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Tax Structure, Income Distribution and Aggregate Output

【Authors】
IU Yuansheng, LI Jianjun & WANG Wenfu
【WorkUnit】
The Southwestern University of Finance and Economics, 611130.
【Abstract】

Increasing the proportion of direct taxes is an important direction of China’s tax reform, so how will the adjustment to the tax structure affect the macro economy? This paper adds labor income tax, capital income tax and consumption tax to a new Keynesian macroeconomic model with heterogeneous individuals characterized by imperfectly competitive markets, liquid and illiquid assets, and nominal rigidity. With the restriction of tax revenue neutrality, we performed two simulations to study the impact of a tax structure shift with an increased share of direct taxes on income distribution and economic output. The results show that under the condition of tax income neutrality, with the ratio of labor income tax increasing, the aggregate output, consumption, and investment decrease, while the inequality of income and wealth distribution declines. If the ratio of capital income tax rises, the aggregate output will decrease too, especially the investment will reduce substantially, but the wealth inequality will lower to some extent. The simulations in this paper indicate that the reform of tax structure faces the trade-off between efficiency and equality. China should speed up the transformation of government function, and gradually optimize the tax structure based on tax reduction and exemption.

JEL:E62, H21

【KeyWords】
Tax Structure, Heterogeneous Agents, Aggregate Output, Income Distribution