Generational Distribution of Fiscal Burdens: A Positive Analysis

Uchida, Yuki and Ono, Tetsuo (2020): Generational Distribution of Fiscal Burdens: A Positive Analysis.

Abstract

This study presents a political economy model with overlapping generations to analyze the effects of population aging on fiscal policy formation and the resulting distribution of fiscal burden across generations. The analysis shows that increased political power of the old, arising from population aging, leads to (i) an increase in the ratio of labor income tax revenue to GDP and the ratio of debt to GDP, and (ii) an increase in the ratio of capital income tax revenue to GDP in countries with high degrees of preferences for public goods, but an initial decrease followed by an increase in this ratio in countries with low degrees of preferences for public goods.

• Item Type: MPRA Paper
• Language: English
• Keywords: Generational burden; Overlapping generations; Political economy; Population aging; Public debt
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D70 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H6 - National Budget, Deficit, and Debt > H60 - General

References

Andersen, T.M., 2019. Intergenerational conflict and public sector size and structure: A rationale for debt limits? European Journal of Political Economy 57, 70--88.

Arai, R., Naito, K., and Ono, T., 2018. Intergenerational policies, public debt, and economic growth: A politico-economic analysis. Journal of Public Economics 166, 39--52.

Arawatari, R., and Ono, T., 2017. Inequality and public debt: A positive analysis. Review of International Economics 25, 1155--1173.

Arcalean, C., 2018. Dynamic fiscal competition: A political economy theory. Journal of Public Economics 164, 211--224.

Bassetto, M., 2008. Political economy of taxation in an overlapping-generations economy. Review of Economic Dynamics 11, 18--43.

Beauchemin, K., 1998. Intergenerational politics, fiscal policy and productivity. Review of Economic Dynamics 1, 835--858. Bishnu, M., and Wang, M., 2017. The political intergenerational welfare state. Journal of Economic Dynamics and Control 77, 93--110.

Boldrin, M., and Rustichini, A., 2000. Political equilibria with social security. Review of Economic Dynamics 3, 41--78.

Cukierman, A., and Meltzer, A.H., 1989. A political theory of government debt and deficits in a neo-Ricardian framework. American Economic Review 79, 713--732.

de la Croix, D., and Doepke, M., 2002. Inequality and growth: Why differential fertility matters. American Economic Review 93, 1091--1113.

Forni, L., 2005. Social security as Markov equilibrium in OLG models. Review of Economic Dynamics 8, 178--194.

Gonzalez-Eiras, M., and Niepelt, D., 2008. The future of social security. Journal of Monetary Economics 55, 197--218.

Gonzalez-Eiras, M., and Niepelt, D., 2012. Ageing, government budgets, retirement, and growth. European Economic Review 56, 97--115.

Greenwood, J., Hercowitz, Z., Huffman, G.W., 1988. "Investment, capacity utilization, and the real business cycle. American Economic Review 78, 402--417.

Kydland, F.E., and Prescott, E.C., 1982. Time to build and aggregate fluctuations. Econometrica 50, 1345--1370.

Lancia, F., and Russo, A., 2016. Public education and pensions in democracy: A political economy theory. Journal of the European Economic Association 14, 1038--1073.

Lindbeck, A.J., and Weibull, W., 1987. Balanced-budget redistribution as the outcome of political competition. Public Choice 52, 273--297.

Mateos-Planas, X., 2010. Demographics and the politics of capital taxation in a life-cycle economy. American Economic Review 100, 337--363.

Müller, A., Storesletten, K., and Zilibotti, F., 2016. The political color of fiscal responsibility. Journal of the European Economic Association 14, 252--302.

Ono, T., and Uchida, Y., 2016. Pensions, education, and growth: A positive analysis. Journal of Macroeconomics 48, 127--143.

Ono, T., and Uchida, Y., 2018. Human capital, public debt, and economic growth: A political economy analysis. Journal of Macroeconomics 57, 1--14.

Persson, T., and Tabellini, G., 2000. Political Economics: Explaining Economic Policy. MIT Press, Cambridge, Massachusetts.

Razin, A., and Sadka, E., 2007. Aging population: The complex effect of fiscal leakages on the politico-economic equilibrium. European Journal of Political Economy 23, 564--575.

Razin, A., Sadka, E., and Swagel, P., 2004. Capital income taxation under majority voting with aging population. Review of World Economics 140, 476--495.

Renström, T.I., 1996. Endogenous taxation: An overlapping generations approach. Economic Journal 106, 471--482.

Röhrs, S., 2016. Public debt in a political economy. Macroeconomic Dynamics 20, 1282--1312.

Song, Z., Storesletten, K., and Zilibotti, F., 2012. Rotten parents and disciplined children: A politico-economic theory of public expenditure and debt. Econometrica 80, 2785--2803.

Trabandt, M., and Uhlig, H., 2011. The Laffer curve revisited. Journal of Monetary Economics 58, 305--327.

Uchida, Y., and Ono, T., 2020. Political economy of taxation, debt ceilings, and growth. https://mpra.ub.uni-muenchen.de/99455/1/MPRA_paper_99455.pdf