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Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective

  • Selahattin Imrohoroglu

    (University of Southern California)

  • Gary Hansen

    (UCLA)

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.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 697.

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Date of creation: 2013
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Handle: RePEc:red:sed013:697
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  1. Takeo Hoshi & Takatoshi Ito, 2012. "Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?," NBER Working Papers 18287, National Bureau of Economic Research, Inc.
  2. Raj Chetty & Adam Guren & Dayanand S. Manoli & Andrea Weber, 2011. "Does Indivisible Labor Explain the Difference Between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Working Papers 16729, National Bureau of Economic Research, Inc.
  3. Selahattin Imrohoroglu & Ayse Imrohoroglu & Kaiji Chen, 2006. "The Japanese Saving Rate," American Economic Review, American Economic Association, vol. 96(5), pages 1850-1858, December.
  4. Takero Doi & Takeo Hoshi & Tatsuyoshi Okimoto, 2011. "Japanese Government Debt and Sustainability of Fiscal Policy," NBER Working Papers 17305, National Bureau of Economic Research, Inc.
  5. Fumio Hayashi & Edward C. Prescott, 2004. "The 1990s in Japan: a lost decade," Chapters, in: The Economics of an Ageing Population, chapter 2 Edward Elgar.
  6. Fumio Hayashi & Edward C. Prescott, 2002. "Data Appendix to The 1990s in Japan: A Lost Decade," Technical Appendices hayashi02, Review of Economic Dynamics.
  7. Masaya Sakuragawa & Kaoru Hosono, 2010. "Fiscal Sustainability Of Japan: A Dynamic Stochastic General Equilibrium Approach," The Japanese Economic Review, Japanese Economic Association, vol. 61(4), pages 517-537, December.
  8. Tomoaki Yamada & Sagiri Kitao & Selahattin Imrohoroglu, 2013. "Achieving Fiscal Balance in Japan," 2013 Meeting Papers 736, Society for Economic Dynamics.
  9. Selahattin Imrohoroglu & Nao Sudo, 2010. "Productivity and Fiscal Policy in Japan: Short Term Forecasts from the Standard Growth Model," IMES Discussion Paper Series 10-E-23, Institute for Monetary and Economic Studies, Bank of Japan.
  10. Kaiji Chen & Ayse Imrohoroglu & Selo Imrohoroglu, 2005. "Japanese Saving Rate," Macroeconomics 0502017, EconWPA.
  11. "Imrohoroglu, Selahattin" & "Sudo, Nao", 2011. "Will a Growth Miracle Reduce Debt in Japan?," Economic Review, Hitotsubashi University, vol. 62(1), pages 44-56, January.
  12. Gunji, Hiroshi & Miyazaki, Kenji, 2011. "Estimates of average marginal tax rates on factor incomes in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 25(2), pages 81-106, June.
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