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OPTIMAL FISCAL POLICY WITH LAND FINANCING IN CHINA

Published online by Cambridge University Press:  18 December 2017

Shen Guo  and
Zheng Jiang
Shen Guo*
Affiliation:
Central University of Finance and Economics
Zheng Jiang
Affiliation:
Central University of Finance and Economics
*
Address correspondence to: Shen Guo, China Academy of Public Finance and Public Policy, Central University of Finance and Economics, 39 South College Road, Beijing 100081, China; e-mail: sguo.cufe@gmail.com.
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Abstract

This paper examines China's optimal fiscal policy in a general equilibrium model, in which the government finances its budget through both a special instrument, an implicit tax on the residential land, and a typical conventional instrument, the value-added tax (VAT). By solving a Ramsey problem, we find that (i) the optimal policy suggests a much lower land tax rate than the existing rate in China, and (ii) a substantial part of debt stabilization should come through an adjustment in the VAT rate, instead of relying on land financing. Switching from the existing policy to the Ramsey policy generates significant welfare gains.

Keywords

Optimal Fiscal PolicyFiscal ConsolidationLand MarketChina
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 7 , October 2019 , pp. 2649 - 2674
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

We are grateful to anonymous referees, the associate editor and the editor for helpful suggestions. Guo thanks China National Social Science Fund (Grant no.16BJY167) and the Program for Innovation Research in Central University of Finance and Economics for the financial support. The author Z. Jiang thank the National Natural Science Foundation of China for the financial support (Grant no. 71503287).

References

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