Social Sciences in China (Chinese Edition)

No.8, 2013

 

Different Effective Tax Rates of VAT and Efficiency Loss: With Some Implications for “Replacing the Business Tax with a Value-added Tax”

(Abstract)

 

Chen Xiaoguang

 

Taking the example of value added tax, this study employs the Hsieh and Klenow model and firm-level data to measure the TFP loss generated by different effective tax rates of value added tax. The results show that during the period 2000-2007, the average annual TFP loss was 7.9%. This brings us again to the importance of the fundamental economic principle in which “different tax rates will lead to a loss of efficiency.” More importantly, it has significant policy implications for the ongoing reforms of “replacing the business tax with a value-added tax” in China. “Replacing the business tax with a value-added tax” can help reduce and eliminate the tax rate differences of indirect tax, thereby improving the general efficiency of Chinese economy. At present, there has arisen a tendency toward multiple value added tax rates in the implementation of the policy of “replacing the business tax with a value-added tax,” suggesting tax rate difference and efficiency loss arising from that difference. In order to avoid efficiency loss, we should try to reduce the differences in value added tax rate in the reform.