Impacts of excise tax on unhealthy commodities in Vietnam: A Computable general equibrium approach

Among many methods to restrict the excessive consumption of unhealthy commodities, the taxation policies are proved to be efficient in not only reducing the consumption, improve the [r]

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

DANG THI BICH THAO

IMPACTS OF EXCISE TAX ON

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

DANG THI BICH THAO

IMPACTS OF EXCISE TAX ON

DR TRAN LAM ANH DUONG

DR NGUYEN TIEN DUNG

Hanoi, 2019

ACKNOWLEGEMENT

During 2 years studying in the Vietnam - Japan University (VJU), I have not only obtained valuable knowledge and skills but also live in the hands of love of VJU and University of Tsukuba’s lecturers as well as my beloved MPP friends

First of all, I would like to express my sincere thankfulness to my supervisors, Dr Tran Lam Anh Duong, University of Tsukuba and Dr Nguyen Tien Dung, University of Economics and Business for their useful support during the whole process of the study Without their guidance, I would have not finished my thesis in time

Secondly, I would like to express my great attitude to MPP program, especially Dr Nguyen Thuy Anh, Dr Vu Hoang Linh, Professor Naohisa Okamoto and Ms Pham Thu Ha Their encouragement and assistance has facilitated me a lot during the studying process

Thirdly, I greatly appreciate the kind support of Professors Hiroichi Kawashima, Morito Tsutsumi, Yoshiaki Ohsawa and staff of the Global Initiative Office, University of Tsukuba for supporting me during 3 months internship in Japan at the end of 2018 The knowledge obtained during this internship contributed significantly for my thesis accomplishment

Finally, the sincere thanks are expressed to my family, especially my husband, my parents and my kids for always staying besides and supporting me over the past two years The experience in VJU and University of Tsukuba would

be the best memory in my life

TABLE OF CONTENTS

ACKNOWLEGEMENT i

LIST OF TABLES iv

LIST OF FIGURES v

LIST OF ABBREVIATIONS vi

CHAPTER 1 INTRODUCTION 1

1.1 Research context 1

1.1.1 The consumption of unhealthy commodities in Vietnam and its impacts 1

1.1.2 The role of excise tax in reducing the consumption of unhealthy commodities and history of excise tax in Vietnam 2

1.1.3 The needs to re-structure taxation revenue sources in Vietnam 4

1.2 Research questions, research objectives and methodology 6

1.3 Research structure 8

CHAPTER 2 LITERATURE REVIEW 9

2.1 Literature on the impacts of excise tax on unhealthy commodities 9

2.2 Literature on research methodologies 12

CHAPTER 3 RESEARCH METHODOLOGY 14

3.1 Static standard single CGE model 14

3.1.1 Price block 15

3.1.2 Production block 17

3.1.3 Income block 18

3.1.4 Demand block 20

3.1.5 Demand for exports and imports 21

3.1.6 Equilibrium conditions 22

3.2 Data 23

3.2.1 Vietnam Input-Output table 2012 23

3.2.2 Data on state budget revenue from excise tax 23

3.2.3 Data on cooperate, personal income tax revenue and fund transfers 24

3.2.4 Elasticity parameters 24

3.3 Simulation scenarios 25

CHAPTER 4 RESEARCH FINDINGS 26

4.1 Impacts of unhealthy commodity excise tax on real GDP 26

4.2 Impacts of unhealthy commodity excise tax on household’s income 26

4.3 Impacts of unhealthy commodity excise tax on state budget revenue 28

4.4 Impact of unhealthy commodity excise tax on consumption 29

4.5 Impacts of unhealthy commodity excise tax on outputs of industries 30

4.6 Discussion on the impacts of unhealthy commodity excise tax on public health32 CHAPTER 5 CONCLUSION, POLICY DISCUSSION, LIMINATION OF THE RESEARCH AND FURTHER STUDY 33

5.1 Conclusion 33

5.2 Policy discussion 34

5.3 Limitation of the research 35

5.4 Further study direction 36

REFERENCE 37

LIST OF PUBLICATION OF THE AUTHOR 43

APPENDIX 44

Appendix 1: List of industries in I-O table 44

Appendix 2: State budget revenue from imported commodities 2012 45

LIST OF TABLES

Table 1.1: History of excise tax in Vietnam 3Table 2.1: International literature on the impacts of taxation on unhealthy commodities 10Table 2.2: Vietnam literature on the impacts of taxation on unhealthy commodities12Table 3.1: Domestic excise tax revenue 2012 (thousand billion VND) 24Table 4.1 Impact of unhealthy commodity excise tax increase on real GDP 26Table 4.2 Impact of unhealthy commodities excise tax increase on household's income 28Table 4.3 Impact of unhealthy commodity excise tax increase on State budget revenue 29Table 4.4 Impact of unhealthy commodities excise tax increase on consumption 30Table 4.5: Impacts of unhealthy commodity excise tax increase on outputs of industries 31

LIST OF FIGURES

Figure 1.1: Ratio of obesity (BMI≥ 30) among adults in Vietnam, 1976-2016, (%) 2Figure 1.2: Average tax to GDP ratio of Vietnam and other countries, 1990-2016, (%) 4Figure 1.3: Public debt/GDP of Vietnam and emerging markets and developing countries, 2000-2016, (%) 5Figure 1.4: Ratio of some sources of state budget revenue/total state budget revenue, 2000-2017, (%) 6

LIST OF ABBREVIATIONS

AIDS Almost Ideal Demand System Model

CGE Computable General Equilibrium Model CIF Cost, Insurance and Freight

CIT Corporate Income Tax

FCU Foreign Currency Unit

FTA Free Trade Agreement

GSO General Statistic Office

GTAP Global Trade Analysis Project

IMF International Monetary Fund

LCU Local Currency Unit

MOF Ministry of Finance

SSB Sugar - sweetened beverage

VHLSS Vietnam Household’s Living Standard Survey

CHAPTER 1.INTRODUCTION

1.1 Research context

1.1.1.The consumption of unhealthy commodities in Vietnam and its impacts

The excessive consumption of alcohol, tobacco and sugar-sweetened beverage (SSB) causes serious problem for human health The 2018 World Health Organization(WHO) reports that alcohol result-ed in approximately 3 million deaths and 132.6 million disability-adjusted life years worldwide in 2016 Tobacco was blamed for the death of around six million people each year including 600,000 whose suspected cause of deaths is second-hand smoking Besides being blamed for ill-health, disability and death from non-communicable diseases, tobacco is also associated with the risks of communicable diseases (WHO, 2015) Meanwhile, Malik, Pan, Willett, & Hu (2013) affirmed that SSB promotes weight gain in children and adults Alcohol, tobacco and SSB, in this study are referred to as unhealthy commodities

Recently, the consumption of unhealthy commodities in Vietnam is becoming more serious Data of WHO (2018a) shows that the alcohol per capita consumption of Vietnam increased steadily since 1991, from only 0.16 liters of pure alcohol1 per person per year in this year to 3.1 liters in 2016 According to Pham, Tran & Tran (2018), the proportion of adults drinking in Vietnam raised from 46%

to 77% among men and 2% to 11% among women between 2002 and 2016 In 2017, Vietnamese consumed 305 million liters of alcohol and 4.1 billion liters of beer, ranking first in Southeast Asia region and ranked third in Asia, just after Japan and China (WHO, 2018b)

The ratio of male smoker in Vietnam is very high (46%) compared to Japan (33.7%) and global average (33.7%)

According to the Vietnam Household’s Living Standard Survey (VHLSS)

2010, 2014 and 2016 of the Vietnam General Statistic Office (GSO), the average

1 Pure alcohol is a common unit to measure the alcohol consumption 25 g pure alcohol is defined as 750 ml beer, 75 g low-alcohol liquor, 50 g hard liquor, and 250 ml wine (Huang, Liu, Li, Xu, & Jia, 2017)

consumption of SSB per households over 2010-2016 was increasing In 2010, each household in Vietnam consumed only 151.42 liters of SSB per year, the consumption increased to 185.38 and 189.14 liters in 2014 and 2016 respectively Figure 1.1 illustrates the ratio of obesity among adults in Vietnam over 1976-2016 which observed a steady increase in recent 10 years From 2006 to 2016, the ratio of obesity among adults in Vietnam has increased from only 0.6% to 2.1%

Figure 1.1: Ratio of obesity (BMI≥ 30) among adults in Vietnam, 1976-2016, (%)

Source: author’s calculation based on Global Health Observatory data of WHO (2018)

The above descriptive data portrays the serious situation of the consumption

of unhealthy commodities and its serious consequences in Vietnam in recent years

It urgently requires the society and government to review its policies to direct Vietnamese consumers toward a healthier consumption habit

1.1.2 The role of excise tax in reducing the consumption of unhealthy commodities and history of excise tax in Vietnam

Among many measures to control the consumption of unhealthy commodities, taxation policies are considered strongly effective Many previous studies have already proved the effectiveness of unhealthy commodity taxation Koski, Sirén, Vuori, & Poikolaine (2007) and J.Cook & Moore (1994) affirmed that alcohol tax had significant impact in reducing drinking prevalence, traffic fatalities, robbery rate and increasing college graduation among the youth Zhang, Cohen, & Ferrence (2006) and Keeler, Barnett, & Manning (1993) said that tobacco tax supported to reduce tobacco consumption and number of smokers Meanwhile, Andreyava, Chaloupka, & D.Brownell (2011) and Wang, Coxson, Shen, Goldman, & Bibblins-

Domingo (2012) stated that SSB taxation would support to reduce consumption, improve SSB-related diseases, reduce medical cost and generate state budget revenue

The tax on unhealthy commodities is usually brought in to excise tax laws due to the fact that one of the key objectives of this tax is to direct consumer’s behavior towards heathier lifestyle

In Vietnam, taxation on tobacco and alcohol was first imposed when the Excise Tax Law was implemented in 2008 In 2014, the tax rates for these 2 commodities were increased In 2017, in the frameworks of the Government’s program to re-structure the state budget revenue, the Ministry of Finance (MOF) proposed to bring SSB to the list of taxable commodities and increase the tax rate for tobacco Many social activists from Oxfam, Health Bridge and WHO suggested

to not only impose new tax on SSB and increase tobacco tax rate but also increase tax rate on alcohol Table 1.1 bellow summarizes the history of excise tax in Vietnam since 2008

Table 1.1: History of excise tax in Vietnam

Tax rate on SSB Wine>20o Wine<20o Beer

25%

45% (till end

of 2012) 50% (since 2013)

30% (till end of 2017) 35% (since 2018)

55% (till end

of 2016) 60% (2017) 65% (since 2018)

70% (till end

of 2018) 75% (since 2019)

None

2017 Propos-al

of MOF Keep the same rates as Law No 2014

Increase tax rate to 80%

since 2020 and 85%

since 2021

Since 2019: Option 1: 10% Option 2: 20%

Source: compiled by the author

1.1.3.The needs to re-structure taxation revenue sources in Vietnam

MOF proposed to revise the Excise Tax Law together with other five tax laws namely (i) Value-added (VAT), (ii) Corporate Income (CIT), (iii) Personal Income (PIT), (iv) Natural Resource and (v) Import-Export Tax The master plan revising many tax laws aimed at re-structuring the revenue sources in the context of reducing tax to GDP ratio, increasing public debt and reducing traditional sources of revenue such as crude oil and trade taxes

Recently, the tax to GDP ratio in Vietnam is decreasing This ratio peaked 27% in

2010, since then, it continuously reduced to 23% in 2012, 2013 and 22% in 2014

As shown in figure 1.2, the tax to GDP ratio of Vietnam is higher than that of other countries within ASEAN-5 and low-income group, yet lower than the average

of the countries with similar levels of development The high-income group maintained an average tax to GDP rate of approximately 40% GDP over the years Upper middle-income countries increased their average tax to GDP rate over time, from 25% in 1990 to about 33% in 2016 Meanwhile, the tax to GDP rate of the lower middle-income group, after a period of rising to nearly 30%, fell to 25% in

1990 Low-income countries truly struggled with revenue mobilization as the rate dropped to below 15% GDP several times, and only increased up to 20% in recent years Vietnam in particular and the whole ASEAN-5 group even had a lower mobilization rate than the average of the low-income group

Figure 1.2: Average tax to GDP ratio of Vietnam and other countries, 1990-2016, (%)

At the same time, public debt in Vietnam is becoming more serious over the past two decades In 2001, the ratio of public debt over GDP is only 39.9 % After

15 years, this ratio increased to 58.25 %

In comparison with other countries, Vietnam's public debt has been growing

at a much faster rate compared with other emerging and developing economies In the 2000-2016 period, the country's public debt to GDP ratio rose sharply from the lowest level among these countries to reach the top in 2016 (Figure 1.3)

Figure 1.3: Public debt/GDP of Vietnam and emerging markets and developing

countries, 2000-2016, (%)

Source: IMF (2019)

The reduction tax to GDP ratio and pressure of public debt urged the Government of Vietnam to boost state budget collection In addition, in recent years, the traditional budget sources such as crude oil and trade taxes are declining sharply Due to the joining of Vietnam into many free trade agreements (FTA), the budget revenue from customs, import-export and excise tax for imported commodities decreased sharply over the past decade The reduction of oil price and the exhaustion of crude oil also caused the reduction of revenue from this type of natural resources Meanwhile, the increase of revenue from PIT was very slow (figure 1.4)

Figure 1.4: Ratio of some sources of state budget revenue/total state budget revenue,

2000-2017, (%)

Source: GSO (2019)

The pressure of public debt and reduction of traditional state budget revenue sources urged Vietnam Government to re-structure the taxation policies to generate more revenue from new tax such as property tax or increasing current tax rates of VAT, environment protection and excise tax on unhealthy commodities

1.2 Research questions, research objectives and methodology

The excessive consumption of alcohol, tobacco and SSB creates bad impact to health and causes other serious socio-economic problems Unfortunately, the consumption of these unhealthy commodities in Vietnam is becoming more serious

by the time Among many methods to restrict the excessive consumption of unhealthy commodities, the taxation policies are proved to be efficient in not only reducing the consumption, improve the health of the people but also support to generate state budget revenue to meet the demand of generating more state budget revenue in the context of reducing traditional revenue sources and increasing public debt

The excise tax on alcohol and tobacco in Vietnam was first imposed in Excise Tax Law 2008 Up to now, after the revision of the Law in 2014, the tax rates for unhealthy commodities in Vietnam were still considered too low in compared to international practice The recent proposal of MOF suggested to increase the tax rate on tobacco and impose new excise tax on SSB However, there are still very limited research providing evidence for policy discussion on the best

Revenue from PIT

Revenue from crude oil

Revenue from customs

Revenue from Import-export tax, excise tax for imported commodities

policy option on taxation policies for unhealthy commodities Paper of Dao (2018) and Truong & Pham (2017) employed partial-equilibrium model which did not discuss the inter-relations between different industries in the economy These two papers also did not provide the forecast on the impact of tax policy to GDP and household’s income Meanwhile, Nguyen (2014) utilized general equilibrium model but did not analyze the consumption and public health impacts of the policy In addition, while paper of Dao (2018) just analyzed tobacco tax, Truong & Pham (2017) and Nguyen (2014) concentrated into only soft-drink industry This thesis would fill-in this research gap through exploring:

- What are the macroeconomic effects of imposing/increasing excise tax on unhealthy commodities in Vietnam?

- What are the policy recommendations on imposing/increasing excise tax on unhealthy commodities?

This study employed the Computable General Equilibrium Model (CGE) which is constructed based on the Static Standard Single CGE model developed by Dervis, Melo, & Robinson (1982) and Lofgren, Thomas, & El-said (2002) The model simulated the whole Vietnam economy with 36 sectors and 4 key institutions: firms, households, government and rest of the world The model was built based on the Input-Output table (I-O) 2012 and excise tax data collected from the General Department of Taxation and UN Comtrade database while data on the other tax revenue and fund transfer between different institutions in the economy were taken from State Bank of Vietnam and VHLSS 2012 Elasticity parameters were from the Global Trade Analysis Project (GTAP) The study measured the impact of excise tax rate revision following four scenarios in which the first two scenarios were the proposals of MOF in 2017: impose 10% tax on SSB and increase tobacco tax from 75% currently to 85% (scenario 1); impose 20% tax on SSB and increase tobacco tax to 85% (scenario 2) In scenario 3, the author suggested a higher tax rate option in which tobacco and alcohol tax rate supposed to increase 1.2 times and 20% tax rate was imposed for SSB As a non-addictive commodities, the impacts of SSB tax was much different from other addictive commodities like

alcohol and tobacco, thus scenario 4 measured the impact of only imposing tax on SSB with the rate of 20%

The research results portrayed that the imposing and/or increasing excise tax rates on unhealthy commodities did not create much impacts on real GDP The tax increase resulted in increased state budget revenue from 9.048 (scenario 1) to 15.573 VND (price of 2012) (scenario 3) Even the household’s income slightly decreased, excise tax had significant positive impact on consumption of unhealthy commodities Especially, the impact on consumption of non-addictive good like SSB is much bigger than addictive goods In addition, the cross-industrial impact was not significant

In the context of increasing public debt, the imposing/increasing of tax rates

on unhealthy commodities, especially SSB was considered as a good option aiming

at both targets: (i) directing consumer’s behavior towards better health and (ii) generating state budget revenue

1.3.Research structure

The research includes 5 chapters Chapter 1 provides information on research context, introduce research objectives, questions, research methodology and key findings Chapter 2 reviews current literature addressing the same research questions Chapter 3 describes research methodology and data Chapter 4 analyzes the research findings while chapter 5 discusses policy implications, limitation of the research as well as further research directions

CHAPTER 2.LITERATURE REVIEW

2.1 Literature on the impacts of excise tax on unhealthy commodities

Seven international and four Vietnamese literature were reviewed to explore the findings and research methodologies used to assess the impact of excise tax on unhealthy commodities

Table 2.1 bellow summarizes the key contents of international papers Most

of these papers reported the positive impacts of unhealthy commodities tax towards consumption, public health, medical cost and state budget revenue The most common research methodologies used to measure the economic impacts of tax policies are price-elasticity measurement and CGE model

Regarding to the impacts of taxation on alcohol, research of Koski et al.(2007) said that alcohol tax cuts in Finland in 2004 led to the increase in the number of sudden deaths relating to alcohol meanwhile Cook & Moore (1994) affirmed that alcohol tax reduces drinking prevalence, traffic fatalities, robbery rate and increase college graduation among the youth

On the tobacco taxation, Zhang et al (2006) said that reducing tobacco tax rates in Australia led to the increase of smoking initiation among the youth Using the data of California State, USA, Keeler et al (1993) said that tobacco tax supported to reduce the number of smokers Ye, Lee, & Chen (2006) employed CGE model to prove that tobacco tax supported to reduce consumption, increase state budget revenue and create positive impacts on the health of the people

Regarding to SSB, Andreyava et al.(2011) used partial equilibrium model to prove that tax on SSB raised state budget revenue and reduced obesity ratio Wang, Coxson, Shen, Goldman, & Bibbins-Domingo (2012) stated that tax on SSB would reduce SSB consumption and medical cost, prevent diabetes, coronary heart events, strokes, premature deaths and generate state budget revenue

Table 2.1: International literature on the impacts of taxation on unhealthy

Alcohol tax cuts in Finland in 2004 led to the increase in the number of sudden deaths relating to alcohol

Cook &

Moore (1994) Empirical research

Alcohol tax reduced drinking prevalence, traffic fatalities, robbery rate and increased college graduation among the youth

Reducing tobacco tax rates in Australia lead to increased smoking initiation among the youth

Ye, Lee, &

Chen (2006) CGE model

Tobacco tax reduced consumption, increase state budget revenue and created positive impacts on the health of the people

Tax on SSB would raise state budget revenue and reduce obesity

Wang, et.al.,

(2012) Empirical research

Tax on SSB would: (1) reduce consumption of SSB; (2) prevent diabetes, coronary heart events, strokes, and premature deaths; (3) reduce medical cost; (4) generate state budget revenue

Source: compiled by the author

Four Vietnam literature in recent years were found related to the topic of this research Different from international, Vietnamese literature did not reach the consensus on the impacts of unhealthy commodities tax policy Dao (2018) strongly supported the increase of tobacco tax rate meanwhile Nguyen (2014) and Truong & Pham (2017) suspected on the positive impacts of excise tax on SSB Again, the price elasticity and CGE model are commonly used in measuring the economic impacts of taxation policies

Paper of Nguyen (2014) used CGE model combining with price elasticity estimation, showed that the loss of the soft-drink enterprises and GDP overweight the gain from state budget revenue when excise tax is imposed for soft-drink

However, this study did not mention the impacts of tax policy to consumption and health which are the key purposes of applying excise tax on unhealthy commodities

In addition, tobacco and alcohol are not taken into consideration in this paper

Nguyen et al.(2018) also employed CGE and Almost Ideal Demand System Model (AIDS) of Deaton & Muellbauer (2008) to measure the impact of tax rate change However, this paper worked with VAT, not excise tax While Dao (2018) worked only with tobacco, Truong & Pham (2017) analyzed only soft-drink tax Dao (2018) and Truong & Pham (2017) employed partial equilibrium model which could not measure the impacts of tax policy on macroeconomic indicators like real GDP and cross-industrial effects

Table 2.2: Vietnam literature on the impacts of taxation on unhealthy commodities

Nguyen(

2014)

Soft-drink industry

and the economic

impact of excise tax

on non-alcoholic

carbonated soft

drink in Vietnam

Price elasticity and CGE

The loss of the soft-drink enterprises and GDP overweight the gain from State budget revenue

Analyze only drink tax, the

consumption and health are not considered

VAT increase would have negative impacts on the welfares of the poor, especially the VAT on agricultural products

Analyze VAT only

Increasing excise tax rate

on tobacco would reduce the number of smokers, improve health of the people and increase state budget revenue

Analyze tobacco tax only

Analyze soft drink tax only

Source: compiled by the author

In conclusion, most international literature proved the positive impacts of taxation on unhealthy commodities while Vietnamese scholars did not reach consensus on this matter The most common-used research methodologies are price elasticity measurement and CGE model

2.2.Literature on research methodologies

The review of current literature on the impacts of taxation policies showed that the most common-used research methodologies are Almost Ideal Demand System Model (AIDS), a partial equilibrium model, and CGE model Three papers of Deaton & Muellbauer (2008), Dervis et al (1982) and Lofgren et al (2002) were reviewed to understand more on AIDS and CGE models

AIDS model developed by Deaton & Muellbauer (2008) measures the price elasticity Later on, this elasticity could be used to estimate and compare the welfare before and after imposing tax through estimating the compensated variation and equivalent variation This method could measure the consumption and welfare impacts of tax policy However, other macro-economic indicators such as real GDP,

state budget or inter-industries effects would not be estimated Meanwhile, CGE model could show these macro-economic impacts

CGE model was developed based on the concept of general equilibrium theory of Walras (1877) However, until the 1970, the general equilibrium model still remained theoretical With advances in computing and the development of I-O table, it became possible to model the national economies At mid-1980s, CGE model was able to provide relatively quick and large computable models for a whole economy, and was the preferred method of governments and the World Bank

In 1982, Dervis et al (1982) wrote a book on the application of CGE model

in development policies Later on, in 2002, Lofgren et al , based on Dervis book, suggested specific mathematical equations and GAMS code for the Standard Single Country CGE model This model simulate an economy with the participation of four key institutions: (i) firms, (ii) households, (iii) government and (iv) rest of the world in which firms maximize their revenue within given technology constraints; households maximize their utility within given budget constraints; government collects taxes and transfers fund back to other institutions Import and export activities follow the Armington frameworks2 The CGE model could measure the impact of different policy socks such as trade and taxation policies to various macroeconomic indicators like real GDP, state budget revenue, consumption, inter-industrial effects

After reviewing 14 papers on the impact of taxation policies on unhealthy commodities and research methodologies, the following conclusions are withdrawn: First of all, many international experience proved the positive impacts of taxation

on unhealthy commodities towards consumption, state budget revenue and public health Meanwhile, Vietnamese literature did not reach consensus on the impacts of this kind of tax policy Secondly, the most common-used and suitable research methodology to measure the macro-economic impacts of tax policy is CGE model Thirdly, there was still research gap for this thesis to measure the macro economic impacts of imposing/increasing excise tax on unhealthy commodities in Vietnam

2

Details on Armington frameworks are presented on part 3.1.5, Chapter 3 of this research

CHAPTER 3.RESEARCH METHODOLOGY

3.1.Static Standard Single Country CGE model

The CGE model of this study follows closely the Standard Single Country CGE model developed by Dervis et al (1982) and Lofgren et al (2002) The CGE model

of this thesis specifies 36 industries consisting of 7 agricultural industries (food crops, industrial plants including sugar-cane, vegetable and annual crops, perennials, livestock, forestry and aquaculture), 01 mining industry, 13 manufacturing industries (processed foods, non-alcohol drink, sugar-sweetened food, alcohol, beer, tobacco, cloth, gasoline, automobile, common machine, boat and ship, other vehicle including aircraft and other manufacturing) 01 public utility industry, construction and 14 service industries (see the list of industries in Appendix 1) The list of industries was arranged to best analyze the impact of excise tax in model simulation

The standard single-country CGE model employed in this study includes 4 key institutions:

First, producers maximize their profit within given technology and factor constraints On the factor market, producers use labour and capital resource and provide wage, rents and profits back to consumers On the product markets, producers provide products for the consumption of consumers Different producers also provide intermediate goods for each other;

Second, consumers maximize their utility within given budget constraints; Third, government collects taxation from producers, consumers and receive transfer from rest of the world and provide transfer back to other institutions in the economy;

Fourth, rest of the world participates in investment and export-import activities through Armington Frameworks;

The model is run using GAMS software The GAMS program is written by

Dr Nguyen Tien Dung, lecturer at the Faculty of International economics and business, University of Economics and Business, Vietnam National University,

Hanoi The simulation is conducted through two steps In the replication step, the benchmark data are used to calibrate parameters In the counterfactual step, the policy shock would be put in to the model to compare the before and after-policy-shock equilibrium status

The economy include 36 industries, denoted by s and 36 commodities, denoted by c Other sub-sets are as following:

3.1.1.Price block

There are six types of price in CGE model, including domestic price of import (PM), domestic price of export (PE), market price (PC), value added price (PN), composite price (PQ), and average output price (PX) which are defined by

accounting equations in equations (1) to (4) Equations (5) and (6) define the composite price index and GDP deflator while equations (7) and (8) are market clearing equations

(1) Domestic price of imports:

where:

PWM : world market price of imports

ER: exchange rate

tarf: tariff rates

stax: other commodity taxes

(2) Domestic price of exports:

where:

PE : domestic price of exports

PWE: world market price of exports

etax: export duties

(3) Market price:

where:

PQ: price of composite goods

spstax: excise tax

stax: sale tax

(4)Value added price: ∑

where:

PX: average output price

ptax: production taxes

iocf: I-O coefficients

(5) Composite price index: ∑

PQ: composite commodity price

XQ: composite commodity quantity

PM: domestic price of imports

PE : domestic price of exports

XE: volume of exports

3.1.2.Production block

Production block defines outputs (equation 9), labour demand (equation 10), capital stock (equation 11), wage (equation 12), capital rent rate (equation 13) Equilibrium rate of return to capital is presented in equation (14) meanwhile equation (15) and (16) define real and nominal GDP

Notably, the equation (10) and (11) are the results of solving the optimization problem of firm to maximize their profit:

where:

F: production factors (labour and capital)

PF: price of production factors (PK or PL)

With production function (CES form) in equations 9

(9) Ouput: ( ( ) )

where:

ad: production function shift parameter

alphl: share parameter in production function

rhop: production function exponent

LD: labor demand

KD: capital stock

(10) Labor demand:

where:

PL: wage rate

PN: value added price

alphl: share parameter in production function

(12) Wage rate by sector:

PKE: equilibrium rate of return to capital

pkcf: coefficients for capital rents

(14) Equilibrium rate of return to capital:

where:

PKE: equilibrium rate of return to capital

PI: investment price index

IVR: inventory investment

ID: demand for capital goods

PI: price of investment goods

Price with “0” at the end means price of bench-mark data