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Viewpoints on the Integrated Reform of Social Security and Tax Systems: Increased Consumption Tax and Intergenerational Equity

Author

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  • Shigeki Morinobu

    (Professor, Chuo Law School, Chuo University)

  • Atsushi Nakamoto

    (Visiting Scholar, Policy Research Institute, Ministry of Finance)

Abstract

The current fiscal situation of Japan is the worst among leading industrialized nations, based on both stock and flow, which means that currently active generations receive benefits on the premise of burdens borne by the future generations. In this paper, we discuss the cause of Japan's fiscal deficit and its relation to economic growth, calculate when and to what degree the tax burden will need to be increased to prevent fiscal collapse in Japan, and analyze how this would contribute to greater equity of intergenerational burdens by applying generational accounts. In such Japan's fiscal situations, spending cuts can only have a limited effect in creating financial resources because Japan has the biggest upward pressure on expenditure of social security spending associated with its aging society. Therefore, it is important to increase tax burden for preventing the fiscal deficit from expanding. Our estimation suggests the need to raising consumption tax by 9% (to 14%) in 2015 and further 6% (to 20%) in 2020, assuming that the primary balance (around 6.5% of GDP as of FY2009) will be "reduced to around 6% by FY2015 and below 3% by FY2020". This appears to be quite a large increase in burdens, although generational disparity would not be improved without such increases, so that such policy could have good possibilities such as tax smoothing and reduction of the risk of a sharp increase in interest payments.

Suggested Citation

  • Shigeki Morinobu & Atsushi Nakamoto, 2012. "Viewpoints on the Integrated Reform of Social Security and Tax Systems: Increased Consumption Tax and Intergenerational Equity," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 8(4), pages 393-414, August.
    • Handle: RePEc:mof:journl:ppr018a
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    References listed on IDEAS

    as
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    2. Auerbach, Alan J. & Kotlikoff, Laurence J. & Leibfritz, Willi (ed.), 1999. "Generational Accounting around the World," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226032139, September.
    3. Willi Leibfritz, 1996. "Generational accounting: an international comparison," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 31(2), pages 55-61, March.
    4. Michael Förster & Marco Mira d'Ercole, 2005. "Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s," OECD Social, Employment and Migration Working Papers 22, OECD Publishing.
    5. Alan J. Auerbach & Laurence J. Kotlikoff & Willi Leibfritz, 1999. "Generational Accounting around the World," NBER Books, National Bureau of Economic Research, Inc, number auer99-1.
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