Exploring the Macroeconomic Effects of Tax and Fee Reductions

Analysis based on the crowding out effect of active fiscal policy

Abstract

This paper combines the IS-LM model to analyze the macroeconomic effects of China's positive fiscal policy of reducing taxes and fees, including tax burden, output, tax structure, consumption and investment, in the stage of combined tax cuts and fee reductions after the "Camp Reform" in 2016. Through the analysis of specific data, in this stage, China's overall tax burden continues to decline, the level of output rises slowly, the value-added tax accounted for the proportion of tax revenue declines while the proportion of income tax accounted for tax revenue rises, the tax structure changes, the level of consumption remains rising, in terms of investment, the growth rate of private-sector investment in the post-tax cut policy has a significant decline, there is the possibility of fiscal crowding out. For the tax cut and fee reduction policy at this stage, it is proposed that while adopting tax cuts as a fiscal policy tool to act against the economic winds, it can be combined with monetary policy; combining tax cuts with economic and social development trends, and promoting the combination of tax cuts with optimization of the tax system; and upgrading the level of tax collection and management and improving the efficiency of the use of fiscal expenditure funds, and other policy recommendations.