Working Paper: NBER ID: w19431
Authors: Gary Hansen; Selo Imrohoroglu
Abstract: Past government spending in Japan is currently imposing a significant fiscal burden that is reflected in a net debt to output ratio near 150 percent. In addition, the aging of Japanese society implies that public expenditures and transfers payments relative to output are projected to continue to rise until at least 2050. In this paper we use a standard growth model to measure the size of this burden in the form of additional taxes required to finance these projected expenditures and to stabilize government debt. The fiscal adjustment needed is very large, in the range of 30-40% of total consumption expenditures. Using a distorting tax such as the consumption tax or the labor income tax requires either tax to rise to unprecedented highs, although the former is much less distorting than the latter. The extremely high tax rates we find highlight the importance of considering alternatives that attenuate the projected increases in public spending and/or enlarge the tax base.
Keywords: No keywords provided
JEL Codes: E2; E62; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Aging population (J11) | Increases in public pension payments (H55) |
| Aging population (J11) | Increases in health expenditures (H51) |
| Increases in public pension payments (H55) | Necessitates substantial tax increases (H29) |
| Increases in health expenditures (H51) | Necessitates substantial tax increases (H29) |
| Necessitates substantial tax increases (H29) | Maintain fiscal sustainability (H69) |
| Tax increases (H29) | Stabilize government debt (H63) |
| Projected increases in public pensions and health expenditures (H55) | Government debt (H63) |
| Tax rates (H29) | Revenue required to finance expenditures (H69) |
| Consumption tax (H25) | Revenue generation (H27) |
| Labor income tax (J39) | Revenue generation (H27) |
| Tax increases (H29) | Required fiscal adjustments (H69) |