National Burden and Economic Inequality: Micro-Simulation Analysis

In order to regain the soundness of the fiscal position, which has been damaged by the population aging and a series of economic stimulus measures, it is inevitable to increase tax revenues and impose a heavier burden of social insurance payment. On the other hand, there are concerns that the increase in such national burdens will impose excessive loads on low - income households, so it may be an obstacle to implement the fiscal restoration. Therefore, this paper conducts micro - simulation analysis that is able to compute the burdens of income and consumption tax payments and social insurance payments using the Keio Household Panel Survey (KHPS). First, using the individual household fs data of the KHPS for 2009 to 2012, we recalculated the amounts of tax payments and social insurance premium payments by applying the tax and social security systems of relevant years to income between 2008 to 2011. Then, we obtained the equivalent gross income of each household by adding the public transfer amount and conducted evaluation based on the decile division of income. Next, we estimated the hypothetical national burden by applying the tax and social insurance systems of FY2015 to income between 2008 and 2011. As a result, it was found that the increases in the burden of social insurance payments and the consumption tax hike are imposing a relatively large burden on low - income households. And the structure of national burden among income classes is flattening because the increase of national burden of high - income households was limited in percentage terms compared with the increase for low - income households. Due to a possible increase in social insurance payments and the consumption tax hike in the future, a further flattening will go on. And we implemented four modifiable policy simulation scenarios ?(i) reduction of the salary income deduction, (ii) reduction of the upper limit on the public pension, etc. deduction, (iii) introduction of an upper limit on the social insurance deduction and (iv) gradual reduction of the spouse deduction in accordance with the income level?with respect to the estimated figures for 2008 to 2011, which were obtained by applying the tax and social insurance systems of FY2015, and conducted impact evaluation concerning a case of small reduction (standard case) and a case of large reduction (reform case). As a result, it was found that gradual reduction of the spouse deduction in accordance with the income level, reduction of the salary income deduction/introduction of the upper limit on the social insurance deduction, and reduction of the upper limit on the public pension, etc. deduction (in a magnitude order) will impose progressively larger burdens on low - income households in that order, compared with high - income households. However, in both cases, the effect of each individual measure alone in expanding the taxation base is limited. As a result, in the standard case in particular, the increase in the burden will be limited in both absolute and percentage terms, and in the reform case, the increase in the burden in percentage terms will not be sufficient. Moreover, we calculated how much the national burden on lower income households can be mitigated through the use of the additional tax revenues estimated above. We found that if all the measures are implemented, the national burden in percentage terms can be reduced by up to 2% for households in the first decile bracket, the lowest income bracket in the standard case and by around 7.5% in the reform case. These findings indicate that reducing income deductions, which benefit especially high - income households, will be an effective tax measure from the viewpoint of correction of the structure of the national burden among income classes, which is getting flat under the recent increase of national burden. However, not only will reducing income deductions have only a limited effect in increasing the burden on high - income households, but also around half of such households will not be affected by the measure. Therefore, reducing some income deductions alone will have only a limited effect in correcting the flattening of the burden due to future increases in tax and social insurance payments. So, it is necessary to consider the preferable national burden, by reviewing the relationship between income deductions in general and social insurance payments.