Working Paper: NBER ID: w12899
Authors: John Whalley; Li Wang
Abstract: Currently proposals are actively circulating in China to move to a unified enterprise tax structure with similar tax treatment of state-owned enterprises (SOEs), other private enterprises (OPE) and foreign investment enterprises (FIEs). FIEs presently receive significant tax preferences through a sharply lower tax rate, tax holidays and other provisions. Here we use analytical representations of SOE behavior, which differ from that of the competitive firm, to argue that a unified tax structure may not be a desirable tax change and that typically a higher tax rate on SOEs is called for on efficiency grounds. Using a worker control model with endogenously determined shirking, taxes on SOEs reduce shirking and a reduced SOE tax rate under a unified tax relaxes discipline on SOEs and losses result. Our results indicate a 0.26% of GDP welfare loss using 2004 data from a unified tax, and larger loss relative to an optimal tax scheme. Alternatively, if we use a managerial control model variant, we find a 0.19% welfare loss from a unified tax, and larger losses relative to initial higher SOE tax rates.
Keywords: Unified enterprise tax; State-owned enterprises; China; Welfare loss; Tax policy
JEL Codes: H2; P3; P35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unified tax structure (H20) | welfare loss (D69) |
| tax policy changes (H29) | SOE behavior (C92) |
| higher tax rate on SOEs (H29) | reduced shirking (J22) |
| higher tax rate on SOEs (H29) | increased output (E23) |
| lower tax rates on SOEs (H29) | reduced discipline (Y80) |
| lower tax rates on SOEs (H29) | increased shirking (H31) |
| shift to a unified tax that lowers SOE tax rates (H29) | misallocation of resources (D61) |
| shift to a unified tax that lowers SOE tax rates (H29) | further inefficiencies in the economy (P19) |