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The optimal sales threshold separating taxpayers by size in China

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  • Zhao, Zhiqi

Abstract

This study optimizes the existing sales threshold that separates taxpaying firms by size in China. In the Chinese value-added tax (VAT) system, small-scale taxpayers, whose annual sales are low and who pay a lower tax rate, are distinguished from general taxpayers by a sales threshold. To qualify as small-scale taxpayers and pay less VAT, some general taxpayers who would otherwise exceed the sales threshold tend to reduce production and bunch below the threshold. This bunching pattern is theoretically explained in this study and used to help derive the optimal sales threshold. Furthermore, this study analyzes how the optimal sales threshold varies with changes in administrative and compliance costs and in tax rates. Simulations reveal that optimal sales thresholds are lower than the actual thresholds, indicating that the trade-off between production efficiency and net tax revenue should be considered when determining the sales threshold for VAT in China.

Suggested Citation

  • Zhao, Zhiqi, 2022. "The optimal sales threshold separating taxpayers by size in China," Economic Modelling, Elsevier, vol. 117(C).
    • Handle: RePEc:eee:ecmode:v:117:y:2022:i:c:s0264999322002231
    DOI: 10.1016/j.econmod.2022.105977
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    References listed on IDEAS

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    1. Li Liu & Ben Lockwood & Miguel Almunia & Eddy H. F. Tam, 2021. "VAT Notches, Voluntary Registration, and Bunching: Theory and U.K. Evidence," The Review of Economics and Statistics, MIT Press, vol. 103(1), pages 151-164, March.
    2. Harju, Jarkko & Matikka, Tuomas & Rauhanen, Timo, 2019. "Compliance costs vs. tax incentives: Why do entrepreneurs respond to size-based regulations?," Journal of Public Economics, Elsevier, vol. 173(C), pages 139-164.
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    Cited by:

    1. Zhang, Wei & He, Jie & Ge, Chanyuan & Xue, Rui, 2022. "Real-time macroeconomic monitoring using mixed frequency data: Evidence from China," Economic Modelling, Elsevier, vol. 117(C).
    2. Zhao, Zhiqi & Yue, Yong & Wang, Wangshuai, 2024. "Unintended consequences of tax incentives on firms' human capital composition: Evidence from China," China Economic Review, Elsevier, vol. 84(C).

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    More about this item

    Keywords

    Value-added tax; Optimal sales threshold; Small-scale taxpayers; General taxpayers; Bunching;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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