China’s tax policy response to the global fi nancial crisis

TL;DRAbstract

On 4 August 2008, two unusually trenchant pieces of commentary on China's tax policy appeared in Caijing magazine (Xu 2008, Liu 2008).Both took aim at China's production-type VAT (value added tax), which differed from the international standard consumption-type VAT in that it did not allow the VAT that producers paid on purchases of equipment and other fi xed assets to be credited against VAT due on output.This resulted in the nonconsumed portion of GDP being subject to VAT, 1 which distorted both production and consumption decisions.The fi rst piece was by Xu Shanda, a former deputy minister of the State Administration of Taxation (SAT).Xu chastised the government's long-standing hesitation to reform VAT.According to him, the conversion to a consumption-type VAT should have happened during the defl ationary aftermath of the Asian fi nancial crisis in 1997, but the government had been too worried that such conversion would result in reduced revenue.What would have been wrong with a lit

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