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OPTIMAL FISCAL POLICY WITH LAND FINANCING IN CHINA

  • Shen Guo (a1) and Zheng Jiang (a1)
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.

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Corresponding author
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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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).

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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