Does graying Japan choose the consumption tax increase for the fiscal consolidation?

財政再建

消費税

シミュレーション分析

population aging

fiscal sustainability

consumption tax

simulation analysis

C68

H61

E62

B41

We calculate welfare changes to reveal Japan’s preferred tax hike option to achieve fiscal sustainability by an overlapping generation model with four types of households grouped by income levels based on the latest Japanese data. Households vote on preferred taxation, i.e. the consumption tax or the progressive income tax, according to respective welfare changes under the current election system. Following implications are delivered.　First, the consumption tax option is chosen when voters consider temporary welfare changes alone, i.e. myopic, while the progressive income tax is chosen when voters consider life-long welfare changes, i.e. rational. Second, the consumption tax option is chosen under the Utilitarian-type government setting even when life-long welfare changes are considered. However, this choice results in net benefits among higher income households at the cost of lower income households, giving rise to worsening income distribution and unfairness. Third, the fiscal consolidation by the consumption tax option tends to bring net benefits to those with higher income, and to those born later. Finally, the government intention to raise the consumption tax further for fiscal consolidation will not be achieved by the current voting system with rational voters. To realize it through voting, it is necessary to give the right of voting to those who will be born before 2137.