Tax System, Replacement Rate of Pension and Child Allowance

This paper examines an endogenous fertility model with the aim of investigating how the tax burden necessary to finance pension benefits and a child-care support policy affects fertility and the replacement rate of pension in the steady state with theoretical analyses and numerical examples. The results presented in this paper are as follows. Without child allowance, income taxation can not raise the replacement rate largely. However, consumption taxation can raise the replacement rate largely. In Japan, the government sets the replacement rate as 50%. In terms of welfare, the pension benefit should be financed by consumption taxation and child allowance should be provided to achieve the replacement rate 50%.