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Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT
Author(s) -
Maebayashi Noritaka
Publication year - 2020
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12403
Subject(s) - social security , payroll tax , economics , altruism (biology) , payroll , overlapping generations model , growth model , value (mathematics) , pension , labour economics , public economics , microeconomics , finance , market economy , psychology , social psychology , accounting , machine learning , computer science
This study investigates how unfunded public pensions financed by value added tax (VAT), as discussed in Japan, affect economic growth and whether payroll tax (PT) or VAT is the more growth‐friendly tax structure for financing public pensions. We examine these issues using overlapping generations models with parental altruism and find that a public pension system financed by VAT may increase economic growth when bequests are operative. By contrast, when bequests are inoperative, public pensions hinder growth unless agents are sufficiently patient. Finally, public pensions financed by VAT are more growth‐friendly than those financed by PT.