Socio-economic and environmental impacts of the iron ore resource tax reform in China: A CGE-based analysis

Abstract

With the acceleration of the resource tax reform in China, the ad valorem tax reform of the iron ore resource tax has become a hot topic. It is important to consider how to effectively play the regulating effect of China's iron ore resource tax so as to achieve iron ore industry's sustainable development through circular economy. However, no analyses of the proposed ad valorem tax reform have thus far been conducted. To bridge this gap in the literature, we adopt a computable general equilibrium model to simulate the socio-economic and environmental impacts of different iron ore resource tax reforms from an economy-wide perspective. The results show that this reform has had a limited influence on reducing the tax burden in the iron ore industry. However, we find that adopting a 1% ad valorem tax rate would enhance the competitiveness of domestic iron ore enterprises and reduce dependence on iron ore imports. In addition, if the resource tax is halved or a 1% ad valorem tax rate in implemented, GDP and household welfare would both rise; however, a 3% or 6% ad valorem tax rate would have a negative impact on GDP and household welfare. Finally, a lower (higher) ad valorem tax rate would increase (decrease) carbon dioxide emissions and carbon intensity. However, if a carbon tax policy was adopted under the low ad valorem tax rate policy, the disadvantageous environmental impact could be significantly improved and the tax burden of iron ore enterprises would also fall. Our research results suggest the following policy implications. First, given the core objectives of the iron ore resource tax reform and socio-economic impact, a lower iron ore resource tax rate should be introduced. Second, a carbon tax should be introduced and the indirect tax rate reduced by the same number of percentage points to ameliorate the possible negative environmental impacts of the reform.