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Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective

Author

Listed:
  • Selahattin Imrohoroglu

    (University of Southern California)

  • Gary Hansen

    (UCLA)

Abstract

Past government spending in Japan is currently imposing a significant fiscal bur- den that is reflected in a net debt to GNP ratio above 100 percent. In addition, the aging of Japanese society implies that public expenditures and transfers payments relative to GNP are projected to continue to rise until at least 2050. In this paper we use a standard growth model to measure the size of this burden in the form of additional taxes required to meet these obligations that maintain current promised levels of per capita public pension and health services. The fiscal adjustment needed is about a 30 percentage point increase in taxes, using either the consumption tax rate or the labor income tax rate. The latter is far more distorting than the former, leading to a significant loss in welfare. Our results highlight the importance of containing the projected increases in public spending and exploring policies designed to enlarge the tax base.

Suggested Citation

  • Selahattin Imrohoroglu & Gary Hansen, 2013. "Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective," 2013 Meeting Papers 697, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:697
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    References listed on IDEAS

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    1. Selahattin Imrohoroglu & Ayse Imrohoroglu & Kaiji Chen, 2006. "The Japanese Saving Rate," American Economic Review, American Economic Association, vol. 96(5), pages 1850-1858, December.
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    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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