The impac of demography on financing social expendiure Moohiro Sao Hiosubashi Univesiy 1
Increase in he social insurance expendiure Japan is aging! Social insurance benefi In Japan Aging will increase fiscal burden on he governmen as i needs o spend more on (a) public pension, (b) healh care and (c) long erm (nursing) care. 188.2~190 Trillion 23.8~24% of GDP Increasing social securiy expendiure mus be financed by (i) ax and/or (ii) social securiy conribuion, which in urn raises he burden on people, especially he young. 121 Trillion 21.5% of GDP How o finance social expendiure and how o conain i? FY2018 FY2040 2
Social Insurance in Japan Social securiy in Japan includes - public pension - healh care - nursing (long erm) care Universal coverage (in principle)=everyone has public insurance. Pension benefis and nursing care services are provided for more han 65 years old. Public pension and healh insurance sysems are differen beween (a) he employed and (b) he self-employed/ unemployed. Dual sysems The scheme de faco follows pay as you go ransferring he conribuion by he working aged o he benefi o he old. The susainabiliy of he social insurance sysem 3
Pay as you go scheme and aging Pay as you go sysem (pension, healh care) is suscepible o demographic srucure. As sociey aging and wage growh declining, eiher burden of insurance premium on workers increases or pension benefi o he aged declines. Pension benefi Wage Need o be adjsued Year N old B N young W Insurance premium rae N N old young B Sociey aging W Growh declining 4
MOF2017 5
Financing social expendiure Social expendiure is financed by boh ax and social securiy conribuion Consumpion ax is earmarked for social expendiure. social securiy conribuion becomes redisribuive following pay as you go involving iner-generaional redisribuion De fac ax on wage Increasing social expendiure should be filled by ax or social securiy conribuion?? Which one is more equiable and growh friendly? Japanese Public Finance Fac Shee 2016 6
Economic Consequences of SSC Labor cos and Wage Social securiy (insurance) premium leads o he same incenive effec as ax if i is no clearly linked o social insurance benefi. Worker side= Working incenive is discouraged Business side= Employmen decreases as labor cos increases Employers = business mus bear social securiy conribuion o hire regular workers whereas no employer based social securiy conribuion is levied on non-regular workers. Incenive for employer o subsiue regular workers by non-regular ones 32.6% of labor cos (SSC=25.7%) Tax Wedge Decreasing employmen Labor demand Labor supply Labor 0 Single individual wihou children a he income Source of Daa: OECD Taxing wage (2017) level of he average worker in Japan(2017) 7
Increasing dominance of VAT In he las decades, (i) VAT has been widely spreading in boh developed and developing counries, (ii) is share in GDP increasing relaive o CIT and SSC There has been shif in ax mix oward consumpion ax away from income axaion including SSC(Social securiy conribuion) VAT fis beer o newly emerging economic environmen namely economic globalizaion and ageing 8
% of GDP (OECD Unweighed Average) Source: OECD Revenue Saisics 9
Wha is good abou VAT? VAT burden accrues o he final consumpion. I does no accumulaed a he producion sages ha assures he producion efficiency. I does no undermine inernaional compeiiveness. In conras, CIT as well as SSC (Social Securiy Conribuion) disors boh (i) producion efficiency and (ii) inernaional compeiiveness. VAT levied on every sage of ransacion works o secure ax revenue as well Key feaure Tax refund/credi mechanism Desinaion principle Economic consequence Producion efficiency Growh friendly Inernaional compeiiveness Fiscal devaluaion 10
Growh friendly feaure VAT does no disor producion process given ha is burden is no accumulaed doe o ax refund/credi mechanism I hen urns ou ha VAT is growh friendly relaive o oher axes including CIT and SSC. Tax burden undermine growh bu VAT is less harmful There has been empirical evidence ha shifing oward VAT away from income axaion under ax revenue neuraliy is growh promoing Effec on growh 0.1% increas e in ax revenu e share Revenue neural ax reducion PIT/SSC CIT VAT Propery ax PIT/SSC +0.101% -0.096% -0.135% CIT -0.118% -0.204% -0.240% VAT +0.092% +0.216% -0.012% Propery ax +0.155% +0.271% +0.071% Source: Arnold (2008) DO TAX STRUCTURES AFFECT AGGREGATE ECONOMIC GROWTH? EMPIRICAL EVIDENCE FROM A PANEL OF OECD COUNTRIES, ECONOMICS DEPARTMENT WORKING PAPERS, OECD Daa: OECD counries 11
Theory and Pracice: VAT and Inergeneraional equiy In heory, VAT is equivalen o ax on lifeime income. Lifeime consumpion = Life ime income For he elderly, VAT serves o ax on heir savings/asses which hey wihdraw o consume Old ime consumpion = Pension + savings asses (inclusive of ineress) Compared o SSC ha is mosly born by he working age populaions, VAT financed social expendiure works o improve iner-generaional equiy. VAT as ax on he old generaions! 12
Theory and Pracice: Consumpion ax shock in Japan! In Japan, consumpion subsanially declines a he ime of raising is VAT rae from 5% o 8% on April 2014 Ineremporal subsaion effec of consumpion was subsanial wih consumpion increasing jus before he VAT rae hike and diminishing aferward Macro economy was emporarily disurbed Growh rae recorded minus in he wo consecuive quarers in 2014 Source :IMF Aricle IV Consulaion 2015 13
Tax smoohing We should no increase consumpion ax rae? Given ha social expendiure is increasing, delaying ax increase requires furher ax increase in he fuure Fuure economy will be undermined Tax smoohing Compared o oher axes like CIT, consumpion ax (VAT) is growh friendly in he mid and long erm. ⒑% VAT rae Curren level =8% Oc.2019 Smoohing ax rae Delay in Tax increase More han 15%? Larger ax Increase in he fuure Due o accumulaed deb Time 14
IMF 15
Challenge on VAT Newly emerging economic and social environmens = ageing and globalizaion + Digializaion Digializaion poses challenge on VAT adminisraion and policy Challenge = Digializaion may make i more difficul for ax auhoriy o idenify/race consumpion in own jurisdicion Rapidly growing sharing economy (ex. ride sharing) wih digializaion (developmen of IT) may urn o be informal/ underground economy in 21 cenury ha is hard o ax. Plaform (Ex. Airbnb, Uber) Maching Service Seller Paymen Buyer 16