Impacts of Direct and Indirect Tax Reforms in Vietnam: A CGE Analysis

The study applies a multi-sector multi-household static computable general equilibrium (CGE) tax model to assess the economy-wide impacts of taxes in Vietnam. It examines two tax reform scenarios based on the tax reform plan proposed by the Vietnam Ministry of Finance. The first scenario is increasing the value-added tax (VAT) rate to 12% from the current 10% rate. The second scenario relates to setting a competitive corporate income tax (CIT) rate to the lowest rate in ASEAN (Associations of South East Asian Nations) countries by reducing it from 20% to 17%. Correction of current tax distortions will have positive impacts on labour supply, utility, consumption, output, and welfare of households as they reallocate resources from more to less productive sectors of the economy. The CGE model allows for the finding of the macroeconomic and sectoral effects on prices and outputs, as well as on welfare of households. While this study contributes to the literature on the CGE model for the Vietnam economy, it is a small step for finding the optimal tax structure in Vietnam. It recommends that the Vietnam government should increase the standard VAT rate to 12% and reduce CIT rate to 17% to shift the tax burden from capitalists to consumers.

Social Status, Conspicuous Consumption Levies, and Distortionary Taxation

This paper explores the optimal tax structure in the presence of status effect. When the consumption of certain goods affects one’s social status, this creates an externality, which results in two opposite effects in a society. Seeking higher status through “positional goods” gives individuals much incentive to supply labor but still allocates income for less “nonpositional goods” as well. In this case, differentiated taxes on positional goods work as corrective instruments to internalize the social cost stemming from status seeking. Furthermore, the differentiated taxes generate revenue that can be used to alleviate preexisting income tax distortion. We develop a game-theoretic model in which each individual with different labor productivity unknown to the others engages in a status-seeking game, where government has a revenue requirement. Then we show that under a condition in which utility is separable between positional goods and leisure, a revenue-neutral shift in the tax mix away from nonlinear income taxes toward positional-good taxes enhances welfare. Hence, the differentiated taxes on positional goods are necessary together with the nonlinear income taxes for an optimal tax structure. Moreover, the differentiated taxes on positional goods could reduce the progressivity of the nonlinear income taxes, which is the case that can easily apply to practical use.

PRODUCTIVE GOVERNMENT EXPENDITURE IN A STOCHASTICALLY GROWING ECONOMY

This paper analyzes productive government expenditure in a stochastic AK growth model. First, a centrally planned economy is characterized, emphasizing the trade-off between the effects of both deterministic and stochastic government expenditures on the equilibrium growth rate and its variance. Both the growth-maximizing and the welfare-maximizing shares of government expenditure are derived and shown to depend (differentially) upon the degree of risk in the economy. Whereas production risk reduces the welfare-maximizing share of government expenditure, it may either increase or decrease the growth-maximizing share, depending upon the degree of risk aversion. Next, the stochastic equilibrium in a decentralized economy is derived. The first-best optimal tax structure is characterized and its dependence on risk is determined. The formal analysis is supplemented by some numerical simulations to assess the quantitative significance of risk and the divergence that this generates between the welfare-maximizing and growth-maximizing size of government.

On the Optimality of a Consumption Tax

Feldstein (1978) employed a simple life-cycle model to argue that a consumption tax would substantially reduce the excess burden of the current system of labor and capital income taxation. This note provides a general characterization of the optimal tax structure for this model. Maintaining Feldstein's other assumptions about parameter values, it is optimal to tax or subsidize capital income according to whether labor supply is an increasing or decreasing function of the wage rate.