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International Journal of Economics and Management, Volume 11, Issue 2, 2017, pp. 371-391

Tax reform, sectoral restructuring and household welfare in Vietnam

Abstract :

This study investigates the effects of Vietnam's recent tax reform on changes in sectoral structures, household welfare, and other key macroeconomic variables across scenarios. A Computable General Equilibrium framework in connection with the most updated Social Accounting Matrix of 2012, was developed to simulate the Vietnam economy. The results reveal that a reduction in the tax rates causes positive changes in the sectoral structure. This is proven by the transfer from labour-intensive towards capital-intensive sectors, increasing the output proportion of manufacturing and service sectors in the direction of industrialization and modernization, initiated by the 1986 Doi Moi reforms. We also find that when all categories of taxes are simultaneously diminished, the positive impact of the tax reform is strongest and the highest level of household welfare is created, though the benefits of cutting taxes are not evenly distributed among the household groups. In addition, a budget deficit is inevitable and should be tackled by the government through effective budgeting strategies and a relevant plan to cut government spending. The study implies that Vietnam needs to analyse the benefits of the tax reform over the opportunity cost of implementing the tax reform, while maintaining competitive and reasonable tax rates in accordance with international commitments and practices.

Keywords : CGE model,Household welfare,Sectoral restructuring,Tax reform
Subject Area : Business and International Management Economics, Econometrics and Finance(all) Strategy and Management

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