This paper develops a dynamic equilibrium model of overlapping generations to study the effect of an introduction of a retail sales tax (RST) in China. Total government tax revenue is fixed, consumption-type value-added tax (VAT) is reduced in response to the introduction of RST, and an output tax exists. An introduction of RST accompanied by a decrease in VAT increases capital accumulation and welfare in the steady state. In the transition period, an introduction of RST accompanied by a decreas