Estimating the Macroeconomic Effects of Large-Scale Value-Added Tax Credit Refunds

The modern economy is a highly interconnected production network. Large-scale refunds of accumulated input VAT credits not only increase the cash flow and reduce the operating costs of recipient firms, but also, through changes in these firms' inputs and outputs, transmit and propagate the effects of tax policy throughout the production network via interactions between upstream and downstream firms, thereby improving resource allocation across the economy and expanding macroeconomic output. Analysis using a production network model with financing constraints shows that refunds of accumulated VAT credits and increases in the VAT credit refund rate can reduce distortions in the economy, strengthen linkages along industrial chains, and increase aggregate economic output. When the additional tax revenue generated by output expansion exceeds the government's cost of capital turnover, VAT credit refunds can increase government fiscal revenue. Calibration of parameters using China's national input-output table shows that large-scale refunds of accumulated VAT credits in 13 industries, including manufacturing, in 2022, together with raising the VAT credit refund rate from 60% to 100%, increased GDP by 0.076% and reduced financing distortions caused by financing constraints by 1.911%. Counterfactual analysis indicates that further extending refunds of accumulated VAT credits to all industries and providing full monthly refunds of VAT credits could increase real GDP by a further 0.017%. To reduce firms' costs and enhance their vitality, accumulated VAT credits in other industries may be appropriately reduced in stages, and the VAT credit refund rate may be raised.