Study On Income Distribution Effect And Welfare Effect Of VAT

Whether from the vertical or horizontal view of China’s income distribution pattern,the widening of residents’ income gap is an indisputable fact.The Report of the 19 th National Congress of the Communist Party of China and report on the work of the government of the "two sessions" in 2018 pointed out that socialism with Chinese characteristics has entered a new era and major social contradictions have changed.In the new era,income distribution should play a major role.Based on tax equity,tax categories and tax rates should be set more scientifically through tax reform,so as to build a more efficient and fair income distribution system.The principle of equity is generally recognized as the primary principle of taxation.The reason is that on the one hand,equity is indispensable to the normal operation of the tax system,and on the other hand,the function of tax revenue in correcting income distribution is indispensable to the maintenance of social stability.Besides,the change of income distribution pattern will have an impact on social welfare which measures the degree of efficiency loss in resource allocation.Under the tax environment,how to design the tax system to achieve pareto optimality of resource allocation,ie.to minimize the efficiency loss and maxmize social equity as much as possible at the same time,is an important issue in the construction of modern tax system.As the largest tax in China,VAT has a wide coverage,directly affects the real purchasing power of residents and further affects social welfare through consumption circulation by taking price as the carrier.Therefore,it is of great significance to study the income distribution effect and welfare effect of value-added tax in China in aspects of optimizing income distribution pattern and improving social welfare.The thesis takes income distribution effect and welfare effect of VAT as research object.Based on Chip2013 households income and expenditures micro datas,taking the family as the research unit and using the effective rates of VAT,we study the income distribution effect and welfare effect of VAT itself and VAT reform.Specific research contents are as follows.Firstly,collect and comb domestic and foreign literatures on income distribution effect and welfare effect of VAT.Based on collected literatures,summarize literatures from two aspects of VAT itself and VAT reform.Among them,foreign literature summarize the income distribution effect and welfare effect of VAT from the perspectives of annual income,lifetime income or consumption expenditure andsocial welfare.This thesis also summarizes the income distribution effect and welfare effect of VAT reform from the scope expanding of VAT,tax rates adjustment,tax preference and comprehensive VAT reform.The domestic literature summarize the income distribution effect and welfare effect of VAT from VAT itself,VAT transformation,VAT expansion and VAT rates uniformity.Secondly,summarize theories of VAT from aspects of income distribution and social welfare.In terms of income distribution of VAT,sort out income distribution theories of different schools in different periods and summarize that tax equity is the core concept and minimum standard of income distribution equity and progressive tax system is the main tool of income distribution equity and so on.Then centering on the internal factors of VAT,theoretically analyze positive and negative effects of VAT on the tax equity and income distribution equity.In terms of welfare effect of VAT,sort out welfare concepts and standards of old and new welfare economics theories of different schools and summarize that utility is a basic tool to measure the size of social welfare,exchange efficiency and production efficiency are main focuses of social welfare and social welfare and income distribution have some in common(for example: pay attention to the utilities of the poor).Then based on pareto welfare economics,further analyze the generation of efficiency loss and its calculation,also the influence factors of VAT on social welfare.Thirdly,based on Chip2013 households income and expenditures micro datas,use the effective rates of VAT to measure the income distribution effect and welfare effect of China’s VAT itself.In terms of income distribution of VAT itself,measure the effect with Gini coefficient,Suits index and Theil index from perspectives of annual income and lifetime income.The specific empirical results can be summarized as follows:(1)VAT is obviously regressive under the perspective of annual income and less regressive in lifetime income perspective.(2)Health care,food,tobacco and alcohol are the most regressive items under annual income perspective,ranking first and second respectively.(3)Income gap in groups of both urban and rural households is larger than income gap between groups,with income gap in group of rural households largest.In terms of welfare effect of VAT itself,measure the effect with ratios of equivalence variation(compensation variation)to expenditure and average excess burden.The specific empirical results are summarized as follows:(1)VAT has a large negative impact on the welfare level of low income households in China,but a small negative impact on the welfare level of high income households,and welfaregap between households from high to low incomes is about twice.(2)Food,tobacco and alcohol,followed by clothing,have the greatest impact on social welfare.The impact of housing and transportation on social welfare is also increasing.(3)Efficiency loss of low income households is the greatest,but in recent years,the above situation has gradually changed,showing that the tax efficiency loss of high income households slightly exceeds that of low income households.Then,based on Chip2013 households income and expenditure micro datas,construct VAT CGE model to measure the income distribution effect and welfare effect of China’s VAT reform.In terms of income distribution of VAT reform,measure the effect with Gini coefficient,Suits index and Theil index.The specific empirical results can be summarized as follows:(1)VAT transformation has obvious positive income distribution effect,which is conducive to narrowing the income gap among households.(2)Business tax replaced with VAT in transportation,postal,information transmission,software and information technology services and the structure of VAT simplified from four to three are increasing the regressive nature of VAT.(3)The VAT rate reduction is conducive to reduce the regressive nature of VAT.(4)Health care,food,tobacco and alcohol are the most regressive items,ranking first and second respectively.In terms of welfare effect of VAT reform,measure the effect with equivalence variation(compensation variation)and excess burden.The specific empirical results are summarized as follows:(1)VAT transformation reduces social welfare losses and improves the overall social welfare,especially rural househoulds.(2)VAT reduction has the greatest impact on the welfare of high income households and the least impact on the welfare of low income households.Finally,analyze the tax system factors that affect the income distribution effect and welfare effect of VAT and put forward some suggestions for improvement.In terms of tax system factors that affect the income distribution effect and welfare effect of VAT,theoretically analyze the influences of VAT factors on income distribution effect and welfare effect,from tax scope,tax structure,tax incentives,threshold and small scale taxpayer.Combined with international experience,make comparative analysis with our country.The specific conclusions are as follows:(1)the broader the scope of taxation,the larger the scope of VAT regulation.The vast majority of countries in the world implement a uniform collection scope of taxation system.Since the formal introduction of VAT in 1984,the scope of VAT collection has been constantly expanding.On May 1st 2016,"replacing business tax with VAT" wasimplemented nationwide,the scope of VAT collection in China has covered all sectors and all links.(2)The tax rate structure has an impact on income distribution and social welfare through tax bracket and tax rate level.Among them,the impact of tax bracket on income distribution and social welfare is inconsistent,while the impact of tax rate level on income distribution and social welfare is basically the same.According to international experience,most countries adopt the mode of 1～3 tax rates.At present,China’s VAT rate structure is "13%+9%+6%".Compared with most countries in the world,China’s VAT rate structure conforms to the general trend of international development.However,from the perspective of the importance and scope of application of standard tax rate and low tax rate,the tax rate of daily necessities in China is relatively high,and some modern service industries are subject to a low tax rate of 6% due to the reason of "replacing the business tax with a value-added tax".(3)The implementation of tax preference for necessities of life is conducive to the promotion of fair income distribution,but it will destroy the chain of deduction,cause efficiency loss,and not conducive to the promotion of social welfare.From the international experience,agricultural products,food and pharmaceutical products are the first choice of tax reduction and exemption items.Compared with the international scope of application of tax reduction and exemption,China’s scope of tax reduction and exemption is relatively small,and the scope of application of tax exemption for daily necessities is limited.If China implements tax exemption on pharmaceutical products and dairy products,it can further narrow the income gap and increase residents’ welfare.(4)Threshold and small scale taxpayers is not conducive to fair income distribution and social welfare.From the international experience,most countries have set the threshold,China has set both the threshold and the small scale taxpayer,compared with the international,threshold and small scale taxpayer setting standard are obviously higher.In terms of suggestions on improving the income distribution effect and welfare effect of VAT,put forward suggestions based on the problems in the tax system discussed above.The specific suggestions are as follows:(1)Reduce tax bracket from three to two.(2)Apply low tax rates to necessities.(3)Apply standard tax rates to goods or services that are neither necessities of life nor public welfare.(4)Decrease standard rate to 10% and the low rate to 4%.(5)Under the permits of fiscal funds and budget,pharmaceutical products,followed by dairy products,should give priority of tax exemption.(6)Appropriately decrease the threshold.(7)Appropriately decrease small scale taxpayer standards.First control theproportion of small scale taxpayers to around 50%,and then continue to reduce it to30%.(8)Make real-time adjustments for threshold and small scale taxpayer setting standards to maintain the rationality and predictability of setting standards.The possible innovations of this thesis are mainly reflected in the following three aspects:(1)Research content.VAT is a neutral tax,raising financial funds is the first major function of VAT,income distribution and social welfare are the auxiliary functions of VAT.However,most of the preliminary research on VAT focuses on the resource allocation function of VAT,and less on the income distribution function and social welfare function of VAT.This study only discusses the income distribution effect and welfare effect of VAT.The research content is more novel.(2)Research perspective.Annual income is more volatile than lifetime income so that lifetime income is a better measure of household’s real standard of living than annual income.However,most of the previous researches on the income distribution effect of VAT in China are from the perspective of annual income,less from perspective of lifetime income.This thesis studies the income distribution effect of China’s VAT itself from perspectives of both annual income and lifetime income.The research perspective is richer.(3)Research method.As turnover tax,VAT has the nature of tax shifting.It can change the relative price of commodities through commodity circulation and then further affect the relative price of factor market.Most of the domestic research use input-output method to measure the income distribution effect and welfare effect of VAT.In fact,the input-output method is difficult to take the articulation relation between goods and factors into consideration so that it has certain limitations in simulating the income distribution effect and welfare effect of VAT.To simulate the above changes of VAT on commodity market and factor market and to reflect the articulation relations between commodities and factors,CGE model is needed.This thesis constructs a VAT CGE model,simulates the articulation relations between commodities and factors by using the elasticity coefficient,and measures the income distribution effect and welfare effect of China’s VAT reform in combination with the household income and expenditures micro datas.The research methods are more scientific.