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Nonlinear Capital Flow Tax: Capital Flow Management and Financial Crisis Prevention in China
Author(s) -
Ju Jiandong,
Li Li,
Nie Guangyu,
Shi Kang,
Wei ShangJin
Publication year - 2019
Publication title -
china and world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.815
H-Index - 28
eISSN - 1749-124X
pISSN - 1671-2234
DOI - 10.1111/cwe.12284
Subject(s) - economics , depreciation (economics) , monetary economics , capital outflow , financial capital , capital (architecture) , capital deepening , capital intensity , international economics , capital formation , market economy , archaeology , history , human capital
How to promote capital account liberalization while preventing financial crises is a challenging task for policymakers. This study proposes a nonlinear (progressive) capital flow tax as a solution. We first demonstrate that the collateral requirement of international borrowing can give rise to multiple equilibria and self‐fulfilling financial crises. We then show that the crisis equilibrium characterized by large exchange rate depreciation, capital flight and welfare loss can be eliminated by imposing a nonlinear (progressive) tax scheme on capital outflows with the marginal tax rate increasing with the size of individual capital outflows. The implementation of such a tax scheme in China is also discussed.