Tax Incentive and Capacity Expansion and Quality Improvement of Residents’ Consumption under the New Pattern of Dual Cycle Development: Evidence from“Replacing Business Tax with Value-Added Tax”

Abstract

Abstract: Under the new development pattern of dual circulation, promoting consumption and expanding domestic demand will play a fundamental role. Tax reduction is an important policy choice to reduce the tax burden on market entities and expand domestic demand. Based on the data of Chinese Household Finance Survey(CHFS), this study uses the evidence from the quasi natural experiment of“replacing business tax with value-added tax”to examine the mechanism and policy effects of tax reduction on the capacity expansion and quality improvement of the consumption of Chinese residents. The results indicate that the“replacement of business tax with value-added tax”has significantly promoted the residents’ consumption and increased the household average consumption propensity and consumption upgrading index, having a capacity expansion and quality improvement effect. Further research has found that“replacing business tax with value-added tax”can stimulate residents’ consumption from both supply and demand sides, following the price mechanism and income mechanism, the consumption upgrading effect of the income mechanism is more sustainable. The consumption effect of the“replacing business tax to value-added tax”policy is heterogeneous among households in different income groups, with a greater impact on the capacity expansion and quality improvement of consumption for low-income households. Therefore, it is suggested to reduce the burden on enterprises, assist residents in employment and in income growth, improve the consumption willingness and the ability of low and middle-income residents, stimulate social consumption potential, promote the equalization and accessibility of basic public services, reduce residents’ motivation for preventive savings, promote the development of modem life service industry, and optimize the supply of development oriented and enjoyment oriented consumption.

Key words: new development pattern of dual circulation, tax incentive, resident consumption, replacing business tax with value-added tax, expanding capacity and improving quality

ZHANG Qing, ZHOU Quanlin. Tax Incentive and Capacity Expansion and Quality Improvement of Residents’ Consumption under the New Pattern of Dual Cycle Development: Evidence from“Replacing Business Tax with Value-Added Tax”[J]. JOURNAL OF CONTEMPORARY FINANCE AND ECONOMICS, 2023, 0(2): 48-64.

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