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Optimal Fiscal Policy With Land Financing In China

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  • Guo, Shen
  • Jiang, Zheng

Abstract

This paper examines China's optimal fiscal policy in a general equilibrium model, in which the government finances its budget through both a special instrument, an implicit tax on the residential land, and a typical conventional instrument, the value-added tax (VAT). By solving a Ramsey problem, we find that (i) the optimal policy suggests a much lower land tax rate than the existing rate in China, and (ii) a substantial part of debt stabilization should come through an adjustment in the VAT rate, instead of relying on land financing. Switching from the existing policy to the Ramsey policy generates significant welfare gains.

Suggested Citation

  • Guo, Shen & Jiang, Zheng, 2019. "Optimal Fiscal Policy With Land Financing In China," Macroeconomic Dynamics, Cambridge University Press, vol. 23(7), pages 2649-2674, October.
    • Handle: RePEc:cup:macdyn:v:23:y:2019:i:07:p:2649-2674_00
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    Cited by:

    1. Gyourko, Joseph & Shen, Yang & Wu, Jing & Zhang, Rongjie, 2022. "Land finance in China: Analysis and review," China Economic Review, Elsevier, vol. 76(C).
    2. Guo, Shen & Jiang, Zheng, 2021. "The welfare implications of housing-related tax policies in China," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 135-153.

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