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An Economic Analysis on Pension Financing Methods: Is VAT Better than Wage Proportional Tax?

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  • Junichiro Takahata

Abstract

Recently, Japanese public pension scheme has been discussed more often, especially about how to finance the scheme. It is possible to finance the scheme by wage-proportional contribution or by Value-Added-Tax, but the allocation may be different depending on the financial method. I find that an optimal tax rate is 0 percent at steady state under either method by using a dynamic general equilibrium model with individuals living at longest 80-period in an incomplete market setting. Moreover, I show that it is better to have the scheme with Value-Added-Tax when we have a certain amount of public pension scheme.

Suggested Citation

  • Junichiro Takahata, 2009. "An Economic Analysis on Pension Financing Methods: Is VAT Better than Wage Proportional Tax?," Global COE Hi-Stat Discussion Paper Series gd08-043, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hst:ghsdps:gd08-043
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    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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