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| Price and Welfare Effects of the Consumption Tax Collection Point Relocation Reform: An Analysis Based on a Social Accounting Matrix Price Model |
| NI Hongfu, WANG Wanting, ZHANG Xingtong
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| School of Applied Economics, University of Chinese Academy of Social Sciences; Research Center of Low Altitude Economy, University of Chinese Academy ofSocial Sciences;Faculty of Economics, University of Chinese Academy of Social Sciences; School of Finance, Renmin University of China |
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Abstract The Third Plenary Session of the 20th Central Committee of the Communist Party of China proposed “advancing the shift of the consumption tax collection to the retail stage and it's steady transfer it to local governments.” As the third-largest tax category in China's fiscal system, the consumption tax plays a significant role. Its revenue surged from 484.7 billion yuan in 1994 to 1611.781 billion yuan in 2023, with its share in total national tax revenue increasing from 4.74% to 8.90%. To strengthen local public finance systems and alleviate local fiscal pressures, the central authority advocates gradually transferring the consumption tax to local governments and shifting its collection point from the production stage to the consumption stage.
This paper examines how relocating the consumption stage affects prices. From a single-industry perspective, the tax base differs between the two stages: the ex-factory price at the production stage versus the final price excluding VAT at the consumption stage. Additional costs in the circulation phase lead to a larger tax base at the consumption stage, potentially raising final consumer prices. However, a general equilibrium perspective reveals three macro channels of influence: (1) mitigating the cost amplification effect of the tax along production chains, (2) directly altering the consumption tax base, (3) affecting tax bases of other levies (e.g. VAT and the urban maintenance and construction tax). Therefore, in the context of “low inflation accompanied by deflationary pressure,” assessing price changes solely from a single-industry perspective is insufficient. A comprehensive evaluation requires a macro perspective that incorporates inter-industry network linkages.
Using a 2020 Social Accounting Matrix(SAM) with disaggregated wholesale and retail sector, we develop input-output price models for consumption tax levied at both the production and consumption stages. These models simulate and quantify the impacts of the collection point shift on prices and welfare in various policy scenarios. Our marginal contributions are threefold: (1) We explore the impact of shifting the consumption tax collection price on prices and welfare, offering a relatively novel research perspective. Most existing studies on consumption tax reform focus on theoretical pathways, with limited quantitative research on the collection point shift. (2) Methodologically, we innovatively incorporate the consumption tax shifting mechanism into the input-output framework, enriching the application of this method. This paper is the first to use input-output analysis to examine the issue of the consumption tax collection point, extending its application in public finance. (3)We offer quantitative estimates of policy impacts across scenarios, providing data-driven insights for reform. Existing discussions on specific pathways for the shift often lack quantitative estimates. This paper calculates specific numerical effects on prices and welfare for different reform options, aiding the reform's implementation.
Our findings indicate: (1) After the shift, price in most industries show a downward trend due to reduced intermediate input costs for enterprises,with a pronounced effect of when taxing only final demand products. (2) Key industries like tobacco, alcohol, and automobiles face upward price pressure due to increased circulation costs, with the tobacco industry experiencing the most significant rise. (3) Taxing only final demand products reduces CPI by 0.55% and PPI by 1.65%, while taxing both intermediate and final products increases CPI by 0.23% and decreases PPI by 0.54%. (4) The reform enhances residents' real purchasing power by lowering industry prices, leading to overall welfare improvement. However, the welfare gains differ substantially between urban and rural residents, highlighting the need to address group inequality. (5) In a gradual reform, piloting the shift in the tobacco or petroleum industries would have a larger price impact, while piloting in the alcohol or automobile industries would have a smaller effect. (6) A higher pass-through rate of indirect taxes correlates with a more pronounced decline in industry prices and greater improvement in residents' welfare.
Based on the conclusions, we proposed three policy implications. First, the pace of the consumption tax reform should be carefully managed to guard against downside price risks. Given that China's CPI has remained below 1% for 27 consecutive months since February 2023, with an average inflation rate of only 0.12%, overly rapid implementation of the collection point shift could exacerbate price declines and harm economic stability. Therefore, the reform should proceed gradually and be implemented in phases. Initially, the tax could be applied to both intermediate inputs and final demand products, later transitioning to taxing only final demand products to avoid sharp price fluctuations. Second, consider launching pilot programs starting in the tobacco and alcohol industries, which have smaller spillover effects on other sectors.. Compared to the petroleum industry, tobacco and alcohol are positioned further downstream in the industrial chain, meaning that the reform would have a smaller price impact on other sectors. Pilots could begin in the alcohol industry, expanding to tobacco after tax procedures are standardized, and subsequently covering petroleum, automobiles, and other areas. Third, strengthen tax administration capacity and optimize tax rates. The dispersion of taxpayers at the consumption stage imposes higher requirements on tax supervision and administration, necessitating enhanced digital and intelligent tax administration to safeguard revenue. The statutory tax rates for key sectors such as high-energy-consumption and luxury goods could be increased initially, followed by gradual rate reductions and simplification of tax brackets. This study also has several limitations. Future research could incorporate differentiated treatments for various tax calculation methods and organizational structures of production at the micro-enterprise or industry level. Furthermore, extending the analysis to a general equilibrium framework could further explore the reform's impact on output and fiscal revenue.
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Received: 08 August 2025
Published: 27 February 2026
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