Marginal Tax Reform and Low-Income Index in Age Groups

Abstract

  This study analyzes the influence of marginal tax reform in age groups using the Difference between Consumption Dominance Curves (DCDC), a simulation tool of marginal tax reform. The study involves performing simulation analysis of marginal tax reform involving the reduction of tax on “medical care” and increasing it on another commodity.

  We developed the model of DCDC and estimated parameters of the Almost Ideal Demand System using consumption data by the age of the heads of households. We derived DCDC in the case of the reduction in “medical care.” Finally, we tested the effect of marginal tax reforms on social welfare.

  We found that the tax increase on commodities, such as “food,” “furniture and household utensils,” “culture and recreation,” or “Others” can improve social welfare when the tax on “medical care” is decreased. This result indicates that the tax increase on these commodities is desirable if the government can reduce the tax on “medical care.” Our results provide directions for marginal tax reforms from the perspective of age groups in an aging society with a declining birthrate.