The Effects of Social Security and the Tax System on Income Distribution and Economic Growth

This paper presents estimates of long-term impacts from changes to the social security and tax systems on income distribution and economic growth in Japan. Different combinations of policies can have significantly different impacts on income distribution and economic growth. Corporate tax cuts or reducing the burden of social security contributions facilitates growth, but it also widens income inequality. Strengthening progressive income taxation or increasing the social security benefits reduces income inequality, but it negatively impacts on economic growth. When there are multiple policy goals, a number of policy measures must be adopted, and it is appropriate to apply effective policies to each policy goal.

If promoting growth and reducing income inequality are equally important policy goals, it is necessary to adopt a combination of policies that are effective in encouraging economic growth and in redistributing income. The combination of cuts in corporate taxes and the introduction of tax credits to low-income earners is an example of such a policy mix. However, specific policy packages differ depending on how much weight is given to each policy goal. The analysis presented in this paper, including the basic data, is provisional, reflecting a number of restrictions. As pointed out by the National Council for Social Security, when designing a social security system, it is desirable to use quantitative analysis based on objective data to ensure that an appropriate policy package is selected.