Tax Cuts,Fiscal Expansion And Economic Fluctuation

From 1978 to 2007,China's economy achieved a 30-year high-speed growth,and the average growth rate of annual real GDP was 9.8%.Since the 2008 world financial crisis,China's economy has fell into the depression cycle.As a respond to the government's 4 trillion investment stimulus,the real growth rate of China's GDP has been briefly returned to about 10%,but has not changed the downward trend.In 2014,the central government formally announced that China's economy entered the new normal period.In 2015,the central government proposed that in order to adapt and lead the new normal period,we should focus on the supply side structural reforms.The new normal period is characterized by the superposition of three periods,including the shift of economic growth period,the structural adjustment period and the pre-stimulus digestion period.Recent prominent contradictions and problems mainly as the "four down and one up"?that is,economic growth,industrial prices,corporate earnings and fiscal revenue growth go down,but the probability of economic risk goes up.These problems are mainly not cyclical,but structural.Adapt to the new normal economic development and promote the supply side of the structural reforms,we should complete five key tasks including to cut down the production capacity,the inventory,the leverage,the costs and to make up the short board.The current macroeconomic policy orientation is a combination of prudent monetary policy and proactive fiscal policy.In the first quarter of 2016,the new social financing scale was 6.59 trillion yuan and the new RMB loan was 4.67 trillion yuan,both reaching the highest level in history.However,the real GDP growth rate was only 6.7%,only slightly higher than the 6.1%level of the financial crisis.A record since the nineties of last century,the history of the second low growth rate,reflecting the monetary policy has been weak for stimulating economic growth,blindly additional currency,to expand the scale of credit,water flooding approach has been impracticable.Steady growth and structural adjustment focus on the proactive fiscal policy.In order to analyze the policy effect of proactive fiscal policy,this paper draws on the New Keynesian dynamic general equilibrium analysis method,using a New Keynes dynamic stochastic general equilibrium model with distorted taxation and government investment externality,analyzes the impact of proactive fiscal policy shocks on economic fluctuations.The tax is divided into three categories:capital tax,labor tax and consumption tax.It analyzes the impact of structural tax cuts on the economy.The government expenditure is divided into two parts:government investment and government consumption.It analyzes the impact of different types of government expenditure expansion on the economy.Finally,based on the applicability of the Ricardian equivalence theorem,the effect of the scale expansion of government debt on the effect of proactive fiscal policy is qualitatively analyzed theoretically.In this paper,the following main conclusions are obtained through parameter calibration and impact simulation response analysis:1.proactive fiscal policy can promote economic growth.By simulating various exogenous proactive fiscal policy shocks,it is found that the response of total output is proactive at the beginning,which shows that proactive fiscal policy has the effect of stimulating economic growth in short term.2.The effect of tax cuts is better than the expansion of fiscal expenditure.By simulating various tax shocks and fiscal expenditure shocks,it is found that reducing the impact of taxation can expand residents' consumption and investment,and the policy of expanding fiscal expenditure has a crowding-out effect on residents' consumption and investment.This is related to the high level of the current overall tax burden and the high level of government investment accumulation.The marginal effect of tax cuts is better than the marginal effect of government investment.3.The effect of reducing capital taxes is better than reducing labor and consumption taxes.Because of the government's intertemporal budget constraint,it is necessary to increase the labor tax and the consumption tax while reducing the capital tax,which can stimulate the investment and increase the labor supply,which has stronger pulling effect on the output and consumption.4.Expansion of government investment is better than expansion of government consumption.Expand government investment,the accumulation of government capital and the production of proactive externalities,is conducive to pulling the total output.Expansion of government consumption will crowd out residents'consumption and investment.The long-term implementation of the policy of expanding government consumption is not conducive to economic growth and consumption growth.5.China's current government debt scale is reasonable,and we can expand the debt scale for proactive fiscal policy.China's government debt ratio of total output is lower than Europe,America,Japan and many developed countries.The government has a huge assets as guarantee.The increase in debt is mainly used for government investment,so that the scale of government assets increased simultaneously.The government exist no risk of debt crisis.6.The expansion of debt will affect the expectations of residents,while affecting the effectiveness of proactive fiscal policy.Although there is no risk of government debt crisis in China,due to the Ricardian equivalence theorem,the continued expansion of government debt scale has a negative impact on the residents'consumption and investment.To control the scale of government debt growth and ensure the sustainability of government debt.7.Ricardian Equivalence Theorem is not fully correct in China,but it has a significant impact on the government and the residents' behavior.Although it is not correct in China due to distorting taxation and liquidity constraints,proactive fiscal policy still has the effect of stimulating the economy.However,with the expansion of government debt,the government's demand for debt service affects the residents'expectations,which will gradually reduce the effect of proactive fiscal policy.