Under the framework of New Keynesian analysis, according to the actual development of China’s economy, this paper constructs a dynamic stochastic general equilibrium(DSGE) model including family, intermediate product manufacturers, final product manufacturers, central banks and finance departments, and assess the tax reduction effect of “replacing the business tax with the valued-added tax”. The paper makes an analysis on the tax reduction effect of the “replacing the business tax with the valued-added tax” from two dimensions. First, it reduces the tax burden in the field of turnover tax as an exogenous shock, and analyzes the changing tendency of such macro-economic variables as total social output, consumption level, government expenditure, labor level, salary level, investment and capital stock and others. Secondly, two different policy environments are constructed before and after the “replacing the business tax with the valued-added tax”, and the economic impact of investment decline is simulated. In addition, the response degree of total output to exogenous shock before and after tax reduction is compared and analyzed. The research shows that the “replacing the business tax with the valued-added tax”reduces the tax revenue of government departments, but its tax reduction effect can promote the increase of output and consumption, stimulate the growth potential of the whole economy; the current reform efforts to cope with the economic downturn does not play the desired effect.