has become the preferred policy to stimulate China's economic growth.With the background of fierce international tax competition,tax cuts and fee reductions are urgent requirements for China to cope with the current situation.How to quantitatively analyze the total effect and local structural effects of tax reduction should be the premise of formulating tax reduction policies.In the past,most studies can quantify the tax reduction effect from the total amount,but ignore the differential impact of the tax reduction for different regions of China.In addition,most of the previous studies were limited to closed economies,ignoring the impact of different monetary policies,exchange rate policies and capital account openness on the effectiveness of tax reduction policies in an open economy.To this end,this paper analyzes the tax reduction policy based on corporate income tax from different levels and perspectives.The full text mainly focuses on the issue of the total amount and partial effect of China's structural tax reduction and the tax reduction effect under different exchange rate regimes.According to the different requirements of the research questions,this paper constructs a global dynamic CGE model,a multi-regional dynamic CGE model and an open economic dynamic CGE model in the Computable General Equilibrium(CGE)model framework.The conclusions of this paper can provide some reference for China's current tax reduction policy formulation.The main conclusions and innovations of this thesis are as follows.Firstly,unlike the qualitative analysis of the impact of the US tax reform,this thesis uses the dynamic GTAP(GTAP-Dyn)model and the latest global input-output(GTAP 9.0)data to quantify the short-term and long-term impacts of the US tax reform,international tax competition and trade frictions on China,as well as quantitatively calculate China's reasonable intervals of tax reduction for dealing with these external shocks.Through analysis,the US's corporate income tax reduction has little impact on China in the short term but the long-term impact cannot be ignored.Trump's tax cuts would lead to a decline in investment and output in China's capital-intensive and technology-intensive industries.The international taxation effect with the participation of major countries such as Japan and the EU countries has a major negative impact on China's real output.A 1% reduction in the effective tax rate of Chinese corporate income tax can effectively hedge the negative impact of US tax reduction competition on Chinese output.In view of the uncertainty of other countries' participation in tax reduction competition and trade friction,China can moderately reduce the corporate income tax by 1%-3% to cope with these external shocks.Secondly,most of previous study on the impact of tax reduction based on macroeconomic models is confined to the national “macroeconomic” level.This thesis uses the latest 31 inter-provincial input-output tables of China to construct China's multi-regional dynamic tax CGE model and quantitatively analyze the total and structural effects of tax cuts.That is to say,this thesis not only analyzes the impact of tax reduction on the overall economy of the country from the aggregate level,but also analyzes the structural effect of tax reduction.After comparing and analyzing the economic impacts of differential tax cuts in different industries,different regions and different types of taxes(the corporate income tax and the value-added tax)on Chinese overall economy and regional economies,this thesis finds that China's corporate income tax cuts can directly increase the return on capital of industries and effectively stimulate the increase in domestic investment,consumption and the quantity of employment,thus driving China's GDP growth.However,when focusing on local effects,it's found that:(i)tax reduction for a certain industry such as the manufacturing industry promotes investment in other industries through the inter-industry linkage and the overall national pull effect of 1% corporate income tax rate cut in the manufacturing industry is greater than that in the service industry;(ii)The growth rate of the real outputs of southern China,Jingjinji Metropolitan Region and Yangtze River Delta Economic Zone is much higher than that in other regions when the national corporate income tax rate is reduced by 1%.When the tax rate is reduced by 1% only for the underdeveloped regions,the output growth rate of the developed regions is still greater than that of the underdeveloped regions because the pull effect of the underdeveloped regions on the demand for goods in the developed regions is greater than the siphon effect of the underdeveloped regions on the capital elements in the developed regions.But the gap is narrowing;(iii)due to the difference in tax structure and tax amount,the value-added tax reduction “acts quickly” and its economic stimulus effect is far greater than the income tax reduction.When the corporate income tax and value-added tax are both reduced by 1%,national real output increases by 0.163% and 0.67% respectively.However,when the amount of the decline in the corporate income tax and value-added tax is the same,the pull effect of the corporate income tax on the real output growth is slightly greater than the pull effect of the value-added tax.Compared with value-added tax rate reduction,corporate income tax rate deduction is more effective in the long term.The stimulating marginal utility of the value-added tax decays faster than the income tax and the stimulus effect of the value-added tax in the following years is small.Thirdly,considering that different interest rate and exchange rate policies can have different influences on the tax reduction effect,this thesis introduces the capital cost into the CGE model under the framework of open economies and constructs a CGE model with open interest rate and exchange rate to study the impact of Chinese tax policy under different exchange rate regimes and the coordinate effect of tax cuts and monetary policy.The simulation results of this thesis show that under the floating exchange rate system,if the monetary policy is independent,the stimulus effect of tax reduction would decrease.This is because that that in the process of tax reduction,expansionary fiscal policy leads to a sharp increase in real interest rates(compared to a fixed exchange rate scenario)so that its crowding out effect on investment increases and meanwhile the rise in the exchange rate aggravates the deterioration of trade conditions.Studies have shown that in the implementation of expansionary fiscal policy such as tax reduction,in order to avoid interest rate tightening,moderately loose monetary policy like moderately reducing deposit reserve or the interest rate should be implemented to improve the interest rate transmission mechanism to guide the real interest rate down and make the fiscal policy effect better.At the same time,RMB depreciation can be allowed when capital is controlled,especially at the current stage of Sino-US trade friction,which can effectively improve the trade balance.Fourthly,considering the quantitative analysis of the risk of RMB depreciation on the real economy under complicated domestic and international shocks,this thesis first introduces the capital control theory into multinational dynamic CGE model to quantitatively analyze the economic effect of RMB depreciation under different capital controls.Previous studies on the economic effect of exchange rate movements in the CGE model have been limited to the perspective of trade.Sharp RMB depreciation and expectation of depreciation easily lead to capital outflows and reduce the supply of domestic funds,which can lead to an increase in domestic interest rates and thus the capital cost.This thesis finds that China can't cope with the current trade friction and the US tax reform through the sharp depreciation of RMB.The devaluation of RMB would increase China's export in the short term but easily lead to capital outflows in the state of loose capital control and make the export dividend disappear in the long term.The decline in export,domestic consumption and investment would weaken the growth potential of China's real output.This thesis also shows that under the current tax reform and monetary policy coordination,China needs to moderately loose monetary policy and increase liquidity and maintain the vigilance of capital control while allowing the exchange rate to depreciate in a small range.Fifth,using the dynamic GTAP model,this thesis finds that China directly or indirectly stimulates the export of most major countries in the next few years after the reduction of Chinese corporate income tax rate especially for the ASEAN economies.Then,the Panel Smooth Migration Regression(PSTR)Model is used to empirically study the impact of China's import growth on ASEAN's economic growth.It's found that China's expansion of domestic demand for ASEAN import shows a significant positive non-linear relationship with the growth of ASEAN's economy.The element “China's import” plays an important role in the productivity growth of the ASEAN economies,especially for countries that still have low export amount to China.The conclusion means that China's tax cuts have a positive pulling effect on the economic growth of economies such as ASEAN,which shows a sense of responsibility of “a great power”.