Viewpoints on the Integrated Reform of Social Security and Tax Systems: Increased Consumption Tax and Intergenerational Equity

Shigeki Morinobu and Atsushi Nakamoto
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Shigeki Morinobu: Professor, Chuo Law School, Chuo University
Atsushi Nakamoto: Visiting Scholar, Policy Research Institute, Ministry of Finance

Public Policy Review, 2012, vol. 8, issue 4, 393-414

Abstract: The current fiscal situation of Japan is the worst among leading industrialized nations, based on both stock and flow, which means that currently active generations receive benefits on the premise of burdens borne by the future generations. In this paper, we discuss the cause of Japan's fiscal deficit and its relation to economic growth, calculate when and to what degree the tax burden will need to be increased to prevent fiscal collapse in Japan, and analyze how this would contribute to greater equity of intergenerational burdens by applying generational accounts. In such Japan's fiscal situations, spending cuts can only have a limited effect in creating financial resources because Japan has the biggest upward pressure on expenditure of social security spending associated with its aging society. Therefore, it is important to increase tax burden for preventing the fiscal deficit from expanding. Our estimation suggests the need to raising consumption tax by 9% (to 14%) in 2015 and further 6% (to 20%) in 2020, assuming that the primary balance (around 6.5% of GDP as of FY2009) will be "reduced to around 6% by FY2015 and below 3% by FY2020". This appears to be quite a large increase in burdens, although generational disparity would not be improved without such increases, so that such policy could have good possibilities such as tax smoothing and reduction of the risk of a sharp increase in interest payments.

Date: 2012
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