The uniform enterprise income tax reform in China

Abstract

In China, the income tax of enterprise is very different between foreign funded enterprises and other domestic enterprises. It is believed that this discrimination is harmful to the entire economy. So there is a reform in the tax system to build a uniform enterprise income tax. This is a significant reform in China's tax system, so every decision about this have to count the cost and the benefit carefully. The author has introduced the Computable General Equilibrium (CGE) to simulate this new tax system and value its benefit and cost. There are two different models in the paper; they are of different assumptions and for different purposes. Model I is a static CGE model and model Ⅱ is a Ramsey Dynamic model. The static model is mainly used for comparative static approach to examine how the tax reform will change the endogenous variables. According to the results of the model, more goods will be produced by both of the DFEs and FIEs after the tax reform in the medium and low tax effective tax rate situations. If the nominal tax rates decrease 24.24% (from 33% to 25%), the enterprise income tax will only reduce 19.36% and the total tax revenue will only reduce 1.911%. The dynamic model will concentrate on the costs and benefits during the transition. From the results of the model, a lower tax rate will increase the level of investment, capital stock, capital prices, wage rate and also the growth rates through transition. If the capital tax rates are changed gradually, the fluctuating of transition will be smoothed a little.