- The Economic Studies Quarterly (ISSN:0557109X)
- vol.40, no.4, pp.336-348, 1989-12-20 (Released:2007-10-19)
The Japanese Tax Reform Act enforced by the Takeshita Administration consists of cutting the income tax with simplification of tax rate structure and introducing the “so-called” shohi zei which is a special type of the value added tax. In general, the tax reform has great influence on the structure of tax burden among different income groups. Unfortunately, however, there have been no welfare analysis on household behavior resulting from the present tax reform in Japan. Motivated by the present stage of the study, this paper aims to develop welfare analysis which is concerned with the response of household to the change in tax structure and with its implications from the view point not only of allocation but also of distribution.The first step of our analysis is to specify respective utility functions as nested C.E.S. type for income decile groups by using Annual Report on the Family Income and Expenditure Survey. The second one is to investigate the change in consumption, saving and labour supply of different income groups due to that in tax structure by simulating the optimal behavior of respective income groups. The third step is to calculate the changes in the after-tax income and utility levels of each income group. The final one is to evaluate welfare implications of the tax reform by adopting special type of social welfare function and the generalized entropy measure for income distribution. To sum up, the present tax reform in Japan reduces tax burden and improves utility level for all income groups expect for the lowest income group. How we evaluate this consequence in welfare aspect depends upon our value judgement on social justice. If we have strong preference to equality, the resulting consequence is not welcomed to the society as a whole not only in social welfare level but also in inequality measure. On the contrary, under such circumstance as utilitarian calculus, it is proved to be favorable for the society.