A Study On Misallocation Effect Of Different Effective Value-added Tax Rates

Value-added tax(VAT)is a kind of turnover tax which is levied on the value-added value of goods or services in the course of circulation.It is a universal indirect tax collected by countries all over the world.Since the introduction of VAT in China in 1979,VAT has gradually become the most important indirect tax and an important part of tax system in China.However,in practice,the problems of repeated taxation of VAT and the incomplete coverage of the industry are becoming increasingly prominent,which aggravates the misallocation of resources.Therefore,since 2004,VAT has undergone a series of major reforms,such as the transformation from production-oriented VAT to consumption-oriented VAT,the "replacing business tax with value-added tax(VAT)" and the merger of tax rates,so as to gradually optimize its tax system in order to adapt to the economic development under the new normal conditions in China and reduce the efficiency loss of resource allocation due to the shortcomings of the tax system.Therefore,based on the basic facts of the difference of effective tax rate caused by the multi-level rate of value-added tax in China,this paper verifies whether the difference of real effective value-added tax rate in the industry will affect the efficiency of resource allocation and how to cause resource misallocation.First of all,we clarify the characteristics and problems of multi-level tax rates in China's VAT system.As we know,the difference in the effective VAT rate of enterprise caused by the differential rate of value-added tax will inevitably change the relative price of products and factors of production.It causes the difference of the effective tax rate among enterprises in the industry,which in turn distort the behavior of enterprises and consumers,leads to the efficiency loss of resource allocation.Secondly,this paper builds a theoretical model on how the difference of real effective value-added tax rate affects productivity dispersion and resource misallocation.The model is based on the data of Chinese manufacturing enterprises over the scale of 1998-2007.Using the standard deviation of total factor productivity and effective tax rate in industry as the proxy variable to measure the efficiency of resource allocation and the difference of effective tax rate,and then to test this model.The results show that the difference of effective tax rates does result in loss of efficiency in resource allocation.An increase of 1 percentage point in the average effective rate of value-added tax in a fourdigit industry will lead to a 0.0896 percentage point increase in the dispersion of the total factor productivity(TFP).At the same time,we analyze the robustness of the benchmark regression from three major sources which are endogenous measurement error,missing variables and simultaneous error,to verify the robustness of the conclusion.The results show that: whether it is the replacement of related indicators,considering the impact of income tax,or the impact of VAT transformation and adding the instrumental variables,all the results support the conclusion of the benchmark regression,that is,the difference of effective tax rate among enterprises is an important reason to explain the efficiency of resource allocation in Chinese manufacturing industry.Then,this paper analyzes the micro mechanism of the resources allocation caused by the difference of effective value-added tax rate from the two channels of influencing the allocation of resources within and among enterprises,which are the two reasons for the effect,and reach the following conclusions:(1)the differentiated effective tax rate has an asymmetric impact on productivity heterogeneous enterprises.The increase in productivity of high-productivity firms is greater than that of low-productivity firms(in fact,the difference in effective tax rates of low-productivity firms prevents the growth of productivity),which is ultimately manifested in the expansion of the productivity dispersion of enterprise in the industry;(2)the differentiated effective tax rate leads to the entry and exit of heterogeneous productivity firms(or turnover of enterprises),that is,the survival of the fittest mechanism,which makes low-productivity firms enter the market relying on their own monopoly advantages,and promotes the medium or highproductivity enterprises to withdraw from the market,resulting in the misallocation of resources between enterprises in the industry.On the basis of the above research,this paper further analyzes the heterogeneity from the dimensions of industry,region and time.It is found that there are significant differences in the effect of resource misallocation from value-added tax distortion across industries,regions and time.To be specific:(1)At the industry level,the marginal effect of resource misallocation in the industry applicable to preferential tax rate is significantly greater than that in the industry applicable to legal tax rate.The industry with low input ratios suffer significantly larger than those with high input ratios,and the capital-intensive industry suffer larger than those resource,technology or labor-intensive industries;(2)At the regional level,the differential effective value-added tax rate has the most serious effect of resource misallocation on the western region,followed by the eastern region and the middle and northeastern regions;(3)At the time level,with the gradual expansion of the difference of effective tax rate,the effect of resource misallocation brought by the multi-level policy is also expanding.Finally,based on the research conclusions and the status quo of the structure of the value-added tax rate in China,we put forward some policy implications,with a view to providing reference for the perfection of the value-added tax system in the era of "replacing business tax with value-added tax(VAT)" :(1)to simplify the value-added tax rate and perfect the structure of the tax rate;(2)to break through the chain of deductions and improve the identification of VAT credit system;(3)to identify heterogeneous enterprises and narrow the gap of effective tax rate among enterprises;(4)to formulate differential policies to stimulate the technological progress of enterprises and so on.