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The Unified Enterprise Tax and SOEs in China

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  • 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.

Suggested Citation

  • John Whalley & Li Wang, 2007. "The Unified Enterprise Tax and SOEs in China," NBER Working Papers 12899, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12899
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    References listed on IDEAS

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    1. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70(3), pages 215-215.
    2. Shoven, John B. & Whalley, John, 1972. "A general equilibrium calculation of the effects of differential taxation of income from capital in the U.S," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 281-321, November.
    3. Shoven, John B & Whalley, John, 1984. "Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey," Journal of Economic Literature, American Economic Association, vol. 22(3), pages 1007-1051, September.
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    Cited by:

    1. van der Hoek, M. Peter & Kong, Shuhong & Li, Zhenzi, 2008. "The dual corporate income tax in China: the impact of unification," MPRA Paper 11547, University Library of Munich, Germany, revised Aug 2008.
    2. Liu, X., 2018. "Export Tax Rebate Policy in Chinese Fishery Sector: Who are the Beneficiaries?," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277454, International Association of Agricultural Economists.
    3. Ji, Jingjing & Ye, Zhiqiang & Zhang, Shunming, 2013. "Welfare analysis on optimal enterprise tax rate in China," Economic Modelling, Elsevier, vol. 33(C), pages 149-158.

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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • P3 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions
    • P35 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Public Finance

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