The Research On The Export Effects Of VAT Reform In China

Since 2001,China has adhered to the structural VAT reform,and the main issues of the VAT reform have changed from traditional problems,like reshaping the fiscal relationship between the central government and the local government and raising the tax collection rate to improve the government's fiscal capacity,to solving the problems in the new stage,like double taxation and eliminating the differences in tax burden between industries due to capital composition.the VAT transformation reform was first piloted in eight industries in three northeastern provinces in 2004,and in 2009,it was fully implemented nationwide.The reform changed the previous rule of not allowing pre-tax deduction for taxes on fixed assets purchased by enterprises,and adopted a tax credit policy for enterprises' investment behaviors,transforming the previous production-based VAT into a consumption-based VAT.As the reform and opening-up process continues,it is extremely important to provide optimal resource allocation solutions from the perspective of tax reform under the open economy.In the context of an open economy,China's VAT tax reform needs to meet not only the target needs of public affairs spending and raising residents' consumption levels,but also the requirement of fostering domestic enterprises' competitiveness in the international market.Unlike the U.S.goods and services tax levied on final sales and services,China's VAT focuses on production and distribution,which is beneficial to the government in terms of tax collection but disadvantageous in terms of fostering enterprises' international competitiveness;China's VAT still has more problems in terms of institutional improvement and specific implementation.Firstly,the existence of multiple tax rates has led to a complicated tax structure and the phenomenon of "low levy and high deduction" and "high levy and low deduction" in the deduction chain,which makes the allocation of resources deviate from the optimal state.From the perspective of China's VAT reform history,except for special policies such as tax exemptions and zero rates for specific industries,China's VAT has adopted a high and low tax rate of 17% and 13% since the beginning of the reform of the sub-taxation system in 1994,and 11% and 6% have been added since the reform of the business reform in 2012,although the 13% rate was eliminated after 2017,the pattern of multiple tax rates has not changed.The problem of misplaced resources caused by the difference in credits between enterprises has not been effectively alleviated.Second,China's incomplete export tax rebate policy is also a negative factor affecting the competitiveness of Chinese products.A full export tax rebate is a good way to avoid international double taxation and to ensure a trade-neutral domestic VAT system;on the contrary,an incomplete tax rebate policy can restrict the international competitiveness of a country's enterprises and products due to double taxation.In addition,the lack of stability of export tax rebate policy in both time and regional dimensions is not conducive to export growth.For a long time,China has frequently adjusted its export tax rebate policy for the purposes of macroeconomic regulation and control,foreign trade structure optimization and export-oriented economic development,as well as under the influence of the central government's financial situation,with a total of 32 adjustments from1995 to 2019,during which the actual extent of export tax rebates varied among different regions due to local financial capacity.Finally,there are practical problems in the process of VAT reform in China,such as the lack of local financial resources and the lack of governance capacity leading to enterprises' evasion of supervision,among which the local fiscal pressure caused by VAT reform has long been a concern.The intensification of fiscal pressure changes the economic policy choices of local governments in terms of economic regulation and public services,and thus has a significant impact on the development patterns of local economic agents in domestic and international markets.As the tax sharing reform has established the dominant position of the central government in national fiscal revenue,while a series of major changes in the fiscal system such as the abolition of agricultural tax,income tax sharing,VAT transformation and "business reform" have continuously weakened local fiscal power,the mismatch between local fiscal expenditure responsibilities and fiscal capacity has been highlighted,especially the imbalance of local government debt and local financial pressure across regions needs to be solved.Therefore,it is particularly important to clarify the economic and trade impacts of the existing institutional arrangements and reforms of China's VAT from the perspective of an open economy,and to explore the export effects arising from the VAT reform practices,as well as to provide a basis for further improvement of China's VAT reform phase-by-phase program.Focusing on the export effects of VAT reform in China,this paper tries to rationalize the impact and mechanism of VAT on exports and quantify its international economic welfare effects to provide a reference basis for China's tax reform.This study is innovative in the following aspects.First,in contrast to the traditional closed economy research framework in the literature,this paper expands the channel of the non-neutral effect of VAT on international trade based on a new perspective of multiple tax brackets and explores the export effects of VAT rate simplification reform in an open economy.Second,this paper applies a structural model to estimate the counterfactual and welfare analysis of the export effects of VAT reform.Specifically,this paper constructs a structural model including VAT in a multi-country and multi-sector general equilibrium framework to simulate and quantify for the first time the export and international economic effects of VAT rate simplification reforms under different export rebate policies in China.Third,while previous studies have considered domestic VAT policy changes to be neutral for international trade,this paper explores in detail the aspects of China's VAT that do not satisfy the "ideal" VAT setting in light of the reality of China's VAT.Specifically,the paper discusses the optimal VAT policy and implementation scheme in an open economy,and proposes a new idea of synergy between VAT simplification reform and export tax rebates,which is a strong complement to the current research on optimal VAT reform in China.The study focuses on the export effects of VAT reform in China and the export effects of local financial resources and regulatory capacity in the process of VAT reform.(1)Focusing on the export effects of VAT reform in China,this study examines the export effects of VAT using quantitative methods such as structural models,starting from the assumptions of single-rate and multi-rate VAT,respectively,which are reflected in the third and fourth chapters of this paper.First,in Chapter 3,this study improves the traditional international effects model of VAT to demonstrate the export neutrality of the "ideal" VAT and to explore the Chinese practice under a single-rate tax.Based on Costinot & Rodríguez-Clare(2014),this study transforms Feldstein & Krugman's(1990)intertemporal consumption analysis of two countries and three sectors into an Armingtonian framework,and thus develops a theoretical and quantitative analysis of the export effects of China's VAT under the single-rate assumption in order to quantify the impact of China's VAT tax changes on bilateral trade and the economic welfare of each country.The final findings are as follows: first,the "ideal" VAT is trade-neutral,and its rate increase does not cause welfare damage due to resource allocation problems,nor does it affect the structure of exports and imports.Second,due to the incomplete rebate of China's exports,both the reduction of export rebate and the increase of VAT rate will harm the economic welfare of other countries but have no effect on the economic welfare of the country.Second,the fourth chapter of this paper is a theoretical and quantitative study of the trade effects of the VAT abbreviated rate reform in China by constructing a multi-country,multi-sector general equilibrium model including trade in intermediate and final goods in an open economy analytical framework.This chapter departs from the traditional literature on VAT in a closed economy framework and employs structural equations to study the impact of multiple VAT rates on exports.The "low tax and high deduction" and "high tax and low deduction" of multiple VAT rates in China will cause resource mismatch,and it is important to promote the "simplified tax system and unified tax rate" of VAT in China.It is important to promote the "simplified tax system and unified tax rate" of VAT in China.To quantify the policy effects of multiple tax rates,the hat algebra is used to derive a counterfactual system of equations based on the structural equation system in the general equilibrium framework.The calibration of the core parameters of the model mainly uses WIOT 2014 year data,and the data sources for the other parameter measures are obtained from IBFD,UN-Commtrade,CEPII,and previous literature,respectively.The conclusions include the following four aspects:(1)In case of complete export rebate,the increase of a single VAT rate has a neutral impact on trade.While in the case of incomplete export rebate,the increase of a single VAT rate is equivalent to trade protection,which impedes the growth of domestic exports and the improvement of economic welfare of every country in the world.Moreover,it distorts the domestic exports through the VAT deduction chain under incomplete export rebate.(2)The effect of multiple VAT rate is not only equivalent to the effect of higher single VAT rate,but also leads to resource misallocation,weakening the international competitiveness of domestic products.Multiple VAT rate can result in a decrease in exports and domestic economic welfare but an increase in economic welfare of other countries,and the complete export rebate cannot eliminate this effect.(3)China's VAT simplification reform in recent years has promoted domestic and trade partner countries' welfare,among which the adjustment of multiple tax brackets has a more significant impact on domestic welfare,while the adjustment of export rebate has contributed more to the improvement of domestic exports and other countries' welfare.(4)Taking into account VAT tax revenues,domestic and international economic welfare effects,the optimal single VAT rate of China is 10%-11%.Based on the above conclusions,this paper puts forward following policy suggestions: first,to adhere to the direction of simplifying the tax system and unifying tax rates.Second,to pay attention to the coordination of export rebate policies so as to strength the role of VAT reform in stabilizing employment and fostering enterprises' international competitiveness,while reducing potential international resistance and risks to tax reform.Third,to take VAT reform as an opportunity to further enhance the level of China's opening up to the outside world and improve the multilateral trade governance mechanism.This paper contributes to the following three aspects: first,we construct a structural model including VAT in a multi-country,multi-sector general equilibrium framework to simulate and quantify,for the first time,the export and international economic effects of VAT simplification reforms under different export rebate policies in China.Second,we expand the study of the non-neutral impact of VAT on international trade based on a new perspective of multiple VAT rates.Third,we discuss the optimal VAT policy and implementation scheme in an open economy,and propose a new idea of synergy between VAT simplification reform and export rebates,complementing the current research on the optimal VAT reform in China.(2)Focusing on the export effect of local financial resources and regulatory capacity in China's VAT reform,this study uses an empirical approach to explore the potential impact of corporate regulatory evasion on the export effect of VAT reform from the perspectives of fiscal pressure and corporate regulatory evasion,firstly,by exploring the impact of China's VAT reform on corporate operations and exports through changes in fiscal pressure,and secondly,by attempting to clarify the link between local government governance capacity and corporate regulatory evasion.First,in Chapter 5,this study selects the exogenous policy change of the VAT transition in 2004 as a quasi-natural experiment.The results show that the increase in fiscal pressure caused by the VAT transition reform is not conducive to the growth of local firms' exports.In terms of the characteristics of the export effect of fiscal pressure,the tax reform relatively lowers the price of capital and adversely affects labor employment in enterprises,which leads to a significant dampening effect of fiscal pressure on processing trade and a less significant effect on general trade.The higher the average tax burden in the province and the stronger the competition among local governments,the stronger the export inhibiting effect of fiscal pressure;at the same time,local governments use limited resources to support the blind investment expansion of state-owned enterprises for the motive of promotion game,which is not conducive to the cultivation of enterprise competitiveness.And this is not conducive to the development of enterprise competitiveness and foreign trade.Compared with the existing studies,the theoretical and practical contributions of this section are: first,this section focuses on the export effect of local fiscal pressure caused by fiscal policy adjustment and explores the empirical evidence from micro enterprises.Second,in assessing the export effects of the VAT transformation reform,this section focuses on indirect effects in addition to direct effects.Finally,this section complements the research on the portrayal of government behavior under fiscal pressure from an export perspective and provides references for the design of government pressure reduction strategies.Second,the study in Chapter 6 finds that the limited resources of authorities and the high cost of enforcement in local government policy regulation are in conflict,and that the phenomenon of corporate evasion is widespread,and the problem is more serious in regions with low administrative levels and strict regulatory policies.Further,the paper explores the potential impact of corporate regulatory evasion on the export effect of VAT reform.In the context of VAT reform,the negative impact of corporate regulatory evasion on exports mainly consists of two major aspects: first,the erosion of government tax revenues and the weakening of local financial resources;and second,the mis-allocation of resources distorts impact on the equity of tax burden,which in turn undermines production efficiency.The research in this paper is distinct in terms of policy recommendations,which can be divided into the following aspects.First,we should adhere to the general direction of simplifying the tax system and unifying the tax rate,so as to create a fair and neutral taxation environment and reduce the misplacement of resources by redistributing resources and improving the credit chain,thus significantly improving the economic welfare of the country and promoting export growth.Secondly,the synergy of various policies should be given attention and concern in the process of VAT reform.We should promote the full export tax rebate policy in a timely manner,"open up and cut down" the tax base,prevent the impact of tax reduction and expenditure increase policies on tax revenues and fiscal expenditures,and maximize the economic effects of the simplified VAT system and uniform tax rates to offset the potential negative factors of international economic growth in the process of tax reform.Third,we should provide more supporting measures for the VAT reform.In the process of VAT reform,corresponding supporting measures should be improved to leave sufficient preferential policy zones for relevant industries and support them as much as possible through preferential loans,government purchases and financial support,so as to reduce the resulting differences in tax rates and thus affect the efficiency of resource allocation.Secondly,in the process of VAT reform in practice: first,we should optimize the institutional design of fiscal and taxation reform at the moment when VAT reform is continuously promoted,and fully consider the impact of tax reform on the financial pressure of local governments.VAT reform needs to leave space for local governments to reduce financial pressure in advance,strengthen local supervision of local enterprises,and eradicate policy space for enterprises to evade;second,we should optimize the external policy environment of enterprises,cultivate the international competitiveness of Chinese enterprises and increase the overseas market share of product exports;third,there is regional heterogeneity in the financial pressure situation of local governments,so it is important to promote the reform of the fiscal relationship between governmental authority and expenditure responsibility to form a situation of reasonable competition and effective control,and to bring into play the financial initiative of both the central and local levels.Thirdly,we should take the VAT reform as an opportunity to further enhance the level of China's opening to the outside world and improve the multilateral trade governance mechanism.Firstly,VAT reform should be deepened to smooth out the domestic circulation with a global perspective.Secondly,the coordination and cooperation of foreign policies on VAT should be strengthened.Ultimately,the VAT reform should be used as an opportunity to promote a unified,open,competitive and orderly dual-circulation pattern.