Tax Policy and Toxic Housing Bubbles in China

Pengfei Jia*, King Yoong Lim

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)


This paper explores the effects of a government tax policy in a growth model with economic transition and toxic housing bubbles applied to China. Such a policy combines taxing entrepreneurs with a one-time redistribution to workers in the same period. Under the tax policy, we find that the welfare improvement for workers is non-monotonic. In particular, there exists an optimal tax at which social welfare is maximized. Moreover, we consider the welfare effects of setting the tax at its optimum. We show that the tax policy can be welfare-enhancing, comparing to the case without active policies. The optimal tax may also yield a higher level of welfare than the case even without housing bubbles. In addition, our simple numerical exercise shows that the optimal tax rate is about 23%;, and social welfare is significantly improved with such a tax policy. Finally, we extend the benchmark economy to a multi-period setting and calibrate the model to China. Our results show that a 20%; tax rate can speed up economic transition and increase output growth. Between 1998 and 2012, aggregate consumption is 4.86%; higher under active tax policies.

Original languageEnglish
Pages (from-to)151-183
Number of pages33
JournalB.E. Journal of Macroeconomics
Issue number1
Publication statusPublished - 1 Jan 2021
Externally publishedYes


  • Chinese economy
  • housing bubbles
  • tax policy


Dive into the research topics of 'Tax Policy and Toxic Housing Bubbles in China'. Together they form a unique fingerprint.

Cite this