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The Political Economy of Social Security Funding: Why Social VAT Reform?

In: The Political Economy of Fiscal Consolidation in Japan

Author

Listed:
  • Hideki Konishi

    (School of Political Science and Economics)

Abstract

Recently, taxation reforms entailing a “social” valued-added tax (VAT), i.e., a social security reform shifting funding from traditional wage-based taxation to consumption taxation, have been obtaining political support in some developed countries, e.g., Japan, France, Denmark, and Germany. This paper analyzes the political economy of social security funding in an overlapping-generations economy. In particular, we consider how population aging influences the choice of wage or consumption tax financing by focusing on their differential impact on inter- and intragenerational redistribution. Our results show that population aging may drastically alter the political equilibrium: if the population growth rate is higher than the interest rate, wage taxation is the only equilibrium choice, but if it is lower, multiple equilibria are likely to emerge, in which the introduction of consumption taxation emerges as an alternative equilibrium choice.

Suggested Citation

  • Hideki Konishi, 2015. "The Political Economy of Social Security Funding: Why Social VAT Reform?," Advances in Japanese Business and Economics, in: Toshihiro Ihori & Kimiko Terai (ed.), The Political Economy of Fiscal Consolidation in Japan, edition 127, chapter 0, pages 35-66, Springer.
    • Handle: RePEc:spr:advchp:978-4-431-55127-0_2
    DOI: 10.1007/978-4-431-55127-0_2
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