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Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT

Noritaka Maebayashi

Journal of Public Economic Theory, 2020, vol. 22, issue 4, 1069-1104

Abstract: This study investigates how unfunded public pensions financed by value added tax (VAT), as discussed in Japan, affect economic growth and whether payroll tax (PT) or VAT is the more growth‐friendly tax structure for financing public pensions. We examine these issues using overlapping generations models with parental altruism and find that a public pension system financed by VAT may increase economic growth when bequests are operative. By contrast, when bequests are inoperative, public pensions hinder growth unless agents are sufficiently patient. Finally, public pensions financed by VAT are more growth‐friendly than those financed by PT.

Date: 2020
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Journal of Public Economic Theory is currently edited by Rabah Amir, Gareth Myles and Myrna Wooders

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