Analysis of the Effect of the VAT on the Size of the Government and Recommendation on the Reform of the VAT in China

Abstract

Since the implementation of the value-added tax (VAT) in 1994, such tax has become the most prominent source of taxation income in the Chinese taxation system. However, its reform is far from complete as the VAT is not fully deductible and its coverage is incomplete within industries causing the future roadmap of the reform to be unclear. This article resulted in two conclusions based on the analysis of the relationship between the VAT and governmental size. Firstly, the VAT is a significant factor that leads to the expansion of the government. Secondly, the VAT reform was not only an economic reform, but also a political reform. Subsequent reforms will have to depend on the balance of economic and political interest and also the balance of power between the central and local government.

Keywords: Value-added Tax, VAT Reform, Size of Government

JEL Classification: H2, K34