We investigate and compare the impact of the tax reduction policies implemented in the United States and China to stimulate consumer purchase of new automobiles and improve manufacturers' profits. The U.S. policy provides each qualifying consumer with a federal income tax deduction on state and local sales and excise taxes paid on the purchase price (up to a cutoff level), whereas the Chinese policy reduces the vehicle sales tax rate for consumers. We observe that these policy designs are consistent with the tax management system and the economic environment in the respective country. We analytically determine the effects of the two tax reduction policies on the automobile sales and the manufacturer's and the retailer's profits. Numerical examples are then used to provide insights on the importance of certain factors that influence the effects of the two policies. Finally, a numerical experiment with sensitivity analysis based on real data is conducted to compare the merits and characteristics of the two policies under comparable conditions. We find that the U.S. policy is better than the Chinese policy in stimulating the sales of high-end automobiles, whereas the Chinese policy is better than the U.S. policy in improving the sales of low-end automobiles. The U.S. policy is slightly more effective in increasing the profitability of the automobile supply chain; but, in general, the Chinese policy is more cost effective. The methodology developed herein can be used to evaluate other tax reduction policies such as those related to the purchase of energy-saving vehicles and to serve as a decision model to guide the choice of alternative tax reduction policies.
Bibliographical noteThe first author (K. Hung Chan) acknowledges partial financial support for this project from Research Grants Council of Hong Kong (RGC Ref. No.340011). The second author (Mingming Leng) is supported by the Research and Postgraduate Studies Committee of Lingnan University (Hong Kong) under Research Project No. DR13A3. The third author (Liping Liang) is supported by the Early Career Scheme of the Hong Kong Research Grants Council under Research Project No. LU343012 and the National Natural Science Foundation of China under Research Grant No. 71461009.
- Accounting-operations interface
- tax reduction policy
- supply chain management