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

Hideki Konishi ()
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Hideki Konishi: School of Political Science and Economics, Waseda University

No 1402, Working Papers from Waseda University, Faculty of Political Science and Economics

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.

Keywords: political economy of social security; consumption tax; structure-induced equilibrium (search for similar items in EconPapers)
JEL-codes: D78 H55 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-04
New Economics Papers: this item is included in nep-age, nep-dge, nep-pbe, nep-pol and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:wap:wpaper:1402

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