Public Infrastructure Investment in China: A Recursive Dynamic CGE Analysis

Abstract

This paper employs a recursively dynamic two-sector CGE model incorporating public infrastructure as input and international trade in order to analyze impacts of tax policies that aims to enhance public infrastructure investment for China. We conduct two policy simulations: (1) Increasing household income tax rate by 10% while other variables remain at their base case level; (2) Increasing the household consumption tax rate by increasing the same amount of government revenue in the first period while the household income tax rate remains at its base case value. Results of both simulations suggest negative effects of adopting tax policies on volume of trade for the purpose of enhancing public infrastructure investment. The measure of welfare change suggests that households would suffer from the use of taxes to fund the increase in public infrastructure investment. Still, the sensitivity analysis results indicate that the conclusions are sensitive to the value of the output elasticity of public infrastructure.