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Cost and Benefit of Tax Reduction: Evidence from China’s Pension Fee Collection

Received: 22 December 2020     Accepted: 5 January 2021     Published: 12 January 2021
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Abstract

Tax reduction policies often implies a trade-off of government between revenue loss and economic boost, which although relates to social governance and economic development. However, the existing literature rather focuses on the economic impacts than the direct pecuniary costs and benefits. To fill the gap in the literature, comparing the direct pecuniary cost and benefit is important for policymaking. Thus, this study aims to evidence the causal impact of potential tax reduction on local revenue loss and economic gain via a case study of China’s pension fee. To address the simultaneity between its collection and the corresponding labour output, this study takes the retiree in the prior period as the instrumental variable. Drawing on a provincial panel data, the two-stage-least-square regressions show that by lowering 1 percentage point pension fee rate (PFR), local pension revenue will decrease by 6.3 percent or 2.1 billion yuan, which indeed generates certain revenue distress; meanwhile, it instead increases employment and wages and leads to growth in the local GDP by 0.84 percent or 113.6 billion yuan, which far exceeds the revenue loss and generates net economic gain. Heterogeneity further shows that this economic benefit is more significant in the less developed areas. Accordingly, it is suggested that tax-cut policy can be a beneficial device to balance the inter-regional differences in economic development.

Published in Journal of Finance and Accounting (Volume 9, Issue 1)
DOI 10.11648/j.jfa.20210901.11
Page(s) 1-7
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Pension Fee Rate Reduction, Revenue Loss, GDP Boost

References
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[2] Angrist, J. and J. Pischke, 2009. Mostly Harmless Econometrics: An Empiricist’s Companion. New Jersey: Princeton University Press.
[3] Besley, T., and T. Persson. 2013. “Taxation and Development.” In Handbook of Public Economics, eds A. Auerbach, R. Chetty, M. Feldstein, E. Saez, 51-110, Amsterdam: North Holland.
[4] Besley, T., and T. Persson. 2014. “Why Do Developing Countries Tax So Little?” Journal of Economic Perspective 28 (4): 99-120.
[5] Blanch flower, D., and A. Oswald, 2003. Wage Curve, MA: MIT press.
[6] Chetty, R., J. Friedman, S. Leth-Peterson, T. Nielsen, and T. Olsen, 2014. “Active vs. Passive Decisions and Crowd-out in Retirement Savings Accounts: Evidence from Denmark” The Quarterly Journal of Economics, 129 (3): 1141-1219.
[7] Coile, C., A. Borsch-Supan, 2018. “Social Security Programs and Retirement Around the World: Reforms and Retirement Incentives” NBER working paper. 25280.
[8] Fang. H. M., and J. Feng. 2018. “The Chinese Pension System.” NBER working paper, no. 25088.
[9] Gruber, J. and D. Wise, 2010. Social Security Programs and Retirement Around the World: The Relationship to Youth Employment. Chicago: University of Chicago Press.
[10] Lewbel, A. 2019. “Identification Zoo: Meanings of Identification in Econometrics”, Journal of Economic Literature, 57 (4):8 35-903.
[11] Li Zhigang and Wu Minqi, 2011. “Estimating the incidences of the recent pension reform in China: evidence from 100,000 manufacturers”. BBVA Research working paper, No.11/38.
[12] Nielsen, I. and R. Smyth, 2008. “Who bears the burden of employer compliance with social security contributions? Evidence from Chinese firm level data” China Economic Review, 19: 230-244.
[13] Saez, E. and M. Matsaganis and P. Tsakloglou, 2012. “Earnings Determination and Taxes: Evidence from a Cohort-Based Payroll Tax Reform in Greece” The Quarterly Journal of Economics, 127: 493-533.
[14] Saez, E. and B. Schoefer and D. Seim, 2017. “Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers' Tax Cut in Sweden” NBER Working paper, no. 27936.
[15] Wise, D., 2017. Social Security Programs and Retirement Around the World: The Capacity to Work at Older Ages. Chicago: University of Chicago Press.
[16] Ulyssea, Gabriel, 2018. “Firms, Informality and Development: Theory and evidence from Brazil” American Economic Review, 108: 2015-47.
[17] Yuan, Z. G., Z. Li, and J. Feng, 2009. “Urbanization and Pension Dependency Ratio in China” Nankai Economic Research, 2009 (4).
[18] Zhao, J. Y. and Z. F. Lu, 2018. “Pension Fee Rate and Economic Efficiency” Economic Research Journal, 2018 (10).
[19] Zhao, J, J. Mao, and L. Zhang, 2015. “Social Security Rate and Compliance – A Study on Employee and Firm Avoidance” Economics (Quarterly), 2015 (1).
Cite This Article
  • APA Style

    Fei Han. (2021). Cost and Benefit of Tax Reduction: Evidence from China’s Pension Fee Collection. Journal of Finance and Accounting, 9(1), 1-7. https://doi.org/10.11648/j.jfa.20210901.11

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    ACS Style

    Fei Han. Cost and Benefit of Tax Reduction: Evidence from China’s Pension Fee Collection. J. Finance Account. 2021, 9(1), 1-7. doi: 10.11648/j.jfa.20210901.11

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    AMA Style

    Fei Han. Cost and Benefit of Tax Reduction: Evidence from China’s Pension Fee Collection. J Finance Account. 2021;9(1):1-7. doi: 10.11648/j.jfa.20210901.11

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  • @article{10.11648/j.jfa.20210901.11,
      author = {Fei Han},
      title = {Cost and Benefit of Tax Reduction: Evidence from China’s Pension Fee Collection},
      journal = {Journal of Finance and Accounting},
      volume = {9},
      number = {1},
      pages = {1-7},
      doi = {10.11648/j.jfa.20210901.11},
      url = {https://doi.org/10.11648/j.jfa.20210901.11},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20210901.11},
      abstract = {Tax reduction policies often implies a trade-off of government between revenue loss and economic boost, which although relates to social governance and economic development. However, the existing literature rather focuses on the economic impacts than the direct pecuniary costs and benefits. To fill the gap in the literature, comparing the direct pecuniary cost and benefit is important for policymaking. Thus, this study aims to evidence the causal impact of potential tax reduction on local revenue loss and economic gain via a case study of China’s pension fee. To address the simultaneity between its collection and the corresponding labour output, this study takes the retiree in the prior period as the instrumental variable. Drawing on a provincial panel data, the two-stage-least-square regressions show that by lowering 1 percentage point pension fee rate (PFR), local pension revenue will decrease by 6.3 percent or 2.1 billion yuan, which indeed generates certain revenue distress; meanwhile, it instead increases employment and wages and leads to growth in the local GDP by 0.84 percent or 113.6 billion yuan, which far exceeds the revenue loss and generates net economic gain. Heterogeneity further shows that this economic benefit is more significant in the less developed areas. Accordingly, it is suggested that tax-cut policy can be a beneficial device to balance the inter-regional differences in economic development.},
     year = {2021}
    }
    

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    JF  - Journal of Finance and Accounting
    JO  - Journal of Finance and Accounting
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    AB  - Tax reduction policies often implies a trade-off of government between revenue loss and economic boost, which although relates to social governance and economic development. However, the existing literature rather focuses on the economic impacts than the direct pecuniary costs and benefits. To fill the gap in the literature, comparing the direct pecuniary cost and benefit is important for policymaking. Thus, this study aims to evidence the causal impact of potential tax reduction on local revenue loss and economic gain via a case study of China’s pension fee. To address the simultaneity between its collection and the corresponding labour output, this study takes the retiree in the prior period as the instrumental variable. Drawing on a provincial panel data, the two-stage-least-square regressions show that by lowering 1 percentage point pension fee rate (PFR), local pension revenue will decrease by 6.3 percent or 2.1 billion yuan, which indeed generates certain revenue distress; meanwhile, it instead increases employment and wages and leads to growth in the local GDP by 0.84 percent or 113.6 billion yuan, which far exceeds the revenue loss and generates net economic gain. Heterogeneity further shows that this economic benefit is more significant in the less developed areas. Accordingly, it is suggested that tax-cut policy can be a beneficial device to balance the inter-regional differences in economic development.
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Author Information
  • School and Public Finance and Taxation, Central University of Finance and Economics, Beijing, China

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