Intergenerational Conflict over Fiscal Consolidation: Theory and Evidence from Japan Real Arai 1 Ryosuke Okazawa 2 Katsuya Takii 3 1 Kochi University of Technology 2 Osaka City University 3 Osaka University January 19, 2018 Very Preliminary 1 / 31
Introduction Consumption tax in Japan Abe cabinet postponed an increase of consumption tax by 10% on May 2016. The increase of consumption tax has been postponed, although Japan s public debt is severely large. Why is it difficult to raise consumption tax? A political reason probably affects the situation. 2 / 31
Introduction Political Economics of public deficit Inter-generational conflict is one of important issues. Ihori (2016, in book, translated by the authors) As the difference in preference by age increases, the current beneficiary tends to hope for an increase in benefit payments but is reluctant to bear their costs, and the reforms tend to be postponed. As a result, the fiscal burden is imposed on the future beneficiary. If the policy is determined by silver democracy, it causes the accumulation of fiscal deficits and an increase in social security benefits. 3 / 31
Introduction Inter-generational conflict and politics Should we lower the political powers of older people? Election system reform is discussed, e.g., reallocating representatives seats to each generational group (Ihori and Doi, 1998) reallocating representatives seats based on voter s life expectancy (Takeuchi, 2012) Demeny voting (Demeny, 1986) c.f. The voting rights in the parliamentary election in Japan extended to 18 and 19 year-old citizens in 2016. 4 / 31
Introduction Objectives of this study 1 Using microdata of JGSS 2010 and 2012, we show features of political preference on a consumption tax increase. We empirically verify the prevailing view on inter-generational conflict on a consumption tax increase. 2 We propose and test three hypotheses that can explain the different preferences among generations. 5 / 31
Introduction Objective 1: Empirical results The older voter tends to support an increase of consumption tax, which is contrast to the prevailing view and to the prediction of the basic model. The people who have higher education or income tend to support a consumption tax increase. Women tend disagree with a consumption tax increase. Whether a voter has a child does not affect the preference on a consumption tax increase. 6 / 31
Introduction Support for Consumption Tax Increase By Age Share of Supporters 0.1.2.3.4.5 20 30 31 40 41 50 51 60 61 70 70 Figure: Support for Consumption Tax Increased by Age (source: JGSS2010, 2012) 7 / 31
Introduction Objective 2: Why is older voter more likely to support for an increase of consumption tax? The baseline theoretical model predicts that older people tend to disagree with an increase of consumption tax. We consider three hypotheses: older voter tends to 1 prefer a large government because they obtain more benefits from public goods and services than young voter. 2 be afraid of risks of an inflation tax because they hold more financial assets. 3 understand well the current situation about Japan s public finance. Our empirical results support hypotheses 2 and 3. 8 / 31
Literature Review Empirics: Preference for fiscal consolidation with individual survey data Blinder and Krueger (2004) Stix (2013) Hayo and Neumeier (2017) Theory 1: Welfare analysis of fiscal consolidation in multi-overlapping generations models Ihori et al. (2006) Yamada (2011) Okamoto (2013) Theory 2: Politico-economic theories on public debt with inter-generational conflict Tabellini (1991) Song et al. (2012) 9 / 31
Data and Facts We analyse preferences for an increase of consumption tax with microdata of JGSS 2010 and 2012. The central question: At what level do you think the consumption tax rate should be? If a person choose the alternatives with tax more than 5%, he/she supports for the consumption tax increase. JGSS includes rich dataset, e.g., income, education, family, opinions for policies Sample size: 5,140. 10 / 31
Data and Facts Support for Consumption Tax Increase By Age Share of Supporters 0.1.2.3.4.5 20 30 31 40 41 50 51 60 61 70 70 Figure: Age and Support for an Increase of Consumption Tax 11 / 31
Data and Facts Support for Consumption Tax Increase By Income Share of Supporters 0.1.2.3.4.5 0 350 350 650 650 1000 1000 Figure: Household Income and Support for an Increase of Consumption Tax 12 / 31
Data and Facts OLS Probit Ordered Probit age 0.0051***0.0141*** 0.0135*** female -0.1140***-0.3081*** -0.1983*** marry 0.0370** 0.1039** 0.0942** havechildren -0.0097-0.0315 0.0057 highschool 0.1178***0.3248*** 0.3102*** university 0.2804***0.7572*** 0.7343*** household income 0.0109***0.0296*** 0.0304*** N 5140 5140 5140 (We control the employment status and survey year. ) 13 / 31
Data and Facts Results of regression analysis: Older voter is more likely to support a consumption tax increase. Women significantly tend to disagree with an increase of consumption tax. Married people significantly tend to agree with an increase of consumption tax. However, the tendancy is not affected by the People who experienced higher education or receive higher incomes tend to agree with an increase of consumption tax. 14 / 31
Data and Facts Robustness Check 1 The result on the relationship between age and support for consumption tax does not change, even though we use cohort dummies instead of age itself. we control living city size, health status, house owner, and experiences of charity or volunteer. 15 / 31
Data and Facts Robustness Check 2 Because of older people s altruism (toward the future generations)? To test, we use opinions for the free education policy in senior public high schools. Are you in favor of policies to make the tuition of public or private school free? Older people are significantly less likely to agree with the public subsidy for education. Altruism does not explain the result on age and the support for consumption tax. 16 / 31
Data and Facts Robustness Check 3: Using the UTAS data in 2012 and 2013. Survey for 3,000 citizens randomly sampled just after the parliamentary election in 2012. Questions on citizens opinions for policies: For the time being, the government should increase spending to stimulate economic activities rather than cut spending for fiscal consolidation. In the long run, it is inevitable that the consumption tax rate will be higher than 10%. We regress on age, gender, education, and employment status (ordered probit). Note: There is no information on income in the UTAS. 17 / 31
Why Does the Old Support Tax Increase? Why are older people more likely to support a consumption tax increase? The baseline model cannot explain the result. We propose the following three hypotheses. 1 Older people prefer a large government : they want more public goods/services. 2 Older people are more afraid of falling the value of government bond. 3 Older people know the situation about public finance more. To derive the hypotheses, we extend the theoretical model in our paper. 18 / 31
Empirical Test Empirical analysis with preference for government spending We test the hypothesis 1. Do older people support the consumption tax increase because they demand public goods/services more than young? We test the following two statements to check hypothesis 1. 1 Do older people have a significant demand for government spending? 2 Do people with a high demand for public goods/services tend to support the consumption tax increase? 19 / 31
Empirical Test Empirical Analysis with preference for government spending We use the results on the following questions. policy on redistribution: Are you in favor of the statement that the government should adopt policies to reduce the income gap between the rich and the poor? opinion for life security of the elderly: Is the life security of the elderly the responsibility of individuals or families? Or is it the responsibility of the state or local government? ( responsibility of individuals or families = 1, responsibility of the government = 5 ) opinion for health care for the elderly: Is health care for the elderly the responsibility of individuals or families? Or is it the responsibility of the state or local government? 20 / 31
Empirical Test Policy Preference and Age Share of Supporter 0.2.4.6.8 20 30 31 40 41 50 51 60 61 70 70 Redistribution Medical Care for the Elder Economic Support for the Elder Figure: Age and Policy Preferences 21 / 31
Empirical Test redistribution healthcare safetynet age 0.0039*** -0.0015-0.0035*** female -0.0761** -0.0091-0.0843** marry 0.0259 0.0554 0.0736* havechildren 0.0881* 0.0103-0.0149 highschool -0.1751*** 0.0314-0.0662 university -0.3791*** -0.0883-0.1941*** household income -0.0394*** -0.0143*** -0.0166*** N 5129 5091 5091 22 / 31
Empirical Test (1) (2) (3) (4) (5) age 0.0052*** 0.0051*** 0.0050*** 0.0051*** 0.0048*** redistribution -0.0278*** -0.0193***-0.0195*** healthcare -0.0294*** 0.0006 0.0001 safetynetforold -0.0390***-0.0358***-0.0349*** ldp support 0.0336* dp support 0.1033*** N 5129 5091 5091 5072 5060 23 / 31
Empirical Test Empirical results with preference for government spending There is no evidence that older people tend to demand public goods/services more. People who demand public goods/services more tend to disagree with a consumption tax increase. The positive relationship between age and support for the consumption tax increase still remains even though policy preferences are controlled. Hypothesis 1 is not supported. 24 / 31
Empirical Test Empirical analysis with financial asset holdings We test the hypothesis 2. We use the qustions on the following financial asset holdings in JGSS 2012 (only sheet B). Do you have stocks / bonds / an investment-trust / foreign deposits? We test whether support for the consumption tax increase is associated with financial asset holdings. 25 / 31
Empirical Test Empirical analysis with acquisition of information We test the hypothesis 3. We use frequency of reading newspaper as a proxy of acquisition of information. How frequently do you read newspapers? almost everyday = 3, several times a week = 2, about once a week = 1, never = 0. We test the relationship between reading newspapers and support of the consumption tax increase. 26 / 31
Empirical Test Financial Assets and Age Share of Asset Hold 0.05.1.15 20 30 31 40 41 50 51 60 61 70 70 mean of stock mean of investmenttrust mean of bond mean of foreigndeposit Figure: Age and Financial Asset Holdings 27 / 31
Empirical Test Newspaper and Age Read Newspaper Everyday 0.2.4.6.8 20 30 31 40 41 50 51 60 61 70 70 Figure: Age and Frequency of Reading Newspapers 28 / 31
Empirical Test (1) (2) (3) (4) age 0.0051***0.0042***0.0044***0.0034*** bond 0.0781* 0.0807* stock 0.0705* 0.0675* investmenttrust 0.0773* 0.0750* foreigndeposit 0.0285 0.0198 newspaper 0.0233***0.0291*** N 5140 1720 5126 1716 29 / 31
Empirical Test Empirical results with financial asset holdings and frequency of reading newspapers. People who holds domestic financial assets tend to support for consumption tax increase. Foreign deposit holding does is not associated with the support for the tax. People who read newspapers more tend to support for a consumption tax increase. Controlling financial asset holdings and frequency of reading newspapers decreases the coefficient of age. Risks of government bond holdings and information can partly explain the effects of age on support for consumption tax increase. 30 / 31
Conclusion Conclusion: Using JGSS data, we find that older people are more likely to support the consumption tax increase, which is inconsistent with the standard view and theoretical model. We cannot find that the hypothesis, older people prefer a larger government, explains the relationship between age and the support. We find that risks of holding public debt and acquisition of information partly explain the relationship between age and the support. We should consider the commitment effect of public debt holding in order to consider the inter-generational conflict on fiscal consolidation. Our analysis can apply to investigation on fiscal consolidation plans in other countries (e.g. EU countries). 31 / 31