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Social marginal cost of public funds: A microdata estimation for the Japaneseprogressive income tax system (in Japanese)

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  • HAYASHI Masayoshi
  • BESSHO Shun-ichiro

Abstract

This paper, taking an explicit account of the progressive tax system, calculates the social marginal cost of public funds (SMCF) for the Japanese economy using large set of micro data of Employment Status Survey. Before calculation of SMCF, we estimate labor supply function of prime-age male using the structural estimation method introduced by Burtless and Hausman (1978). The estimated compensated elasticity of labor supply with respect to wage rate is 0.104 and income effect is -0.08 on average, while the uncompensated elasticity is 0.018. Based on these values the following SMCF's are calculated. First, we compute the SMCF for the three types of progressivity preserving tax increases by Musgrave and Thin (1948) for each prefecture. Our estimates indicates (a) the SMCF of each prefecture normalized by that of Tokyo is greater than unity, which means that the social cost of raising additional tax revenue in Tokyo is less than in any other prefectures; (b) the SMCF of Tottori, Saga, Okinawa or Aomori is relatively high. Second, we also calculate the SMCF for a single bracket tax rate change and compare the estimates among the brackets. The results show that the welfare is most increased with tax rate reductions in 7-8 million yen under the Benthamite social welfare function. These results suggest (a) if it is possible to impose labor income taxes by regional-differentiated tax rate, levying tax on residents in Tokyo is socially most desirable. If not, it is beneficial to raise the local labor income tax rate of Tokyo and transfer the additional tax revenue to other prefectures. (b) the society with more inequality aversion than Nash requires an increase in marginal tax rate of middle-income, rather than an increase in tax rate that low-income people face.

Suggested Citation

  • HAYASHI Masayoshi & BESSHO Shun-ichiro, 2004. "Social marginal cost of public funds: A microdata estimation for the Japaneseprogressive income tax system (in Japanese)," ESRI Discussion paper series 113, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esj:esridp:113
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    Cited by:

    1. Shun-ichiro Bessho & Masayoshi Hayashi, 2015. "Should the Japanese tax system be more progressive? An evaluation using the simulated SMCFs based on the discrete choice model of labor supply," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(1), pages 144-175, February.
    2. Miyazaki, Takeshi & Ishida, Ryo, 2022. "Estimating the elasticity of taxable income: Evidence from top Japanese taxpayers," Japan and the World Economy, Elsevier, vol. 61(C).
    3. Nigar HASHIMZADE & Gareth MYLES, 2009. "Cost-benefit analysis and the marginal cost of public funds," Departmental Working Papers 2009-29, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.

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    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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