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.

Keywords:

• Structural tax reduction
• upgrading of household consumption
• high-tech industry
• NK-DSGE model
• heterogeneous

JEL CODES:

• E23
• E62
• C51

Disclosure statement

No conflict of interest has been declared by the authors.

Notes

1 The earliest prototype of DSGE model is the Real Business Cycle (RBC) theory proposed by Kydland and Prescott (1982). The New Keynesian DSGE model incorporates the innovation of RBC theory in methodology and adds more realistic microeconomic assumptions. For example, researchers introduced price stickiness, monopolistic competition and other factors into the RBC model (Yun, 1996; Christiano et al., 2005).

2 This hypothesis draws on the experience of Christiano et al. (2005), Celso (2016).

3 Autoregressive Process of Order One is recorded as AR(1). Just like the most relevant literature, in order to depict the dynamic change of policy for this model, the process of policy change is set as AR(1). As a result, policy changes create economic fluctuations that level off over time.

Additional information

Funding

This work was supported by the Ministry of Education Humanities and Social Sciences Fund Project ‘Macroeconomic Policy Causal Effect Analysis Method and Its Application Research’ (Grant Numbers: No. 18YJA790005), and the Chinese Natural Science Foundation Project ‘A Dynamic Factor Model Modeling Method with Markov System Transition and Its Application Research’ (Grant Numbers: No. 71271142).