Policy Mix for Fiscal Consolidation Without Harming Japan's Economic Recovery

First, we estimate a macro production function so as to estimate the total factor productivity (TFP) growth rate. With this function, we can estimate the potential growth rate of Japan. By breaking down the growth rate into contributions from labor, capital and TFP, we can better understand the causes that led to the long-term stagnation of the Japanese economy. We can also estimate the positive effects of the increased employment brought about by a lower social security tax rate and the increased investment resulting from investment subsidies generated by carbon-tax revenues. Second, we estimate the expansionary effects from a higher expected inflation rate due to a gradual increase in the consumption tax and carbon-emission tax by using an overlapping generation model with an inter-temporal utility maximization model. By comparing these expansionary effects with the negative effects resulting from tax hikes, we can evaluate the net effect of our proposed policy mix. Finally, we will estimate the net income redistribution effect resulting from the shift in social security funding--from the current poll tax and wage tax to consumption tax--to evaluate the impact on income distribution.

July 6, 2011 - March 31, 2013