TARIFF REDUCTION, TAX REPLACEMENT, AND IMPLICATIONS FOR INCOME-DISTRIBUTION IN CHINA

This paper considers the distributional Effects of trade liberalizatio n and government tax replacement policies during foreign trade reform. The analysis uses a 22-sector, 12-representative-household computable general equilibrium (CGE) model for China. The simulation results sho w that trade liberalization can enhance both economic efficiency and i ncome equality in China. However, the extent of the efficiency gains f rom trade liberalization depends on which tax instrument the governmen t chooses to balance its budget. Imposing a progressive household inco me tax reduces the Gini coefficient while retaining most of the effici ency gains. Hence, this is likely to be one of the appropriate tax pol icies for China's government to choose to replace lost tariff revenue during trade liberalization. (C) 1998 Academic Press.