Social Marginal Cost of Public Funds: The Case of Progressive Personal Income Taxes in Japan(in Japanese)

This paper, taking an explicit account of the progressive tax system, calculates the social marginal cost of public funds (SMCF) for the Japanese economy under alternative labour response assumptions. First, following formula provided by Dahlby (1998), we calculate the SMCF for the three types of progressivity preserving tax increases by Musgrave and Thin (1948). Our estimates indicates (a) there are no substantive differences among the three types of SMCF unless high degree of inequality aversion is assumed; (b) the estimates for the SMCF under the Benthamite social welfare function are very similar to those calculated for a homogeneous economy by Bessyo et al. (2003); and (c) the SMCF increases as the degree of inequality aversion increases. The last finding (c) suggests that a distributional cost-benefit analysis requires a careful application of the SMCF: otherwise, the costs would be under-estimated. Second, we also calculate the SMCF for a single bracket tax rate change and compare the estimates among the brackets. The result shows that welfare is increased with tax rate reductions (a) in the 9th bracket (approximately 9-12 million yen) for any types of the social welfare function, (b) in higher brackets for the Benthamite social welfare function, and (c) in the lower brackets for the social welfare function with higher inequality aversion. Third, we apply the inverse optimum problem by Ahmad and Stern (1984) to the progressive tax system in Japan. The inverse optimum problem calculates welfare weights on households, assuming that the current tax system maximizes the social welfare function of the current policy maker. If negative welfare weights are found, then a Pareto improvement is possible. We find that weights for some brackets are in fact negative, which implies that the current progressive tax system is suboptimal under any types of social welfare function.