Introduction of Progressive Expenditure Taxation to Japan

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Abstract

With a population that is aging faster than any other in the world, Japan faces serious public finance problems, particularly when it comes to tax and social security issues. The structural reforms are urgently needed to accommodate the impending demographic change. We look at the Japanese tax and social security systems through a life−cycle general equilibrium simulation model. We aim to establish guidelines for fiscal reform in Japan’s graying society and use such advanced modeling techniques to permit the calculation of the effects of alternative tax policies on capital accumulation and economic welfare. We also examine the impact of progressive expenditure taxation, coming to the novel conclusion that this form of taxation may hold the key to overcoming the large welfare loss Japan faces as its society ages under the current tax system. Furthermore, we present the concrete measures of implementing progressive expenditure taxation.

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