Social Sciences in China (Chinese Edition)

No. 9, 2022

The Synergy of Fiscal and Financial Policy: Research Based on VAT Exemption on Interest Income from Loans to Small and Micro Enterprises

(Abstract)

Liu Chong and Liu Liya

Within the framework of China’s traditional monetary policy, excessive use of structural policy tools may lead to problems in the aggregate, and monetary policy could encounter difficulties in balancing the stabilization of economic growth and structural readjustment. Exempting value-added tax on interest income from loans to small and micro firms is a valuable attempt to coordinate fiscal and financial policy, i.e., to use the interest rate channel of tax policy. Empirical analysis of specific loan data from a large state-owned commercial bank found that this policy significantly reduces financing costs and increases credit availability. Based on the empirical results, we set up a bank credit decision model including tax conditions to describe the underlying theoretical logic. We found that compared with a structural monetary policy transmitted from a bank’s liability side to its asset side, the VAT exemption of loan interest income directly affects the bank’s asset side and has a transmission path that is more direct and less subject to friction. The tax policy interest rate channel mentioned above does not rely on the central bank’s liquidity supply and interest rate operations and can therefore help expand the scope of macro regulation and control of financial policy, thereby easing the conflicts in multi-objective monetary policy.