Impacts of Direct and Indirect Tax Reforms in Vietnam: A CGE Analysis

Keshab Bhattarai,Dung Thi Kim Nguyen,Chan Van Nguyen

doi:10.3390/economies7020050

Keshab Bhattarai, Dung Thi Kim Nguyen + Show 1 more

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https://doi.org/10.3390/economies7020050

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Journal: Economies	Publication Date: May 22, 2019
Citations: 9	License type: CC BY 4.0

Affiliation: University of Hull, National Economics University

Abstract

The study applies a multi-sector multi-household static computable general equilibrium (CGE) tax model to assess the economy-wide impacts of taxes in Vietnam. It examines two tax reform scenarios based on the tax reform plan proposed by the Vietnam Ministry of Finance. The first scenario is increasing the value-added tax (VAT) rate to 12% from the current 10% rate. The second scenario relates to setting a competitive corporate income tax (CIT) rate to the lowest rate in ASEAN (Associations of South East Asian Nations) countries by reducing it from 20% to 17%. Correction of current tax distortions will have positive impacts on labour supply, utility, consumption, output, and welfare of households as they reallocate resources from more to less productive sectors of the economy. The CGE model allows for the finding of the macroeconomic and sectoral effects on prices and outputs, as well as on welfare of households. While this study contributes to the literature on the CGE model for the Vietnam economy, it is a small step for finding the optimal tax structure in Vietnam. It recommends that the Vietnam government should increase the standard VAT rate to 12% and reduce CIT rate to 17% to shift the tax burden from capitalists to consumers.

Highlights

The transition economy of Vietnam enjoyed prominent achievements in the first 30 years of economic reforms (Doi Moi) from 1986 to 2016 such as rapid growth, accelerated international integration, market liberalisation, and creation of more jobs in the private sector
A general rule of thumb is that a positive Hicksian equivalent variation (EV) is a measure of welfare gain, and corresponds to a negative Hicksian compensating variation (CV), which gives the amount of money to be taken away from the consumer to keep her at the old utility level
EV and CV are given by differences in money metric utility between old and new prices corresponding to benchmark and counterfactual solutions

Summary

Introduction

The transition economy of Vietnam enjoyed prominent achievements in the first 30 years of economic reforms (Doi Moi) from 1986 to 2016 such as rapid growth, accelerated international integration, market liberalisation, and creation of more jobs in the private sector. The personal income tax (PIT) only contributes to an approximately modest portion of 6% of the total revenue. Tax and spending policies like this impact negatively on growth and equality of income redistribution. It has become essential to reform the tax system in order to, create more revenues, and to stabilise the macro-economy and to enhance social welfare and to promote equality of income among households. The Impact of the Global Financial Crisis on Vietnamese Economy. Available online: https://apraca.org/the-impact-of-the-global-financial-crisis-on-vietnamese-economy/ (accessed on 12 January 2019)

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