# The Result of Policy Simulations

## The Simulation Result of Scenario 1

First, the tax structure adjustment in 2012 led to a slight reduction in economic growth; this was slightly lower than the reference value by 0.02 percentage points. However, in the next two years, thanks to the acceleration of urban fixed investment growth and the rise in residual consumption, the GDP growth rate was higher than

**Fig. 4.2** Changes in GDP growth rate (Note: Baseline denotes benchmark simulation; Scenario 1 denotes the simulation result of Scenario 1; diff denotes the simulation result difference between Scenario 1 and Baseline)

**Fig. 4.3** Changes in price level (Note: Baseline denotes benchmark simulation; Scenario 1 denotes the simulation result of Scenario 1; diff denotes the simulation result difference between Scenario 1 and Baseline)

the reference value by 0.13 and 0.06 percentage points, respectively, in 2013 and 2014 (Fig. 4.2). Thus, a reduction in indirect taxes and rise in direct taxes, although it has a slightly negative impact on economic growth in the short term, can promote economic growth in the long term.

Second, a reduction in indirect taxes would decrease the price level slightly and increase resident consumption. In 2012, the CPI was about 2.45, 0.19 percentage points less than the reference value. This then dropped and was less than the reference value by 0.14 and 0.03 percentage points in 2013 and 2014, respectively (Fig. 4.3).

**Fig. 4.4** Changes in growth of total social retail sales (Note: Baseline denotes benchmark simulation; Scenario 1 denotes the simulation result of Scenario 1; diff denotes the simulation result difference between Scenario 1 and Baseline)

**Fig. 4.5** Changes in residual consumption growth at comparable prices (Note: Baseline denotes benchmark simulation; Scenario 1 denotes the simulation result of Scenario 1; diff denotes the simulation result difference between Scenario 1 and Baseline)

Following the rise in direct taxes and dilution of price declines, the nominal growth rate of total retail sales was less than the reference value by 0.3 and 0.2 percentage points in 2012 and 2013, respectively. However, with the rise in economic growth, the nominal growth rate of total retail sales in 2014 was higher than the reference value by 0.1 percentage point (Fig. 4.4). After excluding the price factor, the growth rate of residual consumption, except when it was less than the reference value by 0.11 percentage points in 2012, was higher than the reference value by 0.08 percentage points both in 2013 and 2014 (Fig. 4.5). This suggests that for residual consumption, the incentive effect of decline in price level due to reduction in indirect taxes is greater than the inhibition of increasing direct taxes. Tax restructuring would improve the fairness of the tax burden and raise resident consumption.

**Fig. 4.6** Changes in urban fixed asset investment growth (Note: Baseline denotes benchmark simulation; Scenario 1 denotes the simulation result of Scenario 1; diff denotes the simulation result difference between Scenario 1 and Baseline)

Third, urban fixed asset investment is expected to increase rapidly. Because the total amount of tax has remained unchanged, changes in the ratio of direct and indirect taxes would have little effect on government-led investment, but would have a positive impact on the investment of self-financed enterprise capital, which promotes the overall urban investment growth. The urban fixed asset investment growth for 2012, 2013, and 2014, compared with the reference value, increased by 0.1, 0.6, and 0.2 percentage points, respectively (Fig. 4.6). Among them, self-finance business investment growth improved by 0.1, 0.8, and 0.2 percentage points, respectively, compared with the reference value. This shows that China's current tax system based on indirect taxes indeed inhibits the expansion of private investment. Against the current background of weak business investment will, a reduction in burden of companies would improve the business investment will and effectively promote the growth of investment.

Fourth, the total demand structure is slightly inclined toward investment. After adjustment of the tax structure, the absolute amount of both household consumption and investment would increase, but in view of the ratio of investment and consumption, it would decrease slightly, because investment grew faster than consumption. Compared with the reference value, the ratio of household consumption for 2012, 2013, and 2014 decreased by 0.03, 0.05, and 0.05 percentage points, respectively

(Fig. 4.7); therefore, the investment share increased slightly by 0.03, 0.12, and 0.13 percentage points, respectively, compared with the reference values (Fig. 4.8).

Finally, the growth rate of direct taxes increased at first and then decreased, while the growth of indirect taxes was in the opposite direction. In 2012, the reduction in indirect taxes led to a fall in indirect taxes growth rate by 2.05 percentage points compared with the reference value. However, as the economic growth accelerated, the lagged growth effect of indirect taxes gradually increased. Coupled with the base effect of the previous year, although the indirect taxes continued to decline by

**Fig. 4.7** Changes in the division of residual consumption (Note: Baseline denotes benchmark simulation; Scenario 1 denotes the simulation result of Scenario 1; diff denotes the simulation result difference between Scenario 1 and Baseline)

**Fig. 4.8** Changes in the division of gross capital formation (Note: Baseline denotes benchmark simulation; Scenario 1 denotes the simulation result of Scenario 1; diff denotes the simulation result difference between Scenario 1 and Baseline)

118.65 billion yuan a year, the year-on-year growth appeared to rise, increasing by

0.11 and 0.15 percentage points in 2013 and 2014, respectively (Fig. 4.9a), compared with the reference value; direct taxes showed the opposite trend. In 2012, an increase in direct taxes substantially raised the year-on-year growth rate, which was 3.4 percentage points higher than the reference value. In 2013 and 2014, this slightly decreased by 0.5 and 0.2 percentage points, respectively (Fig. 4.9b), suggesting that the increasing effect of economic growth on direct taxes is stronger than that on indirect taxes. Thus, the ratios of direct taxes to indirect taxes in the final simulation results for 2012, 2013, and 2014 were 0.55, 0.61, and 0.62, respectively, close to the initial target. The total tax revenue growth remained unchanged.

**Fig. 4.9** Changes in classified tax growth rate. (**a**) Change of direct tax growth. (**b**) Change of indirect tax growth (Note: Baseline denotes benchmark simulation; Scenario 1 denotes the simulation result of Scenario 1; diff denotes the simulation result difference between Scenario 1 and Baseline)

**Fig. 4.10** Changes in GDP growth rate (Note: Baseline denotes basic simulation; Scenario 2 denotes the simulation results in Scenario 2; diff denotes the difference between the simulation results in Scenario 2 and the basic simulation results)