Replacing Income Taxation with Consumption Taxation in Japan

Selahattin Imrohoroglu and Gary Hansen
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Selahattin Imrohoroglu: University of Southern California

No 1114, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: Over the past two decades, Japan has suffered from low economic growth and a large and growing debt to output ratio. Furthermore, this ratio is expected to continue to rise as Japan anticipates significant increases in future government expenditures due to an aging population. As a consequence of these problems, Japan has proposed and implemented decreases in the corporate income tax rate as well as increases in the consumption tax rate. In this paper we focus on the output and welfare effects of a reduction in income taxation in Japan along with increases in consumption taxation to stabilize the debt to output ratio. We consider various tax reforms using the model described in Hansen and Imrohoroglu (2016). Reducing or eliminating labor or capital income taxation, and replacing the lost revenues with higher consumption taxation, produces sizable increases in labor supply, investment and output. For example, while output is projected to be roughly constant between 2015 and 2020 in the benchmark equilibrium representing the status quo, under alternative policies considered it would be 7% to 14% higher by 2020.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-pbe
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