Incentive effect of structural tax reduction policy on consumption upgrading and high-tech industry

Abstract

China is implementing a structural tax reduction policy to upgrade the structure of household consumption and promote the development of high-tech industry. This article constructs a heterogeneous NK-DSGE (New Keynesian - Dynamic Stochastic General Equilibrium) model to study the effects of tax reduction policies on consumption upgrading and the development of high-tech industry. The tax categories involved in this model are divided into demand-side tax and supply-side tax. We build two indexes to measure the consumption structure and the development of high-tech industry. It is found that reducing high-tech enterprise income tax would upgrade the consumption structure and promote the development of high-tech industries in the short term. Reducing low-tech enterprise income tax would achieve similar effects in the medium and long term. Moreover, tax such as consumption tax, labour income tax and capital income tax reduction policies can upgrade the consumption structure and promote the development of high-tech industry in the long term. Finally, this article finds that when the elasticity of labour substitution is smaller, reducing high-tech enterprise income tax is more effective.