Should the Japanese tax system be more progressive? An evaluation using the simulated SMCFs based on the discrete choice model of labor supply

Shun ichiro Bessho, Masayoshi Hayashi

Research output: Contribution to journalArticle

Abstract

This study proposes a method to obtain the social marginal costs of public funds (SMCF) that allows for heterogeneity on a household basis as well as labor supply responses along both the extensive and the intensive margins. To demonstrate our methodology, we take the example of the 1999 national income tax reform in Japan and evaluate it by estimating the SMCFs for changing marginal tax rates in different income brackets. We estimate the discrete choice model (DCM) of labor supply using a 1997 data set of Japanese households, and we use the estimates to generate the SMCFs with a DCM micro-simulation. We evaluate the simulated SMCFs with various distributional weights and find that the value of the SMCF for a 1 % increase in the marginal tax rate in any given income bracket decreases as we move across brackets from the bottom to the top. This finding suggests that the national government should have made the Japanese income tax system more progressive rather than less progressive as carried out in the 1999 reform. Our method is readily transferrable to tax reforms in other countries as well.

Original languageEnglish
Pages (from-to)1-32
Number of pages32
JournalInternational Tax and Public Finance
DOIs
Publication statusAccepted/In press - 2014

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Discrete choice models
Labor supply
Marginal cost of public funds
Tax system
Income
Evaluation
Household
Marginal tax rate
National income
Microsimulation
Intensive margin
Income tax
Tax reform
Japan
Methodology
Government
Supply response
Income tax reform

Keywords

  • Discrete choice model
  • Household labor supply
  • Japan
  • Social marginal cost of public funds

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Accounting

Cite this

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abstract = "This study proposes a method to obtain the social marginal costs of public funds (SMCF) that allows for heterogeneity on a household basis as well as labor supply responses along both the extensive and the intensive margins. To demonstrate our methodology, we take the example of the 1999 national income tax reform in Japan and evaluate it by estimating the SMCFs for changing marginal tax rates in different income brackets. We estimate the discrete choice model (DCM) of labor supply using a 1997 data set of Japanese households, and we use the estimates to generate the SMCFs with a DCM micro-simulation. We evaluate the simulated SMCFs with various distributional weights and find that the value of the SMCF for a 1 {\%} increase in the marginal tax rate in any given income bracket decreases as we move across brackets from the bottom to the top. This finding suggests that the national government should have made the Japanese income tax system more progressive rather than less progressive as carried out in the 1999 reform. Our method is readily transferrable to tax reforms in other countries as well.",
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