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

Author

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  • Hideki Konishi

    (School of Political Science and Economics, Waseda University)

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, in that 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, 2014. "The Political Economy of Social Security Funding: Why Social VAT Reform?," Working Papers 1402, Waseda University, Faculty of Political Science and Economics.
  • Handle: RePEc:wap:wpaper:1402
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    political economy of social security; consumption tax; structure-induced equilibrium;
    All these keywords.

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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