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1 results

  • OPTIMAL FISCAL POLICY WITH LAND FINANCING IN CHINA

  • Shen Guo, Zheng Jiang
  • Journal:
    Macroeconomic Dynamics / Volume 23 / Issue 7 / October 2019
    Published online by Cambridge University Press:
    18 December 2017, pp. 2649-2674

  • 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.