The Economics of Taxes and Transfers: An Introduction to the Theory of Optimal Labor Income Taxation ( HAYASHI Masayoshi)
The Bunching Estimation Approach and Its Development (SUZUKI Takafumi)
The Development of Microsimulation and the Burden Structure of Personal Income Taxation (OHNO Taro)
Taxation and Benefits, and Behavioral Economics (MORI Tomoharu)
Changes in Effective Tax Rate due to Fundamental Corporate Tax Reforms ―Analysis of Financing Neutrality Using a Forward-Looking Model― (UEMURA Toshiyuki)
Wealth Transfer Taxation and Household Behavior (NIIMI Yoko)
The Effect of Patient Cost Sharing in the Public Healthcare System on Healthcare Utilization and Health (YUDA Michio)
The Effect of Copayment Rates in Public Long-term Care Insurance Systems on Care Utilization and Health (ONISHI Atsusuke)
Public Assistance and Recipients’ Earnings: The Effects of the 2013 Reform in Public Assistance in Japan (HAYASHI Masayoshi)
Emergency Economic Response and Evaluation in the COVID-19 Crisis (NAKATA Daigo)
| By HAYASHI Masayoshi | (Professor, Graduate School of Economics/Faculty of Economics, The University of Tokyo) |
The theory of optimal taxation, as the core of public finance studies, has important implications for the design of taxes and transfers. In particular, the study on optimal labor income has seen unprecedented development over the past quarter-century, providing new theoretical settings, quantitative analysis methods, and applications to policy issues, perhaps almost simultaneously with growing public concern about economic inequality and redistribution policies. This paper presents a pedagogical introduction to the theory of labor income taxation, which has become a common asset among public-finance economists.
Keywords: Optimal taxation, labor income tax, labor supply, labor earnings
JEL Classification: H21, H24, H26
| By SUZUKI Takafumi | (Assistant Professor, Faculty of Business, Aichi Shukutoku University) |
This paper explains the basic framework of the bunching estimation approach, which is seeing an increase in its applications in recent years particularly in the fields of finance and public economics, and at the same time, addresses the recent developments and criticisms of this approach. The bunching estimation approach was first developed by Saez (2010) and established as a method for estimating the elasticity of taxable income, but its applications have spread to other fields in recent years. However, there is limited literature in the Japanese language that explain how to use this approach, and there is currently relatively little research in Japan that uses the bunching estimation approach. In addition, numerous papers have been published in recent years on the extension of analysis on this approach, and problems in carrying out estimation.
From the context of the elasticity of taxable income in particular, this paper (1) explains the basic analytical methods and (2) looks at the progress of the approach in recent years, alongside the problems and issues in estimation that have been raised in succeeding research.
Keywords: Bunching estimation, bunching, elasticity of taxable income
JEL Classification: H00，C01，H24
| By OHNO Taro | (Chief Economist, Policy Research Institute, Ministry of Finance) |
In research on tax systems and social security, a growing number of studies is focusing on the microsimulation technique amidst advancing efforts to use household microdata. This estimates the amount of taxes and benefits by applying real tax and social security systems to information related to the household’s family composition and income, and fulfills wide-ranging roles such as (1) trial calculation of policy changes, (2) calculation of marginal tax rate, (3) complementing of samples, (4) elimination of seasonality problems, and (5) extraction of contribution from system changes. This paper first surveys research from overseas and Japan, looks at the development of microsimulation, and organizes the research results related to personal income taxation in Japan. It then sheds light on the current situation of the burden structure of personal income taxation, using a microsimulation model that makes use of household microdata from the National Survey of Family Income, Consumption and Wealth (conducted from 1989 – 2019).
Keywords: Microsimulation, tax, social insurance premiums, redistribution effect
JEL Classification: C15，H24
| By MORI Tomoharu | (Associate Professor, Faculty of Comprehensive Psychology, Ritsumeikan University) |
This paper conducts a survey on research utilizing insights from behavioral economics in the economic analysis of taxation and benefits and discusses Japan’s taxation and benefits policies from the viewpoint of behavioral economics. Behavioral economics is a collective term that is applied to research based on models in which the agent behaves under assumptions that differ from the “standard assumptions.” In recent years, there has been a sudden upsurge in research even in theoretical analysis and empirical research on taxation and benefits. Specifically, studies are being conducted on topics such as tax-related inattention, the impact of taxation and benefits on complexity, institutional design of retirement savings and pensions, promotion of tax payment, and the effects of benefits on labor, education and medical care. From the theoretical aspect, researchers are studying its relationship with optimal taxation. Knowledge of behavioral economics offers a new perspective to evaluate systems and policies related to taxation and benefits in Japan and has the potential to propose institutional design that is based on a more realistic image of humankind.
Keywords: Taxation and benefits, behavioral economics, optimal taxation
JEL Classification: D91，G41，H20
| By UEMURA Toshiyuki | (Professor, School of Economics, Kwansei Gakuin University) |
While the current corporate tax system in Japan allows interest expense on debt to be deductible, no such mechanism exists for other financing, leading to a "debt bias." Therefore, the Comprehensive Business Income Tax (CBIT), Allowance for Corporate Equity (ACE), and Allowance for Corporate Capital (ACC) have been proposed. According to international comparisons by the OECD, the marginal effective tax rates in ACE-adopting countries are low, and these countries have reformed their corporate tax systems toward financing neutrality.
This study conducts a comprehensive survey of empirical analyses of Japan's effective corporate tax rates and classifies them into four effective corporate tax rates. Further, fundamental corporate tax reform proposals using forward-looking effective tax rates are analyzed in line with Hanappi (2018), OECD (2020), and Spengel et al. (2020), who conducted international comparative studies of effective corporate tax rates. This study makes improvements to Japan's 2020 parameters in Spengel et al. (2020) to obtain the cost of capital (user cost of capital), marginal effective tax rate, and average effective tax rate values by financing and assets. The parameters of the proposed reforms are then incorporated into a model of the effective corporate tax rate to conduct a simulation analysis under a constant statutory tax rate.
First, a simple CBIT that does not allow deductions of interest expenses increases the cost of capital, marginal effective tax rate, and average effective tax rate for debt financing. Second, a simple ACE that allows the deduction of opportunity cost at the notional interest rate on equity lowers the cost of capital, the marginal effective tax rate, and the average effective tax rate for retained earnings and new equity. Third, a simple ACC that allows all financing to deduct opportunity costs at the notional interest rate lowers the cost of capital, marginal effective tax rate, and the average effective tax rate for all financing.
However, these results are difficult to compare due to different average effective tax rates. Therefore, conducting similar simulations under a constant average effective tax rate results in statutory tax rates of 25.57% for CBIT, 42.33% for ACE, and 42.62% for ACC, compared with 31.30% for the base case. Thus, CBIT reduces its tax rate by five percentage points from the current rate, but ACE/ACC requires a ten percentage point increase. It is also indicated that CBIT increases the cost of capital and the marginal effective tax rate while ACE/ACC reduces these rates.
The above simulations are conducted assuming a simple CBIT with no deductible interest expense, a simple ACE/ACC where the notional interest rate matches the nominal interest rate, and the rate at which ACE/ACC is applied matches the statutory corporate income tax rate. Simulations that relax these conditions are conducted under a constant average effective tax rate.
First, under CBIT, varying the deductibility of interest expenses has a limited effect on the cost of capital and the marginal effective tax rate. Second, when the notional interest rate is set lower than the nominal interest rate or when the tax rate to which ACE/ACC is applied is set lower than the statutory tax rate, the effect on the marginal effective tax rate is significant.
These results have some implications: CBIT can ensure financing neutrality, but it increases the cost of capital and the marginal effective tax rate, which may negatively affect investment. On the contrary, ACE/ACC decreases the cost of capital and marginal effective tax rate, which can positively affect investment. In particular, the ACE has been introduced in many countries and is considered a promising proposal for future corporate tax reform in Japan.
Keywords: financing neutrality, forward-looking effective tax rate, fundamental corporate tax reforms
JEL Classification: H25, H32
| By NIIMI Yoko | (Professor, Faculty of Policy Studies, Doshisha University) |
This paper aims to examine the effect on household behavior of the revision of inheritance and gift taxes that was part of the 2013 Tax Reform in Japan. It first reviews previous theoretical and empirical work that analyzes the behavioral response of households to wealth transfer taxation. It then examines the household response to the 2013 Tax Reform using aggregate data from the Annual Statistics Report of the National Tax Agency. Previous theoretical analyses generally model parents’ bequest motives as a key determinant of the behavioral response of households to wealth transfer taxation. On the other hand, while the empirical literature finds that the response of households to wealth transfer taxation differs by their bequest motive to a certain extent, such as making use of gift tax exemptions to reduce tax liabilities, as predicted by theoretical models, it also finds that the extent of such a response tends to be limited. The examination in this paper of the effect of the 2013 Tax Reform using aggregate data suggests that households did not change their bequest/inter vivos behavior significantly in response to the reform. The 2013 Tax Reform is therefore unlikely to have caused excessive distortions in household behavior, and as a result, it can be expected to help reduce inequalities to a certain extent.
Keywords: Inheritance tax, gift tax, intergenerational transfers, bequest, inter vivos transfers, inequality
JEL Classification: D31, D64, H24, H26, H31
| By YUDA Michio | (Associate Professor, Graduate School of Economics and Management, Tohoku University/ Research Associate, Research Institute of Economy, Trade and Industry) |
Since 1961, the Japanese public healthcare system, centered on the universal health insurance system, has contributed to raising the health standards and life expectancy of the Japanese people through improving the equity of access to healthcare and the quality and quantity of healthcare services. On the other hand, the national medical care expenditure has been increasing steadily. While the level of copayments in the health insurance system contributes to the efficiency and sustainability of the system, it also has an impact on the maintenance of a healthy and cultured life for the people as well as the state of public health policies. This paper summarizes the economic studies that examine the impact of changes in patient copayments on healthcare utilization and health using the Japanese data and organizes the points that have been revealed by the research to date. In addition, I use individual panel data with rich personal attributes and conduct empirical exercises to confirm the robustness of the effect of the drastic reduction of coinsurance from 30% to 10% at age 70 in Japan. Including my empirical results, I find that the price elasticity of healthcare is generally low and that changes in copayment rate generally do not have a large impact on health.
Keywords: Public healthcare systems, copayment, healthcare utilization, health, price elasticity, Japanese Study of Aging and Retirement, regression discontinuity design
JEL Classification: H51，H75，I13，I18，I38
| By ONISHI Atsusuke | (Visiting Scholar, Policy Research Institute, Ministry of Finance) |
The copayment rate in the long-term care insurance system (LTCI) is an issue of growing policy importance, as demonstrated by it being subject to numerous reviews in Japan in recent years. On the other hand, there is limited preceding research on the subject, and it is difficult to say that the effects of copayment have been sufficiently elucidated. In view of that, this paper surveys earlier research on the effects of copayment rates in public LTCIs on service utilization and the health status of users in various countries.
A summary of the analysis results from earlier research in France, Netherlands, Republic of Korea, and Japan, where LTCIs are well-developed, shows uniformly that an increase (or decrease) in copayment generally leads to a decline (rise) in service utilization. In addition, multiple studies have also shown that changes in copayment do not have a significant effect on the health status of users.
On the other hand, it has been shown that price elasticity of changes in copayment varies depending on the country, region, system, period of time, type of service, and user attributes, among other factors. In particular, the effect of the increase in copayment ratio from 10 % to 20% implemented in Japan in August 2015 is considered to be extremely small in comparison with earlier research overseas and in the health care field. However, it is a remaining important issue in future studies to elucidate the mechanism by which the effects of copayment vary between countries or between health care and long-term care.
Keywords: Long-term care system, copayment, utilization of long-term care, health
JEL Classification: H51，H75，I13，I18，I38
| By HAYASHI Masayoshi | (Professor, Graduate School of Economics/Faculty of Economics, The University of Tokyo) |
This study examines the earnings behavior of public assistance (PA) recipients in Japan using a large micro-data set of PA recipients. First, we provide a set of descriptive statistics on the earnings of PA recipients and use probit estimation to analyze the factors that induce PA recipients to work. Next, after explaining how earnings are treated in the calculation of PA entitlements, we examine the impact of this treatment on PA recipients’ earnings. In particular, we take advantage of the 2013 change in the Basic Deduction in the PA system to examine the earnings effects using descriptive statistics before and after the reform and panel-data regressions based on an event study design.
Keywords: Public assistance, labor force participation, basic deduction
JEL Classification: H53，H24，H75，I38
| By NAKATA Daigo | (Senior Fellow, Research Institute of Economy, Trade and Industry) |
This paper organizes the variations of countermeasures put in place by countries around the world as their emergency financial measures to cope with the COVID-19 crisis that hit the world at the beginning of 2020. At the same time, it surveys policy evaluation analyses in countries that implemented similar policies as Japan’s emergency financial measures. In particular, it surveys reports published over the past few years on analyses in the United States, Republic of Korea, and Israel that implemented direct transfer policies on household budgets, similar to Japan’s special cash payments, analyses in the United States and Australia that implemented employment retention policies similar to Japan’s employment adjustment subsidy, and analyses in Germany that reduced value-added tax (consumption tax) rates, which was not implemented but much debated in Japan. By summarizing the experiences and analysis results in these countries, this paper organizes the suggestions and implications related to future policy formation in Japan.
Keywords: COVID-19, emergency economic measures, direct transfer, employment retention policies, value-added tax
JEL Classification: H12，H20，H24，H25
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