Optimal tax combination in an aging Japan

This paper searches for a desirable tax combination in the coming aging society. It looks at the Japanese tax and social security systems through an extended life-cycle general equilibrium simulation model and evaluates the macroeconomic and welfare effects of alternative tax policies in an aging Japan. Simulation results show that an increase in the rate of tax on consumption and a decrease in the rate of tax on interest income may be a desirable tax combination under conditions of revenue neutrality, because the combination substantially promotes capital formation and brings with it a significant improvement in social welfare.