This paper presents a study of the economic impact of an income tax integration implemented in 1998 by the Republic of China. It builds a computable general equilibrium model with which four simulations are made. The four simulations made are: (1) the existing dividend ratio is maintained; (2) the ratio is increased by 50%; (3) the ratio is increased by 100%; (4) the existing dividend ratio is maintained and the demand of capital for each industry is shifted upward by 5%.
The model consists of 10 industries and uses a production function of the Leontief-Cobb-Douglas type for each industry. It incorporates a user cost of capital employed by Hall and Jorgensen and allows for the discount rate to be determined in a way proposed by Fullerton and Henderson. The tax integration can thus affect the demand for capital by industry through the discount rate and then the user cost of capital. Another characteristic of the model is the determination of the components of pretax business income, some of which are affected by the tax integration. The distribution of the pretax business income plays a key role in affecting household’s income and consumption for different income groups.
Simulation results show that the tax integration induces a higher economic growth rate than that in the absence of the tax reform. For example, the growth rate is 0.516% higher under the case of maintaining the existing dividend ratio, which amounts to NT$377 billion in 1991 dollar and based on 1998 GDP. Since total capital stock and total employment for the economy are kept constant in the simulation, this implies that the tax reform can improve the efficiency of the allocation of the economy’s resources.
The tax integration is seen to stimulate the growth of domestic investment and to improve the finance of the government by increasing its revenues and reducing its expenditures. It is also seen to worsen the real after-tax income distribution for favoring top income groups.
