This paper applies a computable general equilibrium model to analyze the effects of the 1994 tax
reform in China. The result of the simulations shows that small aggregate welfare gains are obtained
from the 1994 tax reform. However, household groups are worse off because of the redistribution of
resources from household to government sectors. There will be a substantial increase in the government
revenue and the prudent and productive use of the increased revenue could improve the welfare of the
households. This result also suggests that the statutory rates introduced in 1994 may be too high from
the equal yield standpoint. It is suggested that further improvements in the tax system can be made by
extending a consumption-type VAT to other sectors currently not included in the reform.