Suresh Narayanan commented that China has a strange value-added tax (VAT) in that it does not zero-rate agricultural products. Therefore, results cannot be generalized. Substituting VAT for business taxes is not heard of. He pointed out that a 5 percent decline in retail sales tax (RST) coupled with a 5 percent increase in VAT will not result in the same amount of government revenue collected because VAT has exemptions and thus the RST has to change more to result in revenue neutrality. The RST has a single collection point only, whereas the VAT has multiple collection points. Li and Liu's model does not take care of this difference in feature. Furthermore, Narayanan asked whether this model applies when there are no labor market frictions. He suggested that the model be extended in this direction.
The authors agreed with Narayanan's observation that a decline in VAT and an increase in RST...