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ID112722
Title ProperRebalancing and the Chinese VAT
Other Title Informationsome numerical simulation results
LanguageENG
AuthorLi, Chunding ;  Whalley, John
Publication2012.
Summary / Abstract (Note)This paper presents numerical simulation results that suggest that China can both reduce its trade imbalance and receive welfare benefits by switching the value added tax (VAT) regime from the current destination principle to an origin principle. We modify the traditional general equilibrium tax model to capture endogenous trade imbalances along with endogenous factor supply, a fixed exchange rate and a non-accommodative monetary policy structure which supports the Chinese trade imbalance. We calibrate model parameters to 2008 data and simulate counterfactual equilibrium for VAT tax basis switches in which the trade imbalance changes. Our results suggest that given China's trade surplus VAT regime switching to an origin basis can decrease China's trade surplus by over 40%, and additionally increase Chinese and world welfare. This has implications for present G20 discussions on finding ways to adjust global trade imbalances.
`In' analytical NoteChina Economic Review Vol. 23, No.2; Jun 2012: p.316-324
Journal SourceChina Economic Review Vol. 23, No.2; Jun 2012: p.316-324
Key WordsValue Added Tax ;  Destination Basis ;  Origin Basis ;  Numerical Simulation