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Impact of Population Aging on the Personal Income Tax Base in Japan : Simulation Analysis of Taxation on Pension Benefits Using Micro Data

Author

Listed:
  • Hiroyuki Yashio

    (Associate Professor, Faculty of Economics, Kyoto Sangyo University)

  • Keishi Hachisuka

    (Former Researcher, Policy Research Institute, Ministry of Finance)

Abstract

In Japan, the ratio of public pension benefits to overall individual income (earned income and pension benefits) is rising due to population aging. A pay-as-you-go pension system represents a transfer of income from the working-age population to the retired generation. Therefore, in principle, the system itself does not work to reduce the personal income tax base at a macro level. However, because of the effects of generous income deductions applied to public pension benefits, the overall tax base is expected to be significantly eroded. From the viewpoint of this problem, this paper uses micro data to quantitatively evaluate the recent changes in the personal income tax base across Japan. It also conducts a simulation analysis to determine the extent to which tax base erosion can be mitigated by strengthening taxation on pension benefits. The analysis shows that population aging, coupled with economic stagnation, has continued to erode the tax base in recent years, although it has not been apparent due to the tax reforms implemented in 2005 and 2006. In the future, the tax base is likely to be eroded further. The National Council on Social Security (2013), for example, proposed strengthening the taxation on pension benefits for high-income earners. However, the analysis found that from the viewpoint of the tax policy, the effect of such a reform on the overall tax base would be extremely limited. Presumably, it is necessary to review the preferential treatment that is widely applied to pension benefits.

Suggested Citation

  • Hiroyuki Yashio & Keishi Hachisuka, 2014. "Impact of Population Aging on the Personal Income Tax Base in Japan : Simulation Analysis of Taxation on Pension Benefits Using Micro Data," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 10(3), pages 519-542, October.
    • Handle: RePEc:mof:journl:ppr026f
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    File URL: https://warp.da.ndl.go.jp/info:ndljp/pid/11217434/www.mof.go.jp/english/pri/publication/pp_review/ppr026/ppr026f.pdf
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    References listed on IDEAS

    as
    1. Ejii Tajika & Hiroyuki Yashio, 2007. "The Role of Personal Income Tax to Mitigate Widening Income Inequality: the Case of Japan," Journal of Income Distribution, Ad libros publications inc., vol. 16(3-4), pages 55-70, September.
    2. Hiroyuki Yashio & Yuichi Hasegawa, 2009. "The Household Consumption Tax Burden in Japan (in Japanese)," Economic Analysis, Economic and Social Research Institute (ESRI), vol. 182, pages 27-46, July.
    3. Karen Smith Conway & Jonathan C. Rork, 2008. "Income Tax Preferences for the Elderly," Public Finance Review, , vol. 36(5), pages 523-562, September.
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    Citations

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    Cited by:

    1. Cylus, Jonathan & Williams, Gemma & Carrino, Ludovico & Roubal, Tomas & Barber, Sarah, 2022. "Population ageing and health financing: A method for forecasting two sides of the same coin," Health Policy, Elsevier, vol. 126(12), pages 1226-1232.
    2. Fructuoso Borrallo & Susana Párraga-Rodríguez & Javier J. Pérez, 2021. "Los retos de la fiscalidad ante el envejecimiento: evidencia comparada de la Unión Europea, Estados Unidos y Japón," Occasional Papers 2102, Banco de España.
    3. Masumi Kawade, 2018. "National Burden and Economic Inequality: Micro-Simulation Analysis," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 14(2), pages 245-266, March.
    4. Prammer, Doris, 2019. "How does population ageing impact on personal income taxes and social security contributions?," The Journal of the Economics of Ageing, Elsevier, vol. 14(C).
    5. Honda, Jiro & Miyamoto, Hiroaki, 2021. "How does population aging affect the effectiveness of fiscal stimulus over the business cycle?," Journal of Macroeconomics, Elsevier, vol. 68(C).
    6. Taro Ohno & Junpei Sakamaki & Daizo Kojima, 2020. "Factor decomposition of changes in the tax base for income tax," Discussion papers ron331, Policy Research Institute, Ministry of Finance Japan.
    7. Ohno, Taro & Sakamaki, Junpei & Kojima, Daizo & Imahori, Tomotsugu, 2021. "Effects of deductions on the tax burden reduction and the redistribution of the income and resident taxes," Japan and the World Economy, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    income tax; taxation on pension benefits; tax base; simulation;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy

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