Value-added Tax Change, Labor Demand and the Micro-foundation of Laffer Curve
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| Title | Value-added Tax Change, Labor Demand and the Micro-foundation of Laffer Curve
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| Author | Yao Dongmin, Zhu Yongyi and Zhang Pengyuan |
| Organization | Center for China Fiscal Development, Central University of Finance and Economics |
| Email | yaodongminn@163.com；zhuyongyii@163.com；zpy777343@163.com |
| Key Words | tax reduction, Laffer Curve, value-added tax framework, labor demand |
| Abstract | Laffer Curve is used as a tool to discuss the effect of tax reduction in the academic circles. It’s also regarded as the micro-foundation of study the impact of individual income tax rates on labor supply. However, value-added tax (VAT) is the main tax in China. Besides the basic environment of the labor market is that supply exceeds demand. As a result, the Laffer Curve, which was studied under the personal income tax framework, cannot adapt to China's special national conditions. Therefore, this paper will discuss the existence and characteristics of the Laffer Curve under the VAT framework from both theoretical and empirical aspects, and further explore the impact of tax rate changes on the demand of labor factors by the theoretical tools, which serves as a microscopic mechanism for the VAT framework. This study found that the Laffer Curve also exists under the VAT framework (rather than corporate income tax), and there exists a significant negative relationship between tax rate and labor demand. Besides, for labor-intensive enterprises, enterprises with low monopoly power in the factor and commodity markets, the impact of tax rate changes on their labor demand is more significant. |
| Serial Number | WP1448 |
| Time | 2019-12-09 |
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