Why Fiscal Reform Makes no Progress in Japan

We use the Overlapping Generations Model with intergenerational heterogeneity to analyze the preferred form of taxation to achieve the fiscal reform necessary to maintain fiscal sustainability in Japan. We assumed two forms of taxation, i.e. the consumption tax increase or the progressive labor income tax increase, and used utility criteria and the existing voting system for our analysis. The results showed that support for a consumption tax increase is limited to the upper income bracket in generations younger than middle-age, rendering implementation of the fiscal reform policy impossible. Thus, we assumed a utilitarian government and confirmed that the consumption tax increase option would be favored in a case in which the sum of utility changes in all the people alive in the year fiscal reform is launched. However, a utilitarian government is equivalent to forcing other income groups to make sacrifices solely for the benefit of the high-income group and calls into doubt whether such a choice is fair.